Page 1       TOP OF DOC

Wednesday, July 24, 2002
U.S. House of Representatives,
Subcommittee on Financial Institutions
And Consumer Credit,
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 2:21 p.m., in Room 2175, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding.

    Present: Representatives Bachus, Baker, Lucas of Oklahoma, Barr, Riley, Biggert, Hart, Capito, Tiberi, Waters, Maloney of New York, Watt, Bentsen, Sherman, Gutierrez, Maloney of Connecticut, Hinojosa, and Lucas of Kentucky.

    Chairman BACHUS. [Presiding.] Boy, that is the quietest I have ever heard the room get. We are waiting on Mr. Kanjorski, the first panel, but we will go ahead and get started.
    The Subcommittee on Financial Institutions is hereby called to order.
    The subcommittee meets today for the legislative hearing on H.R. 3424, the Community Choice in Real Estate Act. Ever since the Federal Reserve and the Treasury Department issued a proposed rule in January 2001 to permit banks to engage in real estate brokerage, a vigorous debate has raged between those who believe that the proposal is an appropriate application of the agencies' authority under the Gramm-Leach-Bliley Act and those who warn that it could seriously undermine the separation between banking and commerce that Congress reaffirmed in that same landmark legislation.
 Page 2       PREV PAGE       TOP OF DOC
    One indication of the controversy engendered by the proposed rule is the number of submissions that the Federal Reserve and the Treasury received during the four-month public comment period—over 44,000.
    On May 2, 2001, this subcommittee held the first hearing in Congress on the proposed Fed-Treasury rule, taking testimony from the regulators as well as a broad cross-section of industry groups on both sides of the issue. In the 15 months since the subcommittee's hearing, there have been a number of developments that I want to take a moment to summarize a few of those
    In December 2001, Mr. Calvert and Mr. Kanjorski introduced 3424, the subject of today's hearing, which amends the Bank Holding Company Act to prohibit financial holding companies and national banks from engaging, directly or indirectly, in real estate brokerage or management services. At last count, H.R. 3424 had 245 cosponsors in the House. A Senate companion bill has attracted 18 cosponsors.
    In April, in response to Chairman Oxley's request for a status report on their rulemaking, the Treasury and the Federal Reserve announced that they would delay until next year any further action on the real estate issue, citing the urgent priorities created by September 11 as the primary obstacle to completing the process this year.
    Earlier this month, the Appropriations Committee, over the jurisdictional objections of this Committee, inserted language in the Treasury-Postal spending measure that would block implementation of the proposed rule during fiscal year 2003, or until October of next year at the earliest. The version of the Treasury-Postal appropriations bill that the full House is expected to approve later today—actually they have, I think, approved or will approve today—will include the real estate provision added in the Appropriations Committee.
    I was one of the first members of Congress, along with the gentleman from Kentucky, Mr. Kanjorski, to challenge the regulatory proposal to allow banks into the real estate brokerage business. I convened last year's subcommittee hearing to ensure that members of this committee had an opportunity to be heard on an issue that is of critical importance to so many of our constituents.
 Page 3       PREV PAGE       TOP OF DOC
    Like the proponents of H.R. 3424, I have been concerned that the Fed-Treasury proposal threatens to erode the long-standing separation between banking and commerce that Congress sought to fortify in the Gramm-Leach-Bliley Act. Moreover, important questions remain regarding whether the current federal and state regulatory framework is sufficient to ensure the adequate supervision of bank real estate activities, assuming the proposed rule is ultimately implemented.
    I respect the views of those who feel differently about this issue than I do, and those views are well-represented on the second panel of witnesses that we have assembled for today's hearing.
    Before recognizing the Ranking Member for an opening statement, I would like to thank all of our witnesses for being here today, particularly our colleague from California, Mr. Calvert. This is a contentious issue with strongly-held views on both sides, and yet at our first hearing on the issue last year, I was very impressed, and I think other members were, by the civility and the reasoned tone of the debate. I hope that we can meet that same high standard at today's hearing, and I believe that we will.
    With that, any other members wishing to be heard for an opening statement?
    [The prepared statement of Hon. Spencer T. Bachus can be found on page 66 in the appendix.]
    Chairman BACHUS. Mr. Hinojosa?
    Mr. HINOJOSA. Thank you, Mr. Chairman. I want to thank you for calling this important hearing today on H.R. 3424, the Community Choice in Real Estate Act. This bill, introduced by my good friend and colleague, Congressman Ken Calvert, aims to clear up any confusion the banking and the real estate industries might have in relation to the Gramm-Leach-Bliley Act.
    While GLB Act helped federally chartered banks access many new services and industries in the financial market, I believe that it did not include real estate brokerage. This legislation and this hearing gives us the opportunity to reexamine whether or not these two industries should be allowed to merge or share in similar business enterprises.
 Page 4       PREV PAGE       TOP OF DOC
    As a representative of a congressional district where minority and low-income home ownership are a top concern, I am especially interested in how the potential merger of these two industries will impact the Community Reinvestment Act, predatory and subprime lending as well as low income and first time home owner loan programs.
    Mr. Chairman, I hope the panelists will address these issues, and I look forward to their remarks. Mr. Chairman, once again, thank you, and I yield back my time.
    [The prepared statement of Hon. Rubén Hinojosa can be found on page 76 in the appendix.]
    Chairman BACHUS. Thank you. Other members?
    Gentleman from Oklahoma?
    Gentleman from Ohio? The gentleman is recognized—Mr. Watts, I am—okay.
    Mr. Maloney.
    Mr. MALONEY OF CONNECTICUT. Mr. Chairman, I ask unanimous consent that members can file opening comments for the record.
    Chairman BACHUS. All members' opening statements will be made a part of the hearing record on the motion from the gentleman from Connecticut.
    Gentleman from North Carolina?
    Mr. WATTS. Thank you, Mr. Chairman. I will not take the full time. I just want to applaud the chairman for convening the hearing. We have certainly had a lot of smoke on all sides of this issue throughout the course of this year and ever since the proposed regulations came out. And it is appropriate to try to being some more information and perspectives to this issue, I think, before we get hit with it.
    It is not going to be a major issue obviously this year, because everybody has agreed that the regulations will not go forward, but I suspect the issue will not go away. And at some point we are going to have to deal with it head on, and this hearing will at least start to provide some information perspectives and positions of the various people so that we will be better informed to make a decision about it when the time comes.
 Page 5       PREV PAGE       TOP OF DOC
    So I thank the chairman for convening the hearing and yield back the balance of my time.
    Chairman BACHUS. I appreciate the gentleman's comments. I will say that it was the chairman of the full committee who made the decision to have this hearing at this time and not the chairman of the subcommittee.
    Mr. WATTS. You mean I should have been praising somebody else?
    Chairman BACHUS. That is right.
    I recognize the ranking member, Ms. Waters.
    Ms. WATERS. I would like to thank you, Chairman Bachus, for holding this hearing, and I would like to take a moment to welcome two very distinguished witnesses who are here at my invitation to testify today, if I may.
    Mr. Martin Edwards, Jr. is the president of the National Association of Realtors, and Mr. Robert Bailey is the president of the California Association of Realtors. And I would like to thank them for being here today to testify.
    We are here today to discuss H.R. 3424, and I am very proud to be an original cosponsor of this bill. H.R. 3424 will ensure that banking and commerce are not mixed and will prohibit national banks and financial holding companies from engaging in real estate activities, such as management and brokerage.
    This is important legislation that Congress should support for a variety of reasons. First of all, allowing financial holding companies and national banks to participate in these activities would give them an unfair competitive advantage over real estate companies.
    In fact, banks enjoy the benefit of a federal charter, including but not limited to having access to the Federal Funds Market, the payment system, and Federal Deposit Insurance. On the contrary, real estate companies lend their own money to consumers or have to borrow from commercial banks to make these loans.
 Page 6       PREV PAGE       TOP OF DOC
    Financial holding companies charter advantages can also benefit its non-financial subsidiaries, which results both in lower costs and tremendous tax advantages to the entity. Real estate companies do not have these benefits.
    Real estate business derive their income from fees received when they originate or service real estate loans. National banks have a variety of fee-generating options other than fees on loans. We have to give real estate operations a chance to make a living. Besides real estate companies are generally smaller businesses and will be unable to compete with big banks; therefore, they would be forced out of business.
    The banks benefit from government-imposed barriers to entry into the industry. To operate a bank, a state or federal charter is required. For real estate, on the other hand, they have lower barriers to entry and no government restrictions on market competition.
    Allowing national banks to enter the real estate business will lead to industry consolidation, higher costs and fewer choices to consumers. Consumers can no longer shop around for the best deal, and banks will have no incentive to give consumers the best deal. Bigger institutions providing real estate services will not necessarily result in better services to consumers.
    Mr. Chairman and members, I could go on and on and on. I think it is no secret where I stand on this issue. As a matter of fact, I think that most citizens who understand what this issue is all about would share the same position that I have. With that, again, I thank you, and I look forward to hearing from our witnesses today.
    Chairman BACHUS. Thank you, Ms. Waters. The gentleman from Connecticut, Mr. Maloney, made a motion that all opening statements will be a part of the record. We will include your full remarks in the record.
    The gentlelady from New York.
 Page 7       PREV PAGE       TOP OF DOC
    Ms. MALONEY OF NEW YORK. Thanks, Mr. Chairman. Thank you for calling this hearing. It is an important one. In the interest of time, we have two distinguished members of Congress waiting to testify, I will just place my comments in the record, and I look forward to the testimony, not only from my colleagues but from the panel you have assembled today. Thank you.
    Chairman BACHUS. The gentleman from Kentucky, if you would like an opportunity—thank you.
    At this time, we will hear from our first panel of witnesses. Mr. Calvert, who was a realtor in California, a good friend of mind, a respected member of this body, and Mr. Kanjorski, a member of this committee. And Mr. Kanjorski was one of the first members of Congress and I think you and I signed the first letter challenging the proposal to allow banks into the real estate brokerage business. We have not been shy about making our views made on this issue, nor has Mr. Calvert.
    So at this time, we will hear the testimony from our first panel, and I do not know if you all have an order that you wish to go in. All right. We will go from left to right, from my left. Thank you.
    Congressman Calvert?


    Mr. CALVERT. I thank the gentleman. Thank you, Chairman Bachus, Ranking Member Waters and members of the subcommittee. Thank you for the opportunity to come here today to testify on behalf of H.R. 3424, the Community Choice in Real Estate Act. You all have written testimony in front of you, so I will do my best to keep my remarks short and to the point.
 Page 8       PREV PAGE       TOP OF DOC
    Anyone who has found an error on their monthly bank statement knows how hard it can be to get a bank to admit they made a mistake. On a very serious policy level, we are dealing with that very same issue today.
    Before the ink was dry on the Gramm-Leach-Bliley Act, the banks petitioned to become involved in real estate brokerage and management. That was a mistake. And it has become that mistake, not this bill, that we are here today.
    H.R. 3424 is merely a corrective measure for a situation that we never should have been put in the first place. The simplest solution is for the banks to withdraw their petition, and I will continue to call for them to do so. I introduced this bill with my friend, Paul Kanjorski, on December 6, 2001. It now has 245 cosponsors, certainly more than the majority of the House members.
    Since this legislation directly deals with Gramm-Leach-Bliley Act, I would like to get, again, directly to the point. I was here when we voted on GLBA, and I remember it vividly. It passed the House by one vote. Many of us were given assurances that real estate brokerage and property management were not at all considered to be anything but commercial activities. So we voted for the bill and moved on. I am certain that had this issue been up in the air or in any way ambiguous this bill would not have passed.
    I do not think this issue is the result of confusion. It is a direct result of the banking lobby trying to make an end run around congressional intent. Fifteen House members of the Conference Committee on GLBA are cosponsors of the Community Choice in Real Estate Act. These members include Representatives Kanjorski, Waters, Tauzin, Dingell, Hyde, Gekas, Greenwood, Conyers, Towns, Markey, Waxman, DeGette, Stenholm, Hooley and Gutierrez.
    Clearly, these conferees did not walk away from the conference with the idea that banks would be allowed to engage in real estate brokerage and management, nor did they leave the conference with the understanding that the Treasury could quietly slip this in while Congress debated other matters.
 Page 9       PREV PAGE       TOP OF DOC
    This is a matter for Congress to decide. H.R. 3424 speaks directly to who should make such a monumental decision and whether the Treasury Department and the Federal Reserve should have such broad power to usurp authority over what is clearly a commercial enterprise.
    It is interesting to note that currently, and even if the proposed rule went through, real estate brokers could not open a bank. So what we are talking about here is one industry trying to dominate another while at the same time protecting themselves from meaningful competition.
    When you get a chance I would like to invite you to ask the bankers that are testifying today what happened when Wal-Mart requested a thrift charter so they could offer depository services? The banks fiercely opposed this effort as a prohibited mixture of banking and commerce. So ask the banks, why are the immune from competitors? Because this is not about competition or one-stop shopping. It is about market dominance and conglomeration.
    I have a great relationship with my local bankers, and I know they work hand in hand every single day to make America's dream come true. But the action here in Washington does not represent the close, symbiotic relationship between local bankers and their friends in the real estate industry. Bankers do not want to engage in real estate, their leaders simply want to corner another market, this time a commercial market, while protecting their own interests.
    I would like to leave you with a few quotes from Congressman Jim Leach of Iowa, the sponsor of the Gramm-Leach-Bliley Act. ''The movement to go beyond the integration of financial services and eliminate the traditional legal barriers between commerce and banking is simply a bridge we should not cross. It is a course fraught with risk and devoid of benefit and one for which there is no justification.
    Such a step would open the door to a vast restructuring of American economic and the abandonment of the traditional role of banks as impartial providers of credit while exposing the taxpayers to liabilities on a scale far exceeding the savings & loan bailout. At issue with financial services modernization is increased competition. At issue with mixing commercial and banking is economic conglomeration, the concentration of ownership of corporate America,'' end quote.
 Page 10       PREV PAGE       TOP OF DOC
    From Congressman Bereuter during the debate on GLBA, ''This member has been a fervent of keeping banking and commerce separate. In fact, this member is quite pleased that H.R. 10 does not contain a commercial market basket, which would allow the very dangerous mix of commerce and banking, equity positions by commercial banks. We must avoid the problems that the Japanese have lately experienced because of such a dangerously volatile mixture of commerce and banking in their banking institutions.''
    And from Congressman Boehner, ''We have learned from Japan that we need to go slow on mixing banking and commerce.'' Let me say that again, ''Go slow on mixing banking and commerce. Let's see how we do with affiliation first, then return to the question of commerce and banking.''
    And, finally, again, to quote Congressman Leach in his opening remarks during the debate on GLBA, quote, ''As we all know, there are complex issues involved in this legislation, and there will be differing opinions and judgments by members. One thing we can all agree upon, however, is that Congress needs to reassert its constitutional role in determining what should be the laws governing financial services instead of allowing the regulators and the courts to usurp this responsibility.''
    If the national banks do not withdraw their petition, it is time for Congress to act and reaffirm its overwhelming support for keeping banking and commerce separate. We must stop this blatant end run around congressional intent. It is time for the House to pass the Community Choice in Real Estate Act.
    I am glad that I had the opportunity to come in front of this committee today and make my opinions known, Mr. Chairman, and I appreciate your consideration of this legislation.

