Two years ago the Federal Reserve shocked the real estate industry with its proposal to allow federally charted banks to broker and manage real property. The ultimate Realtor nightmare almost came true—real estate agents inside bank branches sharing customers with their mortgage lending and closing services colleagues in the next cubicles, all employed by a megabank enjoying all the benefits and protection of a federal charter. We called it the "Big Grab" and NAR showed Congress, consumers and the banks themselves how they would be putting at risk the best system of homeownership in the world.

Though that issue is still unresolved, get ready for something worse. Imagine what it would be like to compete with the same federally chartered megabanks who are also exempt from state regulation. Their agents and employees would not need real estate licenses to buy or sell property. They would not have to pass licensing exams or pay licensing fees. They could ignore state laws or regulations governing the business of real estate such as consumer disclosure, environmental protection, and dual agency. Nor would these banks have to comply with state banking regulations, including those covering predatory lending.

Far fetched? I’m afraid not. The Office of the Comptroller of the Currency is putting in force a regulation pre-empting federal banks from state banking regulation.

Realtors who operate mortgage, title, appraisal and other businesses now will have to compete with federally chartered banks that don’t have to comply with the same state laws that they do. If the big banks ever do get Washington’s permission to broker real estate, it’s a small step for them to claim exemption from state real estate regulation as well. They’ll have one more huge anti-competitive advantage over traditional real estate companies—they won’t need to worry about state licensing.

Why has this obscure federal agency stripped states of the power to protect consumers from abusive, illegal, unfair, deceptive, and coercive practices?

The answer is simple, to save the big banks money. National banks want to conduct their business without having to pay the costs of dealing with varying state laws that carry real costs for their shareholders. Ignored is the fact that this rule also conveys a tremendous competitive advantage to federally chartered banks over financial and non-financial competitors, increasing the value of the federal charter at the expense of state licensing, marketplace competition and consumer protection measures.

All 50 states and leading consumer groups are fighting the new OCC regulation. States argue that it’s a usurpation of power and a violation of the Constitution. Consumer advocates argue that the OCC cannot do as good a job as the states in protecting consumers from abusive and predatory lending practices. Predatory lending is a real and growing problem—it costs consumers some $9.1 billion a year, according to the Consumer Federation of America. States have a right and a responsibility to protect their citizens from predatory lenders, some of whom have been federally chartered banks.

Congress is just waking up to this issue. Hearings were held January 28 and more are scheduled but it will take a massive uprising to stop this regulatory power grab. With Congress’ session shortened by elections and attention focused elsewhere, most Washington observers predict little can be done to slow or alter the regulation, now in its final form.

No business is more local in nature than real estate. The back room bureaucratic schemes to regulate it at the Federal level, far from customers and the professionals who serve them, may save the big banks a few dollars but it will change forever the real estate industry--for the worse.

Walt McDonald is president of the National Association of Realtors.

Published: February 18, 2004

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