    [The prepared statement of Hon. Ken Calvert can be found on page 72 in the appendix.]
 Page 11       PREV PAGE       TOP OF DOC

    Chairman BACHUS. Thank you. Appreciate your remarks, Congressman Calvert.
    Congressman Kanjorski?


    Mr. KANJORSKI. Thank you, Mr. Chairman, members of the committee. I am pleased to have the opportunity. I ask that my official remarks be made part of the record. A lot of what I wanted to say my colleague and cosponsor of this bill has already said.
    I have no dog in this fight between the banks and real estate, other than I totally agree that it was my explicit intention when I sat in H.R. 10, and I think many of the members that signed onto that bill and finally voted its approval through the House, that we had no intention of mixing banking and commerce. And now, for some reason, based on this petition and new regulation, the question arises, isn't real estate banking?
    Well, if it is, selling yachts is banking, selling automobiles is banking. Almost anything and certainly Wal-Mart is banking. And we will have opened the door to have a hybrid mixture of banking and commerce to the extent that there will be no lines of delineation.
    When we are in the particular financial difficulties that we find ourselves today, it would seem compelling evidence for us to stop and say do we really want to organize a society that has one or 10 corporations that can do everything and anything everywhere? Or are we hearing a cry that bigness and hugeness and greatness may have its inherent difficulties in social life, and maybe we should just hold back a little.
 Page 12       PREV PAGE       TOP OF DOC
    The reason I got into this bill is very simple. It really was not the fight between the interest of banks doing real estate work or real estate people wanting to get into the financing business. It was really an approach entirely different. I represent a very small congressional district in northeastern Pennsylvania. We have 176 municipalities, little towns. When we put on a Boy Scout drive, the people that lead those drives are generally in the business community.
    When I first got elected to Congress in 1984 Saturn had announced that it was going to locate a Saturn plant somewhere in the country, and it came to my attention there were people that we wanted to make a competition in Pennsylvania. At that time I called a meeting, and I asked one of our chief bankers in the community to serve as chairman and we put on a outreach community, and we called a meeting of all the leadership in the financial services industry. And at that very first meeting, we had 40 bank presidents that showed up, and I knew them all. They ran little banks in little towns all over my district.
    If we had that same competition today, Mr. Chairman, I would go to the same type of leadership, the chairman or president of a bank, and ask them to take the chairmanship and call a meeting together of the financial institutions and rather than having the meeting in a clubhouse we would meet in a closet, because there are only three or four banks that are in my district anymore. We have had such a gigantic growth in the last 18 years and particularly since the act and consolidation of the financial services in this country, it is not only banks, it is insurance companies, the security industry—almost every one of them too large to fail.
    And now they are setting their sights, basically, on other businesses, but they can make some sort of an argument because money transfers that it is banking. But if you can make that argument that selling real estate and managing real estate is banking, you can make that argument about almost any business I can conceive of there is a financial transaction involved because that is what business is—a financial transaction. So using the logic of their argument, really anything is open to them.
 Page 13       PREV PAGE       TOP OF DOC
    I do not think we can afford that to happen in the United States. And going back to that Saturn project I was telling you about in my district, and many since, what the realtors represent to my district are they are the final profession left in business. The lawyers all belong to large law firms, the doctors all belong to hospitals, associations and HMOs, the banks are consolidating their home offices to either New York or Pittsburgh but they are not local. But when you call that meeting now, who shows up? It used to be insurance agents, but they are gone. Who shows up? It is the realtors. And we are about to clug off their head and say, ''No, we do not need you as local leadership anymore.''
    So I pose the proposition that I think that failure to enact this or the failure of the banks to withdraw the petition for the regulation and the allowance tantamounts to a positive decision of this Congress, a very important pubic policy social decision, that we want to go into a society of incredible size of corporations that literally extract leadership from the local communities and have it reside in the core, huge metropolitan areas of our country and eventually of the world. And that it will be something that none of us dreamed of and probably would have feared if we had read it in the science fiction 25, 30, 40 years ago when we were in school.
    I know we can make an argument, and I have lost a lot friends in the financial service industry, particularly in the banking, I do not see them anymore and they are not my friends anymore, and I miss that. I hope after all this is over they call me, because I think we have a lot of work to do in the years ahead.
    But the one thing I am certain of is that the realtors have asked a very simple thing. This question of banking and commerce has to be decided. What is the proper role and who is the proper people to decide it? It is not the Treasury of the United States and it is not the Federal Reserve, it is the Congress of the United States. It is not only a legal question, it is a social question.
 Page 14       PREV PAGE       TOP OF DOC
    And it does not only have immediate impact over the next few years but has long-term ramifications of the very nature of the American society. And I would argue compellingly on everything my colleague has said and the few factors that I have thrown in that we must move forward as a Congress and show the nerve and the intestinal fortitude to say we did not intend and did not enact the authority in H.R. 10 to mix banking and commerce. This would be an act of mixing banks and commerce, and if it needs legislation to clarify it, it is this body, not the regulators, that should make that decision, because we represent the people.
    And I want to just call the attention to the committee, we have 245 cosponsors. I have never seen a more diverse, philosophical, ideological, geographical and political dispersion of people. This is an overwhelming number of members of Congress that have expressed their intent on the record as to where they stand now, but I think at least another 100 that have not yet gone on the record.
    I think we ought to give it time, as my colleague suggested, that if a withdrawal of the petition is the act that would disengage this, fine. But if that does not happen, this Congress should act on this legislation as speedily as possible, and I really do believe it has a very strong chance of going on suspension. I think we will get a two-thirds vote of the Congress to accomplish that end.
    So I urge my colleagues to consider this legislation and join my colleague and myself and the other 243 members that are cosponsors of this and do the right thing. Thank you.

    [The prepared statement of Hon. Paul E. Kanjorski can be found on page 77 in the appendix.]

    Chairman BACHUS. Thank you. Do any members have questions for our first panel?
 Page 15       PREV PAGE       TOP OF DOC
    Mr. Sherman?
    Mr. SHERMAN. Thank you, Mr. Chairman. I do not know if I have questions, I was not here for opening statements. I am very impressed by the presentation here. I want to associate myself with our two colleagues. I personally was angry when the regulators, with the encouragement of some others, decided to take my vote and yours in favor of a huge feast of additional powers for commercial banks. And before that feast was digested, to try to add another major dish to it, particularly because we all sat here, we voted for financial modernization. We were not lazy, we were not stupid. We wanted to know what was in that bill.
    And what was in that bill was a separation of commerce and finance. And none of us had a mental picture that somehow anything that needed to be financed was part of financial services. Many people, not all, when they buy a house, need to get a loan. This suit I am wearing was financed too, thanks to my friends at Visa, and an awful lot of my friends when they buy clothing or an appliance or food are doing that in a financial transaction involving a loan.
    And as these panelists and colleagues have pointed out quite eloquently, if real estate and realty services are financial services, then what is the difference between a suit of clothes or a toaster. This is a battle between democracy and bureaucracy—ruled by the people or ruled by the bureaucrats. And let us, may we assert the power of the people, of Congress, or our committee, of our subcommittee to make these decisions.
    These hearings should have come before—there never should have been a proposed regulation. Instead we should have waited several years to see if this great feast of additional powers was digested without food poisoning. And then three or four years from now, we should have such esteemed representatives as are coming before us today. We should make the decision in this subcommittee and our committee and figure out whether this additional set of powers should be conferred on banks.
 Page 16       PREV PAGE       TOP OF DOC
    We would then be worried, as we are worried today, about whether federal insurance was either endangered or was being used to subsidize a possible endangerment of traditional realtors. And, Paul, you pointed out how important they are in not just rural communities but in urban communities as well.
    But in a few years, my anger would subside to the point where we could balance, or I could balance, along with everyone else on this subcommittee.
    So with that, I just want to ask our panelists whether they have any additional comments. I hesitate to do that because their opening statements were so eloquent, what else could they add? But let me turn it over to them.
    Chairman BACHUS. Did you all understand the question?
    Mr. CALVERT. I will be more than happy to attempt to answer any questions the gentleman may have or any of the other members.
    Mr. SHERMAN. Paul, do you have anything else to say?
    Mr. KANJORSKI. Just let's do our duty, gentlemen and ladies.
    Chairman BACHUS. All right. Thank you. The first panel is discharged, and we appreciate your attendance and testimony.
    At this time, the second panel will take their seats. The second panel is made up—as you all come forward, I will go ahead and begin to introduce you. Mr. Joseph Face, Jr., Commissioner of Financial Institutions, Commonwealth of Virginia, on behalf of the Conference of State Bank Supervisors; Mr. James E. Smith, Chairman & CEO, Union State Banker & Trust Clinton, Clinton, Missouri, President of the American Bankers Association, testified before our committee on many occasions. We welcome you back, Mr. Smith.
    Mr. George T. Eastment, III, Executive Vice President, Long and Foster Real Estate, on behalf of Real Estate Services Providers Council; Mr. Stephen Baird, Baird & Warner, Chicago, IL, on behalf of Realty Alliance; Mr. Patrick Grabill, former NAR Director for Coldwell Banker King Thompson, current president, King Thompson/Holzer-Wollam Realtors.
 Page 17       PREV PAGE       TOP OF DOC
    At this time, we will start with Commissioner Face. And because of the large panel, ask the panel to try to keep your remarks to five minutes, if possible. Thank you.


    Mr. FACE. Good afternoon, Chairman Bachus, Congresswoman Waters and members of the subcommittee. I am Joe Face, Commissioner of Financial Institutions for the Commonwealth of Virginia, and chairman of the Legislative Committee of the Conference of State Bank Supervisors. Thank you for asking us to share the views of CSBS on bank real estate brokerage and management authority and on H.R. 3424, the Community Choice in Real Estate Act.
    As the organization that represents the primary regulators of more than 70 percent of our nation's banks, we appreciate this opportunity to discuss the states' experience with real estate brokerage. We salute H.R. 3424 sponsors for their appropriate emphasis on competition and choice for communities and consumers. The legislation in its current form, however, would not promote these goals.
    All of us are clearly most concerned with the welfare of consumers. We suggest, however, that the experience of the state banking system offers a valuable perspective on how to create an environment that offers consumers responsible, competitive options.
    As you may know, CSBS has strongly supported the rulemaking proposed by the Federal Reserve and Treasury Department, which would allow financial holding companies and financial subsidiaries to offer real estate brokerage and real estate management services.
    While CSBS agrees that real estate brokerage and management are activities that are financial in nature and that these activities are both incidental and complementary to banking, this should not be the thrust of our policy debate. As Representative Calvert and the sponsors of H.R. 3424 have appropriately said, advancing choice for consumers should be at the core of our discussion.
 Page 18       PREV PAGE       TOP OF DOC
    Twenty-nine states and the District of Columbia currently allow their state-chartered banks to offer real estate brokerage services. Despite the availability of these powers, only a few state-chartered banks are actively engaged in real estate brokerage. Among the banks that do use these powers, state bank supervisors have not encountered any significant safety and soundness or consumer protection concerns related to these real estate activities.
    The states' experience supports the Federal Reserve's and Treasury's interpretation of real estate brokerage as an appropriate activity for bank holding companies. Based on this experience, we generally support the agencies' determination that real estate brokerage and real estate management activities are financial in nature or incidental to a financial activity.
    We qualify this support, however, with the stipulation that financial institutions should conduct these activities in compliance with applicable state laws, prudential operational safeguards and appropriate consumer protections. With these safeguards, consumers will benefit from the enhanced competition of new providers in real estate services.
    The ability for state banks to test new products, services, powers and structures on a state-by-state basis has helped policy makers identify best practices for the delivery of financial services before granting these powers on a nationwide basis. This model has been very effective in promoting safety and soundness and ensuring consumer protection, while fostering innovation within our banking system.
    While few banks currently engage in real estate activities, a growing number of securities firms, insurance companies and notably real estate firms are blending banking and real estate services. H.R. 3424 would make this evolution unfairly one-sided by preventing banks from offering their customers the same breadth of services.
    State bank supervisors seek to promote credit availability and economic development in all communities in our states. We would strenuously oppose any system that would allow a few institutions, be they banks or non-banks, to dominate the financial markets and limit choice for our local communities. Like banking, real estate is a service business. And as in banking, local providers often know their customers' needs best. If this is truly the case, government intervention to protect these local service providers should not be necessary. Increased competition in real estate will benefit not only consumers and their communities, but also the service providers that are eager to earn their business.
 Page 19       PREV PAGE       TOP OF DOC
    Again, we commend this committee for its attention to this challenging issue. Thank you for the opportunity to testify. I will look forward to your questions.

    [The prepared statement of E. Joseph Face Jr., can be found on page 144 in the appendix.]

    Chairman BACHUS. Thank you.
    Mr. Smith, or President Smith?

    Mr. SMITH. I want to thank you, Mr. Chairman, for holding this hearing. I do have some charts to show you, and if it is permissible, I would like to ask staff to distribute copies of these charts for your to review.
    I believe that bankers and realtors have more in common on this issue than the rhetoric suggests. We both believe that customers deserve the best possible service. We both want customers to have many choices so that they can seek out that agent or company that the trust most. And we both believe that any financial service should be provided in a safe and sound manner, including adhering to all licensing, sales practices and continuing education requirements.
    If banks could offer real estate services, consumers would have more choices of real estate firms when buying or selling a home. Real estate agents would have more choices of potential brokerage firms. And brokerage firms would have more choices of companies to partner with, providing new sources of capital and technology. By prohibiting bank involvement in H.R. 3424, results in fewer choices for everyone.
 Page 20       PREV PAGE       TOP OF DOC
    As we begin our discussion, it is important to note that combining brokerage and banking services is not a new or unusual activity. Real estate firms do it, insurance companies do it, securities firms do it, and well over half the depository institutions in this country, including many of the largest banks, can do it. In fact, my community bank in Clinton, Missouri has the authority to provide real estate brokerage.
    Like most banks that could provide real estate today, I have yet to move into this line of business, but I am rethinking my bank strategy on this matter. I have to. Even in my small town with 9,600 residents, it is obvious that the world is changing rapidly. I am losing customers to real estate firms that aggressively offer mortgages and insurance. Since the customer often goes to the real estate first, I lose out on the ability to offer this product.
    And the choices for customers are getting fewer and fewer as aggressive firms like Cendant, which owns Century 21, Coldwell Banker and ERA, and Re/Max gobble up small locally owned real estate firms. Cendant, for example, has averaged about one acquisition per week since 1997. This trend is obvious in the pie chart on my right, showing that the real estate market is far more concentrated than banking.
    In my town, Re/Max is the largest of the three real estate firms. Its mortgage lending and insurance operations are much bigger than mine. The number two real estate firm seems to be doing well, but the smallest agency seems to be struggling to compete. I wonder if it has the marketing and financial resources to compete with Re/Max. What are its choices? Continue to struggle, go out of business, sell out to Cendant. Would it not be better for it and for my community if it could partner with my bank? How is the National Association of Realtors helping that agency or my community by working to preclude such an option for them?
    My experience is not unique. My fellow community bankers are witnessing the same trends and believe that their ability to offer real estate services would significantly benefit their customers and communities. The packages many real estate firms offer, including those provided by the outstanding real estate firms with me here on this panel, provide valuable cost, convenience and service options. The posters on my right show examples of these combinations.
 Page 21       PREV PAGE       TOP OF DOC
    GMAC, backed by General Motors, owns GMAC Mortgage Corporation, GMAC Real Estate and GMAC Bank, a full service bank chartered two years ago. They have 1,300 real estate offices and 20,000 agents and ranked eighth in mortgage originations in the first quarter of this year. Such combinations of services are good for consumers. The ABA believes that all banks should have the same opportunity to meet the needs of our customers.
    The Gramm-Leach-Bliley Act is a solid, well thought out piece of legislation. It promotes competition and enables Congress to avoid becoming embroiled in every competitive issue. The Fed and Treasury proposal on real estate follows exactly the process Congress set forth. H.R. 3424 would put Congress back in as referee for future competitive disputes.
    In conclusion, let's look ahead, not backward. We want to work with realtors to make the most of the skills and advantages each side brings to the table. Above all, we want to be able to partner with realtors to provide good, honest real estate, real estate services to America's homeowners and home buyers. Thank you very much.

    [The prepared statement of James E. Smith can be found on page 167 in the appendix.]

    Chairman BACHUS. Thank you.
    Mr. Eastment?

    Mr. EASTMENT. Good afternoon, Mr. Chairman and members of the subcommittee. My name is George Eastment, I am the Executive Vice President of the Long and Foster Companies, a full service home ownership company headquartered in Fairfax, Virginia.
 Page 22       PREV PAGE       TOP OF DOC
    Long and Foster has 200 residential real estate brokerage offices that engage in real estate sales and leasing in seven Mid-Atlantic states and the District. Long and Foster also offers a full array of mortgage services through Prosperity Mortgage, which is a joint venture of Long and Foster and Wells Fargo Home Mortgage.
    We also offer a full line of personal and commercial insurance through Long and Foster Insurance Agency, a wholly owned insurance agency. Mid-States Title, another wholly owned company, runs five joint ventures that conducts real estate settlement in the Mid-Atlantic area. Our firm has 12,600 sales associates and employees, of which 9,000, including myself, are members of the National Association of Realtors.
    I am a past Chairman of The Real Estate Services Providers Council, known as RESPRO, and I currently serve as a member of its board of directors and Executive Committee. RESPRO is a national association of approximately 200 residential real estate brokerage, mortgage, home building, title and other settlement service companies who promote an environment that enables providers to offer one-stop shopping for home buyers across industry lines.
    Together, RESPRO members who are in the real estate brokerage business closed over 1 million residential real estate transactions last year, utilizing over 300,000 sales associates and 78,000 employees. Like the majority of the nation's top 350 residential real estate brokerage firms, most RESPRO real estate broker members also offer mortgage, title, closing and other settlement services.
    In fact, according to a 1999 study conducted by the independent consulting firm of Weston Edwards and Associates, 72 percent of the top 350 real estate brokerage firms offered mortgage services and closed $22 billion in mortgage loans in 1998 and realty and builder-based lending accounted for about 10 percent of all purchase money mortgages that same year. Forty-five percent of these same firms offer title or closing services and personal lines of insurance.
 Page 23       PREV PAGE       TOP OF DOC
    Mr. Chairman, RESPRO favors open competition in the real estate marketplace, and we believe that any bank should be able to compete with us in providing home buyers with one-stop shopping programs. For this reason, we oppose H.R. 3424 which would prevent affiliations between nationally chartered banks and real estate brokerage firms.
    All available evidence shows that home buyers prefer one-stop shopping and that realty-based one-stop shopping programs offer them potential benefits. The most recent consumer survey in this area was performed in March by Harris Interactive, the parent of the Harris Poll. Harris surveyed over 2,000 recent and future home buyers and found that 82 percent of home buyers prefer using a one-stop shopping service for their home purchase and 64 percent of those home buyers who recently did use realty-based one-stop shopping service also had a much better overall purchase experience.
    Other studies, some of which are described in my written statement have found that services offered through realty-based one-stop shopping programs are competitive and even lower in cost than those offered by independent firms. RESPRO does not believe that the entry of financial holding companies and national banks would change the potential consumer benefits of realty-based one-stop shopping programs.
    Over the last 20 years, a number of financial conglomerates have entered the real estate brokerage business: Sears Roebuck, Metropolitan Life, Merrill Lynch, General Motors, Prudential Insurance Company, Cendant Corporation and Warren Buffet's Berkshire Hathaway.
    On the surface, these companies appear to have significant competitive advantages over traditional real estate brokerage firms. Sears even had access to federally insured deposits through its affiliate, Sears Savings Bank. But Sears, Merrill Lynch and Metropolitan Life have since left the real estate brokerage business. While Prudential, GM, Cendant, and Berkshire Hathaway remain competitors, their presence has not changed the basic character of the real estate brokerage marketplace. In fact, we believe that their entry has contributed to the development of a wider range of services and has caused traditional real estate brokerage firms to be more efficient and more consumer-focused than we were before.
 Page 24       PREV PAGE       TOP OF DOC
    In summation, I would say that at Long & Foster, we would not fear banks being in the business. They have a very different management style than realtors. We believe that we can compete heads up with them. And, basically, a real estate company, whether it has five agents, 9,000 or 90,000 basically has to do the same thing every day to win those customers over.
    Mr. Chairman, I thank you for the opportunity to testify. I would be glad to answer any questions.

    [The prepared statement of George T. Eastment can be found on page 97 in the appendix.]

    Chairman BACHUS. Thank you.
    Mr. Baird?


    Mr. BAIRD. Good afternoon, Mr. Chairman and members of the subcommittee. My name is Stephen Baird, and I am President and CEO of Baird and Warner. Baird & Warner has 35 residential brokerage offices throughout the Chicago metropolitan area, and we are currently ranked 12th largest residential brokerage company in the United States.
    Baird & Warner Financial Services is a wholly owned subsidiary providing mortgage services to our clients. The company currently employs approximately 1,600 employees and independent contractor agents. As a five-generation family business, we are the oldest real estate company in the United States, dating back to 1855. Baird & Warner has been a member of NAR since NAR's inception.
 Page 25       PREV PAGE       TOP OF DOC
    I am currently on the Board of Directors of the Realty Alliance. The Realty Alliance consists of 45 of the largest independently owned and operated real estate companies in America, and I speak on their behalf.
    With NAR's escalating opposition to banks entering the real estate business, our members have grown increasingly concerned that NAR's position and vehemence would have a negative impact on consumers, our companies and the industry as a whole. Because of that concern, the Realty Alliance began a serious debate on the pros and cons of this issue. At the end the debate, the Realty Alliance voted to support the Fed regulations to encourage banks to enter the real estate business by a vote of 41 to four. The following are some of the reasons for that decision.
    Number one, open competition is the American way. As the real estate industry has changed, real estate brokerage companies have looked to diversity and enter new businesses, such as mortgage, title and insurance. Just as we should be able to compete in these businesses, so should other industries be able to enter and compete in our business. Open competition is the American way. Open, free markets are superior to closed, controlled or regulated markets.
    There are certain areas in our business that could use a greater level of competition. Nationally chartered banks would provide competition against other large financial entities, such as Cendant, Prudential and GMAC. This would certainly benefit the industry as a whole, since today these companies have little competition.
    Number two, capital is good for our business. Residential real estate has always been a capital-short industry, and we should encourage any efforts to bring more capital to our business. We have struggled for many years to find enough capital to expand our businesses, to innovate and to do research and development. With open markets, capital would most certainly be available. Furthermore, capital provides liquidity for real estate brokerage firms of all sizes, large and small.
 Page 26       PREV PAGE       TOP OF DOC
    Three, competition will make us better. Competition makes us all better. NAR's argument that banks are anti-consumer makes no sense at all. How could real estate brokerage be less competitive and anti-consumer if there are more companies offering new and different services? Frankly, I think NAR is afraid of a new form of competition. We are not.
    Four, RESPA reform. Our industry is facing RESPA reform in the near future. RESPA reform will have significant impact on how we practice our business and our ability to grow our companies. We feel it would be hypocritical to work towards RESPA reform by building a model for one-stop shopping while prohibiting certain financial entities from participating in that solution. One-stop shopping should be offered by and available to everyone.
    Five, We should welcome new players. Our industry has succeeded for many years by on open, competitive marketplaces, while all players can compete on an even footing and welcome new entrants into the marketplace. Over the years, many companies have entered our business: Sears, Merrill Lynch and Metropolitan Life. They have brought new ideas and new ways of doing business. We have changed and grown and prospered. The challenges have only make us better.
    Six, and last, banks are already in our business. Currently, over 25 states permit state chartered banks to engage in real estate brokerage, either directly or through a subsidiary. Also, federal savings banks are authorized through service corporations to engage in real estate activities. We already compete with large financial players, such as Cendant, Prudential and GMAC. We see no difference between them and a large bank or a federal savings bank.
    Mr.Chairman, the National Association of Realtors does not speak for the vast majority of Realty Alliance members on this issue. We hope that you and members of the subcommittee will consider our views on the issue as you consider this legislation. Thank you for the opportunity to testify, and I would be glad to answer any questions.
 Page 27       PREV PAGE       TOP OF DOC

    [The prepared statement of Stephen W. Baird can be found on page 91 in the appendix.]

    Chairman BACHUS. Thank you.
    At this time, I am going to recognize a member of the committee, Mr. Tiberi from Ohio.
    Mr. TIBERI. Thank you, Mr. Chairman. It is an honor for me to introduce to the committee today a constituent and friend who was recently appointed as chairman and CEO of a company called Homestead Communities. Before that, Patrick Grabill was the CEO of a central Ohio company called Coldwell Banker King Thompson. And he was the founder of his own company, but during his tenure he expanded a 60-sale associate firm, Mr. Chairman, to its current size of 800. And I think, actually, officially this week, he became the former CEO, resulting in over a billion dollars in sales for the combined King Thompson Coldwell Banker firm.
    For over two decades, Patrick Grabill has been heavily involved in the real estate associations at the national, the state and the local level. He is the former president of the Columbus Area Board of Realtors, which I was a member. And on a personal note, Pat is known in central Ohio as an innovator. He is someone who is respected by both his peers, his competitors as well as the community as a whole. And I am sure glad that I am not competing with he or his company today as a realtor.
    With that, here is Patrick Grabill.

 Page 28       PREV PAGE       TOP OF DOC
    Mr. GRABILL. Thank you, Congressman Tiberi. Can I just leave now? That was awfully nice of him.
    Good afternoon, Mr. Chairman and the members of the subcommittee. My name is Patrick Grabill. I am enjoying my 30th year as a realtor in the central Ohio area. By way of background, which Mr. Tiberi gave, so I will condense that, I speak to you as a citizen, an independent realtor and a small business owner.
    Over the course of building my prior business, I served my industry in various capacities in the realtor associations, including local board president, state trustee, national director, member of numerous committees and task forces, including the state and national association finance committees. I take no pleasure in the statements I make here today, which are in direct opposition to the position of the National Association of Realtors.
    The leaders of that association, both volunteer and staff, are bright, decent, well-meaning people trying to do what is right. I believe that the structure of this trade association and its self-perpetuating, self-protecting tendencies have dictated their conformance and desire to close ranks on this issue.
    With respect to H.R. 3424 and Senate bill 1839, the NAR has embarked on a vigorous campaign to position itself as the representative of the entire real estate industry. My purpose in coming before you is to underscore that there are numerous other opinions within NAR that are not being heard precisely due to the structure of that association.
    Rather than putting forward a balanced information program on this issue, and it is a complicated issue, a campaign was launched by NAR entitled ''Stop the Big Grab.''
    This well-funded and highly focused effort comes complete with a cartoon character of an octopus meant to be the banks reaching out to engulf the industry. Enormous political pressure is being brought to bear on association leaders at all levels and congressional members to support their position on this issue.
 Page 29       PREV PAGE       TOP OF DOC
    I could cite other incidents of this but there were in many other incidents opposition to NAR's positions. These opponents are ridiculed, labeled disloyal or out of touch and generally just drowned out. The leadership charges right ahead. And that is a result of what is known in the industry as a three-way agreement. This requires as real estate salesperson to join all levels of this association: local board, state and National Association of Realtors. Otherwise, they cannot gain access to the Multiple Listing System or use the term ''realtor,'' which is a trademark owned by the National Association.
    The three-way agreement generates an income stream to the National Association of Realtors that is substantial. I believe the dues income generated plus the non-dues revenue and income from reserves exceeds $100 million annually. The level of income obtained in small amounts from a vast number of people provides little accountability other than a 500-member board of directors which meets semi-annually.
    The leadership team is thus given great latitude to craft issues and a response to those issues. The general members have little voice and no ability to vote with their wallets. They cannot leave the association because they will be cut off from the only source of local data exchange—the local Multiple Listing Systems. Thus, NAR's claim to represent 800,000 members, to me, rings hollow.
    I believe that NAR's position on this issue is as much about protecting the income and interests of the trade association as about protecting the ability of its members to represent buyers and sellers in real estate transactions.
    If banks enter the real estate business, they could ask questions currently being asked by many of the larger regional brokerages today. Today, the NAR can largely ignore these concerns because there are only a few, maybe 100, large companies, and NAR perceives its interests to lie with the masses, the 800,000 plus individual members. With larger, better capitalized firms, such as banks, asking questions of accountability and values for money spent, these voices could grow louder, threatening NAR's role as the sole voice for organized real estate.
 Page 30       PREV PAGE       TOP OF DOC
    I do have concerns about banks broadening their scope of activities into the real estate brokerage and property management businesses. Protections against undisclosed tying and firewalls should be required to protect against abuses, ensuring a level playing field. But to assume that bankers are less ethical, virtuous or less consumer friendly than realtors are is at the very least a stretch. It would seem to me that given the less scorched-earth approach by the National Association of Realtors a middle ground of compromise could and should be reached on this issue.
    Open competition in the marketplace would, in my opinion, provide a method for consumers to employ who they believe will act in their best interest. I believe the competent, caring, community-minded professionals I have worked with over the years will be the consumers' choice if they are given a chance to make a choice. Realtors need not be concerned about competition, they have lived with it all their lives, providing they stay responsive to the consumers' needs, just like any other small businessperson.
    To follow NAR's logic, realtors should not be allowed to participate in mortgage, title or insurance businesses. This is ludicrous because consumers have demonstrated that they would like the home buying process simplified, streamlined and made more affordable.
    Chairman BACHUS. Mr. Grabill, if you could wrap up.
    Mr. GRABILL. Yes, sir. In summary, at the end of the day, the fundamental question is with every other industry faced with new methods of competition and alternate delivery systems, why should traditional real estate be granted special protections? I thank you, Mr. Chairman.

    [The prepared statement of Patrick Gabrill can be found on page 156 in the appendix.]

 Page 31       PREV PAGE       TOP OF DOC
    Chairman BACHUS. Thank you. At this time, it is the intention of the chair to recognize Mr. Tiberi and then break for a vote. So if other members other than Mr. Tiberi want to go back, when we come back Mr. Watts will be recognized.
    Mr. WATTS. Mr. Chairman, I am not sure I am going to be able to come back.
    Chairman BACHUS. Are you going to return to the hearing? Well, if Mr. Watts would like to ask questions at this time and then we will recess. And if any members want to be excused at this time.
    Mr. WATTS. That is fine. Thank you, Mr. Chairman. You caught me a little off guard. I just wanted to ask—I am glad to see Mr. Eastment here since word must have gotten back to him that I was using his company as one of the models. I thought they were on the other side of this issue at the outset.
    Mr. EASTMENT. I think, sir, that is one of the problems, that everyone assumes that the other side speaks for realtors, and I do not think that is necessarily the case.
    Mr. WATTS. That is fine. I did not mean that as a put-down. I think it is very—I intended it as a compliment. Let me just ask you about something Mr. Grabill raised, Mr. Eastment, and that is the tying issue. How are you companies dealing with that and how would you suggest we deal with that if banks are in this business, to prevent kind of the appearance of imposition on the client that once you get in the door you cannot get out?
    Mr. EASTMENT. The question on the tying, the way that works is that the real estate agents have to pay dues, as he said, to the national, state and local—
    Mr. WATTS. I do not mean tying in that sense. I mean tying of services where once you—one of the concerns that has been expressed with banks getting into real estate is if they are real estate brokers, then that gives them a means of requiring or at least applying more pressure to consumers to use their lending products.
 Page 32       PREV PAGE       TOP OF DOC
    And I was just wondering how your companies are dealing with that? Are there rules that currently govern your companies that keep a particular person who is buying a home through your real estate company from being required to use your mortgage company, in other words?
    Mr. EASTMENT. Well, I think RESPA is a very important issue here in that we have to follow all of those guidelines and absolutely nothing can be required. We deal with it through disclosures. For example, after 20 years in the mortgage business, we have achieved a 16 percent capture rate, and the individual agent is free to recommend where or when their buyers go to a particular service provider.
    Mr. WATTS. Sixteen percent capture rate means that 16 percent of—
    Mr. EASTMENT. Sixteen percent of our buyers are using our mortgage company.
    Mr. WATTS. Oh, I see.
    Mr. EASTMENT. And so that 84 percent of them are going somewhere else. We do not pay our agents or our managers. We are not allowed to pay them. There is no financial incentive. And I would assume anyone else in the business would also be subject to those RESPA rules. And the nature of the business is those agents are independent and they do not want anything to damage their relationship with their client, and they will use our services or anyone else is only if they think those people can perform.
    Mr. WATTS. I did not realize there was anything in RESPA that required no tie-in. I mean I know that—I thought RESPA was a disclosure thing that says we cannot—I mean maybe I am just wrong, but is this an industry standard? Are all companies that have the whole range of services in their company fully disclosing that there is no tie required?
 Page 33       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. We have to provide—I have with me, this is a copy of our disclosure that we give to our buyers upon contact that does outline our interest in these various companies.
    Mr. WATTS. And that is required by RESPA?
    Mr. EASTMENT. Yes. We must give that disclosure, and, as I said, the agents choose or they make their recommendations based upon who they feel can provide the best service. Sometimes that is us, sometimes it is not.
    Chairman BACHUS. Mr. Eastment, I have been advised we have got about two and a half minutes left on a vote on the floor. So we are going to recess the hearing until approximately 4 or 4:15. As soon as we are through we will return and start the hearing. Thank you.
    Chairman BACHUS. At this time, I am going to recognize—the gentleman from Oklahoma does not have any questions for the panel, so I am going to recognize the gentleman from Ohio for questions.
    Mr. TIBERI. Thank you. Thank you, Mr. Chairman.
    First question, Mr. Eastment.
    Mr. EASTMENT. Yes, sir.
    Mr. TIBERI. Are you a licensed realtor?
    Mr. EASTMENT. Yes, I am.
    Mr. TIBERI. So you are a member of the National Association of Realtors.
    Mr. EASTMENT. For the last 30 years.
    Mr. TIBERI. In your opinion, as a licensed realtor, and you said you are opposed to this bill, why do you believe the National Association, in your mind, just speaking on your own personal behalf, not the company's behalf, why is the National Association for this bill?
 Page 34       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. Quite honestly, I am not sure about really why they are against it. I do not understand it. I think it is irrational, but I cannot begin to understand their arguments or see any credibility in them. So what is exactly in their minds I do not know.
    Mr. TIBERI. You have obviously peers, friends in the business and employees or independent contractors that work for you. What is the general nature of thinking from people in the profession that you come into close contact with regarding this issue?
    Mr. EASTMENT. I have received numerous questions about this from our agents and our managers, and the vast majority are, number one, even not aware of the issue, and another substantial number really could care less. I think the typical real estate agent is interested in day-to-day issues, how is the market, what does money cost today, where is my next deal coming from, what is my commission split? And I think there is only a very small percentage of realtors who really support NAR on this subject.
    Mr. TIBERI. Mr. Baird, you mentioned in your testimony that 41 of your members, I assume brokers?
    Mr. BAIRD. They are large, independent real estate companies like ours. Long & Foster is a member.
    Mr. TIBERI. And all 41—41 to 40 voted to support the Fed-Treasury proposed rule, according to your testimony. All 45 of those voters, I assume they are all licensed real estate brokers and members of the National Association?
    Mr. BAIRD. Oh, yes. All of them are, and they have numerous agents that are members, in the—I do not know how many there are, I think 60,000 or 80,000 throughout the whole organization.
    Mr. TIBERI. Just to follow-up with the same question I asked Mr. Eastment, what are your thoughts in terms of why you believe the National Association is opposed to the rule?
 Page 35       PREV PAGE       TOP OF DOC
    Mr. BAIRD. My personal opinion, and I have also been a realtor, not as long as George, but 22 years, my person opinion I am also perplexed why they would take this position. I think it has to do with some of the remarks that Pat made earlier that they somehow got onto this issue, put their, for whatever reason, marketing, PR muscle behind it. And now it is kind of become bigger than life.
    Mr. TIBERI. You are primarily in the Chicago market?
    Mr. BAIRD. Yes.
    Mr. TIBERI. What percentage of the market in Chicago do the three largest real estate brokerage firms handle?
    Mr. BAIRD. The three largest companies?
    Mr. TIBERI. Ballpark. Yes.
    Mr. BAIRD. Oh, 30 percent, 35 percent.
    Mr. TIBERI. Mr. Eastment, in your market, what are the three largest brokerages?
    Mr. EASTMENT. In the Washington area—we are in many markets. If we took the Washington area here, I would say the three largest companies are probably 35 to 38 percent. And if I may add to my previous comment, the real estate brokers in RESPRO represent about 40 percent of the membership of NAR in the companies that are our members.
    Mr. TIBERI. Mr. Grabill, same question to you. In the central Ohio market where you are company has been located for your entire career, what are the three largest?
    Mr. GRABILL. I was just trying to add it up. It is close to 50 percent.
    Mr. TIBERI. The three largest?
    Mr. GRABILL. Yes.
 Page 36       PREV PAGE       TOP OF DOC
    Mr. TIBERI. In your testimony, you talk about 800,000 members of the National Association, and those members, I assume you are including part-time realtors, brokers, full-time realtors. And you made the statement in your written testimony that the NAR really does not represent them. Can you kind of further elaborate?
    Mr. GRABILL. Well, if you are a broker and you are a member of the local board of realtors to get access to the Multiple Listing System, all of your agents are required to become members or you cannot employ them. So I do not know if that exactly answers your question, but that is how it is composed.
    Mr. TIBERI. But just if I could follow-up, Mr. Chairman. If you are a member of the National Association of Realtors, whether you are part-time or full-time, why—I am trying to figure out why the statement that the National is not really representing 800,000 members.
    Mr. GRABILL. There are an awful lot of members that are not terribly active in the industry. They may be part-time, they may work for banks, but to gain access to the Multiple Listing they have got to be members of the association. Or they may be appraisers or other fields of related real estate. They are not necessarily all real estate practitioners, but they are required to join all three levels of the association to get access to that data. So there is no distinction made between part-time, full-time, ancillary careers or anything else.
    Mr. TIBERI. Thank you.
    Thank you, Mr. Chairman.
    Chairman BACHUS. Mr. Bentsen?
    Mr. Barr?
    Mr. BARR. Thank you, Mr. Chairman. One thing that I am a little bit unclear on, several of you all used the term, ''one-stop shopping.'' You also used the term, ''foster competition.'' I am a little bit confused. How does one-stop shopping, where you would have a number of different services, including now real estate services available through the same entity that provides money and insurance and so forth, exactly how does that type of one-stop shopping, which may or may not be good, I do not think there is anything magical about one-stop shopping, that can be a monopoly also as one-stop shopping, how does that sort of one-stop shopping foster competition? It may be something that you all want to do and there may be some benefits to it, but I am not sure that fostering competition is one of them.
 Page 37       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. I will take that. One-stop shopping came about because consumers wanted it. In this area, for example, when you go into Giant, you used to go in to buy food. Now they have a dry cleaners, they have a drugstore.
    Mr. BARR. Excuse me just a second. In terms of this piece of—these proposed regulations, which consumers are you talking about? It is my impression that these proposed regulations were not based on consumer input, they were based on folks here within the government making what seems to be a fairly quick decision after the passage of Gramm-Leach-Bliley before we have really had much of a chance to really see how it was developing in the real world.
    I am not quite sure what consumer or customer input there was, at least for this set of proposed regulations. I understand generally what you are saying, but in this case, there has not been that public input. As a matter of fact, the public input seems to be in the other direction with regard to the regulations.
    Mr. GRABILL. Could I respond to that, Congressman?
    Mr. BARR. Well, I really want maybe if you could just finish following up on that, please?
    Mr. EASTMENT. Yes. I was addressing the question of why we got into one-stop shopping. I am not aware of what consumer input there was or was not in terms of the regulation.
    Mr. BARR. Okay. Are any of you all, because, again, this was a decision made by the federal agencies pretty much on their own to move forward with these proposed regulations. So it is my impression that it was not based on consumer input. Do you all know otherwise?
    Mr. GRABILL. Sir, I do not have any information about the government agencies, but I would believe it is the result of the fact that we are watching the marketplace change underneath our feet as this is happening. As an example, a company I just separated a relationship with, on an amiable basis, has grown their mortgage operation to the second largest mortgage operation in the country in the last four years from being pretty much nowhere on the charts.
 Page 38       PREV PAGE       TOP OF DOC
    That is consumer-driven, that is not corporately driven. The consumer has found a value in that relationship. And if I was sitting in a banker's seat, I would see that happening. I know it is happening in my marketplace because bankers that I know of wondered why we are growing so rapidly in providing that service. I believe it is consumer-driven, and I think it is a result of that sea change in the marketplace.
    Mr. BARR. We have in my district, in Georgia, a lot of bankers, a lot of large banks, community banks whom we work very closely with. There are a lot of realtors, a lot of real estate companies. And to be honest with you, in the eight years that I have served in the Congress, we have not gotten complaints from consumers that banks dealing with financial services and the delivery thereof and real estate agents and brokerages dealing with real estate has created a problem for consumers.
    Have you all seen studies that indicate that people's needs, their ability to find homes and get them into homes is being hampered under the current legislative system that we have and have had for many, many years?
    Mr. GRABILL. I have not perceived a problem from that sense. I have perceived a competitive situation, and, again, I am seeing the landscape as a real estate practitioner change rather dramatically when people like Warren Buffet come into the real estate business, corporations like Cendant and Prudential and other major corporate entities do that. There is a shifting in the landscape regardless of what happens in terms of this legislation. And I think the real estate industry is reacting to that, and I assume that the banks are reacting similarly.
    Mr. BARR. But the changing landscape, for example, with regard to financial services generally, clearly was a legitimate basis on which to take up the Gramm-Leach-Bliley bill. The Glass-Steagall Act was woefully outdated. They did not even have computers back when that went into effect. So I think there was a very legitimate basis that the entire financial system out there, regulatory system, had not kept up with realities and customers were not being properly served.
 Page 39       PREV PAGE       TOP OF DOC
    I do not see the same thing, though, with regard to the delivery of real estate services. The housing market is doing well, the real estate business is doing well. It is keeping up with the changes in technology. I am just not quite sure what need that is out there that you all seem to talk about as providing the basis for supporting the regulations that the federal government is proposing here.
    And at a minimum, would not it make sense, without prejudicing whatever the government might do in the future, let's just see how the process that we change fairly dramatically in Gramm-Leach-Bliley works itself out to see if there are in fact areas out there, real estate or others, that are not being properly met by this new framework? I guess the question is what is the rush to judgment?
    Mr. SMITH. If I may give you a personal example that is happening in Clinton, Missouri, which is a community of 9,600 people. We have three real estate agencies in town. One is a Re/Max, one is a Coldwell Banker, and one is an independent agency. There are five banks in town.
    The RE/MAX office started about three years ago making mortgage loans, and so now somebody comes to Clinton, Missouri looking for a home, they go in and they sign a contract to buy a home. They walk into the next office, do the mortgage, walk into the next office, get the title insurance. I do not get the opportunity to see that customer or present my product to that customer unless they happen to walk into the bank.
    And one to four family residential loans are well over half of my loans at my bank. So when I stated in my oral statement it was making me rethink my strategy, I am going to have to rethink how I can have the opportunity to present my bank products to that customer so they have a choice.
    Mr. BARR. And wouldn't that be fair to say, well, competition ought to guide that rather than the federal government coming in and artificially perhaps dictating something?
 Page 40       PREV PAGE       TOP OF DOC
    Mr. SMITH. Well, I have real estate powers, but if it is taken away from me, I will not have the opportunity to be competitive in that nature.
    Mr. BARR. What is being taken away?
    Mr. SMITH. If the real estate brokerage powers, which my bank today has, if I want to get into the market, my bank has the authority to do that. But if H.R. 3424 passes, that could be taken away and—
    Mr. BARR. No, it would not. H.R. 3424 simply maintains the status quo before the proposed rules would go into effect. It does not take anything away.
    Mr. SMITH. Well, it would eliminate national banks from being involved.
    Mr. BARR. It does not take anything away from the powers that banks currently have.
    Mr. SMITH. As I understand it, it would eliminate national banks from getting involved in real estate brokerage powers.
    Mr. BARR. But they are not involved now.
    Mr. SMITH. They are not involved now.
    Mr. BARR. So it does not take anything away.
    Mr. SMITH. But in my community, the smallest bank is a national bank, so I am not sure that they should be eliminated from having the opportunity to do real estate powers. If credit unions can do it, savings banks can do it, if I can do it, if RE/MAX can do it, I am not sure why we would want to eliminate the national banks, which 90 percent of the national banks are community banks. And I am not sure why we would want to eliminate them from being competitive in this marketplace.
    Mr. BAIRD. Congressman, if I may add to that?
    Chairman BACHUS. Go ahead.
 Page 41       PREV PAGE       TOP OF DOC
    Mr. BAIRD. I do not think it is an issue of creating less of an environment. By adding another player into the mix, you are going to increase the amount of competition. Today, what is happening in our market is there is a move towards one-stop shopping. Different companies are approaching it from different ways. They are creating different combinations. You are eliminating one element from playing in that game. It is going to happen no matter what happens here. It is already happening in the marketplace.
    By prohibiting these certain financial institutions, there are already a bunch of financial institutions that are doing it, you are just holding the level of competition at one level. By opening it up and making it an open playing field for everyone, you are just going to increase the competition because there are going to be different combinations of services that are brought to bear.
    Chairman BACHUS. All right. Thank you.
    Let me just before I go on, Mr. Smith, you have a thrift, do you not?
    Mr. SMITH. No. I have a trust charter. I am a trust company.
    Chairman BACHUS. Okay. All right.
    Ms. Waters?
    Ms. WATERS. Mr. Chairman—
    Chairman BACHUS. Or Mr. Bentsen, whichever of you all want to—
    Ms. WATERS. It is okay if Mr. Bentsen wants to go. I thought he was about ready to go. I have no problems with that. Go right ahead.
    Mr. BENTSEN. I apologize for missing the earlier part of the hearing.
    Mr. Smith, you talked about title insurance, but under Gramm-Leach-Bliley, national banks can offer title insurance through their operating subsidiary, I believe. So you have gotten that authority, and I think while there was a struggle over that particular issue, as I recall, it was determined that it was financial in nature.
 Page 42       PREV PAGE       TOP OF DOC
    But the two questions I have, for you and for the entire panel, are, one, I do not think that—you reference Cendant Corporation, for instance. I do not think that Cendant could own a bank. They can own a mortgage company, which is not a federally insured depository institution. And I am not sure that—I am concerned that if we want to go all the way and say that real estate is financial in nature under Gramm-Leach-Bliley, we might need to look at it from the other direction.
    And I think that is something that you all need to think about, that real estate companies can now get into the banking business themselves, not just the mortgage business, not just the mortgage brokering business or the mortgage banking business, but in the banking business. I want to hear your thoughts on that.
    The second question, and this is just sort of a broader question, because you referenced Cendant Corporation, which has had its ups and downs, I think, recently, is what is the rationale, beyond the legal issues which will be hashed out, but what is the rationale for getting into this business if you were in fact allowed to do so? I mean, yes, the one-stop shopping and all that, but I mean is there really profit margin in that for the banking industry?
    Mr. SMITH. Well, first, as to whether Cendant can own a bank, a broker, the people that own the real estate companies, can own banks. They can charter a bank and we are seeing many new charters today. So individuals that own the agencies can charter banks.
    Mr. BENTSEN. But the corporation cannot.
    Mr. SMITH. That is correct. That is correct.
    Mr. BENTSEN. And they cannot use the capital from the corporation to capitalize the bank, because that would be mixing banking and commerce.
    Mr. SMITH. Right.
    Mr. BENTSEN. But on the other hand, to see it from your viewpoint, that it is not mixing banking and commerce for the bank to own a real estate company.
 Page 43       PREV PAGE       TOP OF DOC
    Mr. SMITH. Well, the bank would own the agency, and that is what I could today under my powers. I could own an agency, which under Gramm-Leach-Bliley or under the previous things we are allowed to own agencies. And so we have that precedent—
    Mr. BENTSEN. Only pursuant to the regulation if in fact it becomes—I think that was what Mr. Barr, who is not here, but I think that was where he was going, that it is only pursuant to whether or not the regulation is final. It is not explicit in the act.
    Mr. SMITH. As a trust company charter, I have agency powers, and I can own an insurance agency, I can own a real estate agency. So I have that ability to own that agency. And, again, that is not capital-intensive, that is not a safety and soundness issue. We will own the agency, and we have agents that will be selling insurance or agents that will be selling real estate. So we do not view that as a safety and soundness issue, because we are not pouring capital into that product.
    Under Gramm-Leach-Bliley, it expressly prohibits us from getting into real estate development because that is capital-intensive and could possibly pose a safety and soundness issue. But that is our view is that an agency relationship would not pose a safety and soundness issue.
    Mr. BENTSEN. And would you oppose a real estate agency, itself, with its own capital, seeking a rule to be able to own a trust charter or a national bank?
    Mr. SMITH. Well, I think that is a determination by whether Treasury and Fed, which I think is what Gramm-Leach-Bliley was intended to do is to ask the Treasury and Fed to determine what things are financial in nature and those powers that can be afforded under that. So I think that is up to the Treasury and the Fed to determine how that is. We have explicit laws on the books on mixing commerce and banking, and I am sure that would have to be followed.
 Page 44       PREV PAGE       TOP OF DOC
    Mr. BENTSEN. But you would consider that mixing commerce and banking.
    Mr. SMITH. Yes. A company cannot own a bank.
    Mr. BENTSEN. Sure.
    Mr. BAIRD. I think your example of the Cendant Corporation is an interesting example. First, let me just say that I am not—
    Mr. BENTSEN. And if I might, the only reason I raise that is I did not think of it. To be honest, it was in Mr. Smith's testimony.
    Mr. BAIRD. Right.
    Mr. BENTSEN. I just picked it up.
    Mr. BAIRD. And I am not an expert in the banking regulations, so I will start off with that part of it. But the Cendant Corporation essentially, from a market point of view, from my point of view as a competitor, owns a bank, because they have one of the largest mortgage companies in the country, and they own a real estate company, actually. They own my number one competitor. So they can offer the same services as if they were a bank and owning a real estate company. So by prohibiting banks getting into the business, you are essentially giving them a mini-monopoly on that connection, and I cannot go out, for example, and make a connection with a bank and—
    Mr. BENTSEN. If I might, with the chairman's indulgence, there is a slight difference in that a mortgage company in and of itself is not a bank, and it does not have access to the Fed window, it does not have access to—it does not have what, say, Alan Greenspan likes to talk about, this implicit subsidy that we had long debates over, that I will not bring back.
    And I do not think a mortgage company has access to the home loan bank system. I may be wrong about it, but I do not think it has access to own shares in the home loan bank system so that it can warehouse funding for mortgage purposes. It can sell to the secondary market like theoretically anybody can, but obviously you have to have capital. So I think that is an important distinction that has to be made. And my time is up. The chairman has been very generous, and I yield back.
 Page 45       PREV PAGE       TOP OF DOC
    Chairman BACHUS. The chair now turns to the ranking member, Ms. Waters, for her questions.
    Ms. WATERS. Thank you very much, Mr. Chairman. Even though this hearing is being held, I think the issues are quite clear. I, for one, never supported Gramm-Leach-Bliley. I was concerned about these kinds of issues, concerned about the growing powers of the bank and the fact that ordinary citizens would be subjected to one-stop shopping where the banks would be in an unusually influential positions of offering all of the services and basically eliminate all competition because of the ability to do so.
    But let me just ask Mr., is it Grabill?
    Mr. GRABILL. Grabill.
    Ms. WATERS. Grabill. Do you believe that if real estate is deemed incidental—do you understand that if real estate is deemed incidental or a financial activity, that it may become subject to regulation under the federal Treasury? How would you feel about that?
    Mr. GRABILL. Well, I am a real estate practitioner and I am not a lawyer, so I really do not have an opinion on that particular point of law.
    Ms. WATERS. Does anyone have an opinion on it? How would you like to have your activities become federally regulated? What happened if you sold real estate in the bank, in the federal bank, would that real estate agent be separate and apart from everything else that goes on federally or would that agent then come under some kind of federal regulation? How would it work?
    Mr. GRABILL. Congressman Waters?
    Ms. WATERS. Yes.
    Mr. GRABILL. What I said earlier is what I believe that these two industries need to get together and find a common ground to respond to changes in the marketplace. I do not think I am qualified to advise you on how the federal regulations of the statute should read, but I do think I am qualified to represent my observations in the marketplace. Whether you change this legislation or not, there is a sea change in how real estate has being marketed, and there are consumers who are taking advantage of the ability to vertically integrate the industry just like they go get their gas and get a quart of milk.
 Page 46       PREV PAGE       TOP OF DOC
    They want to have their life simplified. The consumer is finding ways to do this. If you do not change this, it is not going to make a tremendous amount of difference in the average life of a consumer because they are going to find a way to do it anyway. Companies like Berkshire Hathaway, companies like Cendant, companies like Prudential, franchise organizations that can respond to the needs of a small businessperson who is a realtor in the marketplace will find ways to partner in the mortgage opportunities and the other ancillary services to help them be more profitable, to grow their real estate companies and to get the needs competitive to the consumer.
    Just the big issue I have had with the realtor industry is that because we are so busy in our lives, we end up only talking to other real estate people. We do not realize these kind of pressures are on every other industry. The consumers get it. The consumers want the services, provide the need, and I can tell you from growing my business we did better as a company when we provided more services.
    We are more competitive because the consumers want it. And a consumer may move from California to Ohio and have experienced it in California, and they want it in Ohio, or they move from Ohio to New Jersey and they want those abilities to do it because that is the society we live in.
    I believe, and the reason I am here as a private citizen, is that the marketplace is making these changes, my trade association is not responding effectively to communicate the real changes that are going on. They are trying to build barriers and partitions to the marketplace. And I hope you find a way to get these two industries together.
    Ms. WATERS. Well, let me just say this: I have not heard all of the testimony, but I have heard some testimony that suggests, for example, that Cendant is now this conglomerate that owns RE/MAX and Century 21 and Coldwell.
    Does someone suggest that these real estate entities are now out selling properties and offering to get the mortgage and all of the other services related to that sale? Is someone suggesting that this is going on in some big way in America?
 Page 47       PREV PAGE       TOP OF DOC
    Mr. GRABILL. Congressman Waters, I sold my business to Cendant last year, a year ago today, and I can tell you they have been very successful and providing very good service, and I am a big fan of their format to do exactly that.
    Ms. WATERS. Well, you know, I do not know if this is being maybe exaggerated a little bit, and I tell you why. I am a great observer of real estate and the real estate market, and I interact an awful lot with those entities that have been identified, the Coldwells and the RE/MAXs, et cetera. I am a lookie-Lou. I just go look at houses, and I just call real estate agents, and I know they hate me.
    Mr. GRABILL. I knew you looked familiar.
    Ms. WATERS. As a matter of fact, in one area of Los Angeles, one real estate person said, ''Now, Ms. Waters, I think you know every house in this community. What else can we show you?'' And I say that because—and the reason I am telling you about this just little personal experience is I have not met one real estate agent that has even suggested that they wanted to do anything more than sell me that house. Not one suggested that they wanted to finance it or even direct me to financing. They want you to come with your financing. Bring your banker with you to buy the house. That is what I have found.
    Mr. GRABILL. I think that is very true, and that will vary geographically around the country. And agents, by and large, are independent contractors, and they will do what is in their interest and their client's interest. No matter what real estate broker owners or corporations want them to do, the agent will control that transaction. And I do not think your experience is unusual.
    When we can get to 20 to 30 percent of our transactions through some of our ancillary companies, that is a very high number. I think the marketplace, that is the genius of the marketplace. I see this proposed legislation as adding additional restrictions, not solving the problem, and that is why I came.
 Page 48       PREV PAGE       TOP OF DOC
    Ms. WATERS. Well, I do not think it is intended to add additional restrictions. This is about the separation. This is about the wall. This is about saying, ''We do this business and you do this business, and we want to keep it that way.'' And because even though you have described the marketplace a bit differently and people wanting the one-stop shop and it being inevitable and all of that, I do not really think so.
    I think what people want are personalized services by real estate companies that are prepared to do what it takes to sell that property. I think they want people who are willing to meet them at a given location at 7 o'clock in the morning or 9 o'clock at night, because that is what I make them do—''Come meet me someplace, I want to see this house.'' And not only do they do it, but they educate you along the way.
    The more I look at real estate the more I learn. I think I have learned everything, I keep learning more because that agent is there knowing his or her business. And what I like about this business it has opened up opportunities for a whole lot of people to be in business, for small folks to be in business, and I want to keep it that way. So I yield back the balance of my time.
    Chairman BACHUS. Thank you.
    Mr. Eastment, I will ask you—well, Mr. Baker, do you have a question?
    Mr. BAKER. Mr. Chairman, if I might, I really had intended to be able to stay for the next panel, but we have a conference meeting at 5 that I must attend. If I may, I would just like to make my statement now within the five minutes here.
    Chairman BACHUS. Absolutely.
    Mr. BAKER. Thank you, Mr. Chairman. And I want to express my appreciation to you for calling this hearing and bringing attention to this most difficult matter. Certainly, all of us who were engaged in the debate over Gramm-Leach-Bliley intended for the offering of financial services to be in a more efficient and convenient methodology for the public. And the question of whether real estate services and brokerages constitute financial services was at the heart of the debate.
 Page 49       PREV PAGE       TOP OF DOC
    As a former realtor and home builder, I certainly understand the concern about consolidation within the financial services world and the potential for enhanced competitive environment. No one will ever believe that the letter which I am about to read was sent to me unsolicited on July 15 but it was in fact. And I would like to read it into the record within the time I have available.
    ''Dear Congressman, as president of Latter & Blum Companies, I feel it is very important to personally communicate our feelings on the issue of banks entering the real estate business. We do not oppose their entry. We own and operate Latter & Blum and CJ Brown Realtors. Our organization is composed of 1,000 real estate agents and staff with 23 offices covering Louisiana and Mississippi. We are a Louisiana-based organization and proud to be recognized as the largest real estate company in the Gulf South by the National Association of Realtors, as well as independent media reporting services.
    Latter & Blum is headquartered in New Orleans, and our CJ Brown operation is headquartered in Baton Rouge.'' That got my attention. I represent Baton Rouge. ''We vehemently disagree with the National Association of Realtors' position on this matter. Is it highly unusual for our firm to oppose NAR's position on issues because as a general rule, we do support wholeheartedly their efforts. Our firm collectively is the largest contributor to LARPAC in the state. We cannot support or defend their position this time, however; it is dead wrong.
    Competition is good and healthy. Our firm does not need anti-competitive protective measures from the government or the National Association of Realtors to keep us in business. Our organization was founded in 1916, and we have done quite well in the face of new and innovative competitors. Each new entrant over the years has brought us challenges, to be sure, but we have always prevailed and we will do so against banks. They provide no unfair advantage against our firm, in our opinion. We believe they may bring a different level of products and/or innovation that will force real estate companies to even further improve their delivery of services and products.
 Page 50       PREV PAGE       TOP OF DOC
    This is the natural evolution of business. Poorly managed real estate companies with poorly trained agents may not survive the new challenge, but that is in the best interest of the consumer. That is the American way. Quality real estate firms have nothing to fear. Bring on the banks. We may learn new things and do a better job for our existing and future customer client base. It is hypocritical, self-serving to prevent banks from entering the real estate brokerage industry while allowing real estate companies to provide mortgage, brokerage and other ancillary services.
    The issue of federally insured deposits creating unlevel playing fields in favor of the banks is a red herring and a diversion to the real issue. Let's speak the obvious. The public can certainly see it. We would most appreciate your consideration of allowing the market to work. Your energies and talents should be directed to the truly serious and potentially catastrophic insurance industry problems of our region—flooding—rather than becoming embroiled in this industry protectionist issue. Thanks for your help and many years of support, blah, blah, blah. Arthur Sterbco, President and CEO and Latter and Blum in Baton Rouge, Louisiana.''
    And I wish to speak just briefly to the issue of FDIC insurance. Whether or not it helps to resolve anything or not, I am not sure, but a bank pays a premium for insurance. If the premium is paid, it is a cost of business for the bank to operate—a premium which a realtor does not pay. Now, the beneficiary of the premium is not the bank or its officers, it is shareholders who are left holding the bag and depositors left holding the bag in the event the bank fails. So the bank sees no benefit from a mandated cost in order to do business.
    I have really struggled with understanding how that is an advantage to a banker in competing with a realtor. And I certainly want to have further explanation made as to how that is a bottom line cost advantage to a banking enterprise in relation to the delivery of real estate product.
 Page 51       PREV PAGE       TOP OF DOC
    I do not have any offer to make, Mr. Chairman, as to how this issue is resolved. I simply say that a decade ago we were embroiled in a similar debate between insurance companies and banking and that is banks entered into the insurance business, insurance as we know it would evaporate and banks would own the world. History may have spoken a different story. I simply appear here today to put into the record the letter of one constituent who I think is brave enough to give us the facts. Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you.
    Mr. Sherman, have you had questions yet?
    Mr. SHERMAN. Believe it or not, I do have a few comments.
    Chairman BACHUS. Okay.
    Mr. SHERMAN. I have not had a chance to work with this panel. I want to invite our ranking member if she wants to tour more houses to come to the San Fernando Valley where our local realtors will show you interesting places. I know you are constrained and probably will not actually join me in living in the San Fernando Valley, but it will be a wonderful—
    Ms. WATERS. If the gentleman will yield, I will just explain to you, despite what my friends may say, the real estate has become so expensive in California, now is not the time to buy. I am waiting. And I think that in about a year I may take up some of the persons I have been putting through all these hoops on one of those houses I have been looking at.
    Mr. SHERMAN. The one thing everybody in the room will agree on is they are all hoping the real estate continues to go up. You may be able to unite the bankers and the realtors.
    Mr. Chairman, these hearings are in a way premature and in a way absolutely necessary. We need to pass H.R. 3424 and lock in the fact that there is a very interesting policy issue, an issue well addressed by this panel and the next panel as well, but it is a policy issue that needs to be decided in this room by the people's elected representatives.
 Page 52       PREV PAGE       TOP OF DOC
    Once we pass this bill, once we tell the bureaucrats this is our decision, then we can explore some interesting questions, like whether deposit insurance gives banks an unfair ability to compete with realtors or not, whether there is a risk to the insurance fund knowing that bank lending decisions may have the appearance of being influenced by whether the bank's holding company is getting an extra 6 percent by acting as a realtor, whether bank regulatory authorities are capable of regulating realtors or whether realtors working for banks, real estate agents working for banks would be exempt from local state regulation.
    In a few years, we will know whether Gramm-Leach-Bliley worked well, and after you digest one feast, and only then, should you be looking for another one.
    And, finally, we would be able to explore in hearings, once we decide the decision is to be made by the elected representatives and the hearings should be here and not over at the Fed, this interesting chart, which is on everyone's desk and seems to indicate that 36 percent of the real estate firms of the whole real estate realty industry is dominated by three firms, which I believe confuses the fact that these are franchisees that are independent, locally owned companies making their own decisions, for the most part.
    Whereas these 15 percent of banks—you know, last I checked with the bank manager of Bank of America down the street, he did not say, ''This is my company. I do what I want. I just hang out a sign that has red, white and blue on it.'' The 15 percent bank figure is indeed owned by the banks. I have a feeling the 36 percent figure for concentration in real estate just indicates a bunch of local realtors preferred all have the same sign.
    So we have to pass H.R. 3424 now and then revisit the policy issue, then we can bring this panel forward, then we can discuss all those interesting questions. If we do not do it that way, if we fail to pass this bill, then an important issue of public policy is going to turn on 12 bureaucrats can get into a room and stretch the word ''financial'' to encompass the commercial.
 Page 53       PREV PAGE       TOP OF DOC
    Well, that is not how we make policy decisions, whether bureaucrats can stretch a word. We should make them based on whether it is good for consumers and good for the country to have these find folks in the real estate business. And once we demonstrate that that decision is going to be made here, then we should have you folks back to convince us that we should make a decision different from the one I am leaning towards.
    But worse than that, and that is if we sit back and let the bureaucrats stretch financial to encompass real estate, then maybe appliance sales, maybe automobile sales. I venture to say there is not a single person on this panel that can tell us whether banks should be involved in automobile sales. And if they can, I am sorry, that is outside the scope of the issue.
    If we acquiesce in this, then we have, by default, told the bureaucrats at Treasury, at the Fed that it is their decision, not only for real estate, which you folks may be able to make a good case for, but for toasters as well.
    Mr. Face, does your Virginia commission have the capacity to regulate realtors?
    Chairman BACHUS. Mr. Sherman, your time is up.
    Mr. SHERMAN. Oh, my time is up.
    Chairman BACHUS. No, I am kidding. You can go ahead with your time.
    Mr. FACE. No. My particular agency is a regulator of financial institutions. We do not regulate realtors. That is done by another agency in the Commonwealth of Virginia.
    Mr. SHERMAN. Thank you.
    Chairman BACHUS. You can go ahead if you all want to elaborate on the question. You can go ahead.
 Page 54       PREV PAGE       TOP OF DOC
    Mr. SHERMAN. You want me to ask—okay, I will ask Mr. Grabill—Patrick, how do I pronounce your last name?
    Mr. GRABILL. Grabill.
    Mr. SHERMAN. Grabill. You are a former director.
    Mr. GRABILL. Yes.
    Mr. SHERMAN. But as I understand it, they have 655 directors which means that they must have what, 5,000 former directors still on the planet?
    Mr. GRABILL. Oh, there are many.
    Mr. SHERMAN. Okay. So you are not here asserting that your role as a former NAR director makes you a—
    Mr. GRABILL. Not at all.
    Mr. SHERMAN. —representative of a huge percentage of the realtors in the country.
    Mr. GRABILL. Absolutely not.
    Mr. SHERMAN. Got you. Believe it or not, I have run out of questions.
    Chairman BACHUS. Thank you. Yes, we will have a second round. Let me ask this question. I have reserved asking questions.
    Mr. Eastment, you mentioned that you thought RESPA prevents you from tying the real estate transaction operating as one's broker from the financing from offering them a loan or something you basically said?
    Mr. EASTMENT. Well, RESPA does a number of things. Number one, it prevents us from requiring the use of any other services.
    Chairman BACHUS. Yes, tying of services.
    Mr. EASTMENT. It also prevents us from offering compensation or any other thing of value to the real estate agents to encourage them to use the services.
 Page 55       PREV PAGE       TOP OF DOC
    Chairman BACHUS. And that policy is that there should not be any tie or any expectation that when you are someone's broker that you would then finance that purchase. Is that the policy behind that?
    Mr. EASTMENT. I think the background of RESPA was to prevent, back in the 1970s, kickbacks for the referral of business. It is basically to prevent referrals.
    Chairman BACHUS. Or even anti-competitiveness.
    Mr. EASTMENT. Yes.
    Chairman BACHUS. Let me ask you this: When you talk about one-stop shopping, doesn't that imply a tie, though?
    Mr. EASTMENT. No, I do not believe that it does. I believe one-stop shopping makes the opportunity available. Ms. Waters' experience, for example, was her realtor did not choose to offer any other services, and as I said in my earlier testimony, after 20 years, we have a 16 percent capture rate.
    Chairman BACHUS. Yes. That, I guess, is my point. Now, Mr. Baird and you both said that customers are the reason for banks to offer their services, as people are seeking one-stop service. But then on the other hand, you turn around and say only 15 percent of the people actually do this. And in certain locations, there are probably not but five brokerage firms. You are maybe one of five, so that does not sound like people are—at least the 15 percent does not imply that people really care about—
    Mr. EASTMENT. Well, if you took the largest real estate companies in the country, probably more an average capture rate would be in the high 20's. Ours is on the low side. I believe that the consumer does want it. They do not want to have to come and buy the house from us, then go down the street and go to someone else for their title insurance.
    Chairman BACHUS. Wait a minute. Yes. Okay. That is my second point. Now, they have to do that anyway, don't they? I mean I have been trying to sit here and figure out how you could buy a house and on that same occasion close on a mortgage. I just cannot conceive of that being possible.
 Page 56       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. Well, the way it would work would be—
    Chairman BACHUS. How is that one stop? I mean, you know, I cannot go buy a house and—I cannot go to Long & Foster, sit down and buy a house—
    Mr. EASTMENT. You could come to Long & Foster, buy a house and under the same roof there would be a loan officer who would offer you a loan that you—
    Chairman BACHUS. The same day that I close?
    Mr. EASTMENT. The same day. In fact, we actually prefer to pre-qualify the person before they would go out and look at a house so that when they offer a contract to a buyer they would know that you were qualified. And then we can actually close the loan in the same office.
    Chairman BACHUS. Now, isn't that tying it when you actually pre-qualify someone, you say, ''We will give you a loan,'' you pre-qualify them, and then you go out and you sell them a house. I mean how could that not be tying it together? I cannot think of anything be more tied together.
    Mr. EASTMENT. When you are buying a home, especially in an environment such as we have the last few years where the seller is interested in the qualifications of a buyer. And if they have two buyers coming to them, one who says, ''Yes, I am interested in your house and I am writing a contract,'' and the other one says, ''I am interested in your house and I am writing a contract, and here I am, I am already pre-approved for a loan of X dollars,'' that is a sure thing, and that would—
    Chairman BACHUS. So, actually, what you are saying is that if you had at a bank that was a real estate broker and you were competing against someone that did not have a bank, did not have an affiliation, there would be a real competitive advantage because your client would come saying, ''I am pre-qualified.'' Boy, now that is not what we call a level playing field, is it?
 Page 57       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. I would think that it was. I think what we are offering is a service, and we are representing the seller of the home and we want to bring them qualified buyers. The—
    Chairman BACHUS. But, you know, in a way it would—let's say you have a bank in a certain town and you also have a real estate firm and you start pre-qualifying people. It would almost get to the point that if I wanted to buy a house, I would almost have to go out and go to a bank and get pre-qualified to be able to go out and buy at a reasonable price, because I would be competing with all these people who walked in, because you said it was a tremendous advantage.
    Mr. EASTMENT. It is a tremendous advantage when you have a seller who has to decide among, for example, multiple contracts. It is an advantage to them knowing someone is qualified rather than someone who writes a contract, they accept the contract and then the buyer has to go out and spend a few days getting approved. In the meantime, the seller has his home off the market. I think the other point—
    Chairman BACHUS. If we said that we were not going to allow brokers to finance this transaction, then everyone would have the same advantage—
    Mr. EASTMENT. I do not think we would be providing the service that the people would want then. They do not want to go around from place to place to get these different—
    Chairman BACHUS. My time is expired. If we have a second round, I think—are any members wishing to ask a follow-up question on this side? How about on this side?
    If they do not, let me close with one question. You are talking about one-stop shopping and I know, Mr. Baird and Mr. Eastment, you really focused on that. Convenience of dealing with the same person, pre-qualified. What about General Motors, do you think they ought to be able to own a bank and then they could basically own a bank and finance it all, when you could go to the bank and buy a car? What do you think about that?
 Page 58       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. I believe General Motors already does that with GMAC and—
    Chairman BACHUS. So is it you all's position that General Motors ought to be able to own a bank? What would your membership say?
    Mr. EASTMENT. I do not think that would bother us.
    Chairman BACHUS. Okay. How about your members?
    Mr. BAIRD. One of my big competitors is owned by GMAC.
    Chairman BACHUS. Yes. I am talking about a bank as opposed to opening finance company. You just think they ought to go ahead and do it.
    Mr. BAIRD. I do not view that if General Motors owned a bank versus their current financial situation that it would make them any more or less competitive than they are right now.
    Chairman BACHUS. Well, what do you think about them owning a bank? Does that bother you?
    Mr. BAIRD. Whether General Motors owns a bank or not is not going to affect the real estate business or my competitiveness in the market.
    Chairman BACHUS. And this is not a trick question, but that would certainly it would open another avenue to them, right?
    Mr. BAIRD. Well, General Motors' ability to borrow money today is probably one of the lowest in the country, because of their financial resources. That is a huge competitive advantage that they have—over me or over a lot of other institutions.
    Chairman BACHUS. Well, wouldn't that be a case of a large bank in a big town? Wouldn't they have a tremendous competitive advantage over a realtor with two agents?
    Mr. BAIRD. I guess what I am trying to say—
 Page 59       PREV PAGE       TOP OF DOC
    Chairman BACHUS. You are and awfully big company, and yet General Motors, you are saying they have a tremendous advantage over you today.
    Mr. BAIRD. No. They have a tremendous advantage in borrowing money. But as it comes down to the competitive nature in the real estate business, that does not have a significant difference for me.
    Chairman BACHUS. Well, wouldn't a big bank—wouldn't the same thing be true of a big bank? Wouldn't they have a tremendous advantage on being able to loan money?
    Mr. BAIRD. Well, they already are in my marketplace loaning money. The fact that they might offer real estate brokerage is not going to mean that their financial capabilities are any more competitive?
    Chairman BACHUS. What about Wal-Mart? Do you all see anything wrong with allowing Wal-Mart to operate a bank? Your group does not?
    Mr. BAIRD. You know, my own personal opinion is if Wal-Mart thinks they can compete with us, I will be glad to compete with them.
    Chairman BACHUS. Because this would be consistent with your policy, right?
    Mr. BAIRD. Absolutely.
    And how about you, Mr. Eastment?
    Mr. EASTMENT. I would say the same thing. Wal-Mart would not bother me. I think there is this—
    Chairman BACHUS. And I am not questioning that. I believe you all sincerely think let Wal-Mart have banks, let them operate banks, because that is consistent with the competitiveness and the free market and the one stop, correct?
    Mr. EASTMENT. Yes. I think there is a misunderstanding that large institutions, be they banks or General Motors or Cendant or whomever—
 Page 60       PREV PAGE       TOP OF DOC
    Chairman BACHUS. Or Wal-Mart.
    Mr. EASTMENT. —or Wal-Mart, does something differently when they take someone out to show them a home. And as I said earlier, no matter what size company you are, unless you have a good agent who is looking after their customers' interest, they have to do the same thing to sell that customer something. And I think that is the key, customer service.
    Ms. WATERS. Will the gentleman yield?
    Chairman BACHUS. Yes. I will simply just close by saying I mean if you argue there is one stop and the competitor, then your philosophy has to say let the Wal-Mart in the banking business. It would be inconsistent not to, wouldn't it? I am just asking you two.
    Mr. BAIRD. Could I add one thing to that? There have been many large financial institutions who have come into our business, and you can argue about how strong they are: Sears, Merrill Lynch, Prudential, Metropolitan Life. And quite a few of them have exited the business, because they had trouble providing the level of service that realtors provide.
    Chairman BACHUS. And Wal-Mart could have that same problem.
    Mr. BAIRD. A lot of people. I would love to be able to compete with large financial institutions, because I will beat them every day of the week, because they cannot provide the level of service that my realtors can, that I can attend to on a local basis. That is why the entrepreneur realtor is always going to win out.
    Chairman BACHUS. So if we let the banks in the real estate business, we have got to let Wal-Mart in the banking business. So you all would agree with that?
    Mr. Eastment?
    Mr. EASTMENT. That would be fine with me.
 Page 61       PREV PAGE       TOP OF DOC
    Chairman BACHUS. Thank you.
    Ms. Waters?
    Ms. WATERS. You know, Mr. Eastment, when you talked about pre-qualification, it kind of struck a chord with me. I do not know if you know or believe that many of us feel that the banks have not done a good job in making mortgages available or loans available to people in certain communities. The reputation of banking in general is such that, you know, from the old description of red lining to the newer descriptions of predatory lending and all of that, I mean still kind of saddled with that reputation. When you talk about pre-qualification, if you use the same kind of thinking that banks have used in the past to determine whether someone is creditworthy, it causes me a little bit of concern.
    What is different about the bank and the real estate agent is this: The real estate agent really wants to be financed. They want to make that sale, and they will help talk about possibly what you need to do in order to qualify, where perhaps there are several places you can go to seek that mortgage. Would you, as a banker, tell your customer that there is a bank across town that has lower interest rates than I have, maybe you ought to check them out first?
    Mr. EASTMENT. Our agents do that all the time, and as I said earlier, the agents they want to keep you—
    Ms. WATERS. They do what all the time?
    Mr. EASTMENT. They have their buyers check multiple lenders before they commit. And, for example, if they were showing you a house, they might recommend two or three lenders, including ours, maybe not ours.
    Ms. WATERS. Wait just a minute. I want to make sure that I understand you correctly. You would have someone representing your bank selling real estate suggest that there is another lender who will have better interest rates than you?
 Page 62       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. If you understand how real estate agents work, if our company was owned by a bank and the bank said, ''You only recommend us,'' the agent would leave and go across the street to our competitor. And I think that is why we are not afraid that banks could bring anything that would be much of a competition. If they did that, they would not be in the business very long.
    Because the agents are independent, they are looking out for your interest, and they are going to do what they feel is right, because they want to keep you as a future customer. They do not want you to be mad at them because they recommended a loan that was inappropriate for them. And they want to stay in your good graces. And if they think an in-house mortgage company has an appropriate product, they will recommend us. If they do not, they will not.
    Ms. WATERS. What is the advantage then of having that agent inside the bank? Aren't they there to bring business to the bank?
    Mr. EASTMENT. Well, I think if we are talking about we have a loan officer in our real estate office. The advantage is the loan officer is right there and all we are asking for is the opportunity to present a loan package to you, and if you choose to go elsewhere, you are free to do so. As opposed to an outside loan officer from a bank across the street who you may have to page, he has to come by. We offer a mortgage office in our real estate office.
    Ms. WATERS. Oh, that is interesting, and it is kind of hard to digest here, that an agent would be welcomed inside the bank for very long if they were sending the business all over town. I do not know. That just does not sound right to me. You know, I know a little about competition and business, and I just do not think that that agent would be welcome inside the bank if they were directing the sales at other places with better interest rates, et cetera. Now, I hear what you are saying and that sounds lofty and that sounds pretty good, but I do not know if they would have a chair there very long if they operated that way.
 Page 63       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. If the agent was not welcome, if we take your premise they were not welcome, there are hundreds of other—for example, in this area, there are hundreds of other real estate firms that they could go to there and conduct the business the way they see fit. And what I do not agree with would be the premise that if a bank bought our company, all of a sudden they could direct the business to their bank. Our agents would leave in a heartbeat.
    Ms. WATERS. Yield back.
    Chairman BACHUS. Thank you.
    Mr. Sherman, you indicated you had some—
    Mr. SHERMAN. I would like to pick up on my colleague from California's comments. I am not so much concerned about a requirement but rather an incentive. As I understand real estate law now, and anyone on the panel can indicate this is wrong, if I am a real estate agent, I cannot accept from my favorite mortgage broker cash so that I direct all my folks to that one mortgage broker; is that correct?
    Mr. EASTMENT. That is correct. Not only can they not accept cash, they cannot accept anything, quote, of value.
    Mr. SHERMAN. Got you.
    Mr. EASTMENT. And I think RESPA already covers that.
    Mr. SHERMAN. We have dealt with the stock analyst problem. We have not solved it yet, but we have tried to do it with a little bit of a wall, and we have pressured, if not legislated, so that the big Wall Street houses will say, ''We are not going to directly compensate you for recommending stocks of the companies we are doing underwritings for.'' And so I assume that RESPA would prohibit an employee of a bank from participating in a bonus program in which the more loans you get your customers to originate the greater your pay. Would RESPA prohibit that?
 Page 64       PREV PAGE       TOP OF DOC
    Mr. EASTMENT. RESPA would prohibit that. You know, the issue that you have—
    Mr. SHERMAN. Now, my concern is this: I do not believe in Chinese walls to separate in the sense of expecting employees not to do what is in the best interest of their company, because if you are a real estate agent, you could not get compensated directly by your bank employer based on loan originations, but loan originations could be determined, calculated, kept track of. And then at the end of the year, you could get a bonus and it would not be tied to an exact calculation, but rather it would be an all facts and circumstances test.
    And maybe because you are willing to work Sundays when other people will not or maybe because you have a good attitude or maybe because you have helped train some of the junior agents or maybe because your origination figure is good you could get the biggest bonus in the office. Are you proposing polygraph tests for supervisors of agents so that we know that the bonus at the end of the year, the discretionary bonus, the all facts and circumstances bonus is not influenced at all by loan originations?
    Mr. EASTMENT. The situation on Wall Street involves employees on both sides. The real estate agents are literally and figuratively independent contractors and are prohibited by RESPA from receiving anything of value. It prohibits us from doing anything, and it would prohibit us regardless of who owned the company. So I would assume that if a bank owned our real estate company, they would still be subject to the RESPA provisions and would not be permitted to do that.
    Mr. SHERMAN. Well, I know that the tax law has been designed to identify them as independent contractors and that benefits the industry. But are you saying that real estate salespeople do not get discretionary bonuses at the end of the year ever?
    Mr. EASTMENT. I am not aware of—
 Page 65       PREV PAGE       TOP OF DOC
    Mr. SHERMAN. I know usually they get a piece of the 6 percent, but are there some firms where they also get bonuses?
    Mr. EASTMENT. We certainly do not, and I am not aware of other firms that do that either.
    Mr. SHERMAN. Because the question is not are you an employee or an independent contractor, the question is, is there an all facts and circumstances discretionary bonus payable at your firm at the end of the year that could be influenced by steering your customers to a particular mortgage source. And that could somehow interfere with the fiduciary duty to steer them to the best source.
    I think, though, most customers, if they are dealing with Bank of America Real Estate are going to figure that they are going to be urged to get a Bank of America loan. As a matter of fact, panelists have talked about one-stop shopping, and that is exactly what one-stop shopping is.
    I would have to learn more and, as I say, I look forward to learning more after we pass the bill, take this decision back from the bureaucrats and decide this issue in a way that does not license the bureaucrats to deal with toasters, cars or anything else but just decide the real estate issue in this body. And I yield back.
    Chairman BACHUS. Thank you. I very much appreciate your testimony and I know some of the questions we asked you were banking questions and you are real estate, in some cases, Mr. Eastment, Mr. Baird. We do appreciate your testimony, and you are discharged at this time.
    At this time, we will call the third panel. Our third panel is made up of Mr. Martin Edwards, Jr., President of the National Association of Realtors; Mr. Robert Bailey, President of the California Association of Realtors; Ms. Mary Frances Burleson, President and CEO of Ebby Halliday Realtors in Dallas, Texas; and Ms. Elizabeth Holland, Asset Manager and General Counsel, Abbell Credit Corporation in Chicago, on behalf of the International Council of Shopping Centers; Mr. John Taylor, President and CEO, National Community Reinvestment Coalition.
 Page 66       PREV PAGE       TOP OF DOC
    At this time, I am going to recognize the gentleman from Texas, Mr. Bentsen.
    Mr. BENTSEN. I thank the chair for yielding. I just wanted to make note that Mary Frances Burleson, who is the chair of the Texas Association of Realtors, is testifying before us today. I would also mention that Martin Edwards used to be a Texan, but somewhere down the line he went bad and ended up in Tennessee, I think it is, but still has strong ties there, and we are glad to have you both on the panel today.
    Chairman BACHUS. I thank the gentleman.
    Mr. Sherman?
    Mr. SHERMAN. If I can recognize Robert Bailey who has the good sense not to live in Texas and instead to be president of the California Association of Realtors.
    Chairman BACHUS. Thank you. And at this time, I am going to recognize Mr. Barr. He has a conference or committee to go to, and I am going to recognize him, with the indulgence of the other members, first.
    Mr. BARR. Thank you, Mr. Chairman. I appreciate you letting me speak briefly out of order. I apologize to the panel. I have to leave and go to the floor on a bill, but I want to thank you, Mr. Chairman, for both panels, both the previous panel as well as this panel.
    And I would like to pay a special word of welcome to Mr. Edwards. Mr. Edwards was a very, very eloquent spokesperson for the realtors just a few months ago, a couple of months ago, when he appeared before my Subcommittee on Commercial and Administrative Law to speak on the same issue. And I appreciated very much his input then, and I know that he will bring the same eloquence to bear with regard to the substance of the testimony today. But I would like to thank him and the rest of the panelists and apologize.
    I do have to leave. I will try and get back after the floor debate that I have to participate in, but if I do not, rest assured that as with the previous panel, I appreciate very much you all being here and will pay very close attention not only to the transcript of the proceedings today but your written statements as well. Thank you, and thank you again, Mr. Chairman.
 Page 67       PREV PAGE       TOP OF DOC
    Chairman BACHUS. Thank you. And also wish to ask questions, we will recognize you.
    Mr. BARR. I will submit them in writing if there are any. I know that you will probably cover pretty much most of them, as you always do, hit the high points. But if there are any specific ones, Mr. Chairman, I will submit them in writing, but I do have to get over to the floor very quickly here.
    Chairman BACHUS. Thank you.
    Mr. BARR. And thank you for letting me speak out of order.
    Chairman BACHUS. Mr. Bentsen, you have a question? Oh, I am sorry, they have not testified yet.
    Yes, I have read their testimony, so I am ready just to ask questions.
    Mr. Edwards, I apologize. I have been up till 1 o'clock and up at 7 this morning and it is beginning to show. It will turn on, actually. There is a button—


    Mr. EDWARDS. Push that button. That works, even for Texans, right?
    Chairman Bachus, Representative Waters, members of the subcommittee, I am pleased today to testify on behalf of the National Association of Realtors, the National Association of Home Builders and the National Auctioneers Association, with a combined membership of approximately 1.25 million people, practitioners in our business supporting H.R. 3424.
    Mr. Chairman, in these precarious times, housing and the real estate industry are a shining light in contrast to some of our country's largest corporate institutions who are now facing failure, bankruptcy and due to accounting problems and cozy relationships, in some cases, outright fraud.
 Page 68       PREV PAGE       TOP OF DOC
    Ordinary Americans have seen their retirement accounts wither and portfolios vanish with corporate management while corporate management has profited. Federal Chairman Greenspan testified last week that the continued strength of the housing and the real estate sector are necessary elements to keep the economy on the right track. We are proud as three organizations of this accomplishment and point to it as a strong evidence that the current system is not only working but is working very well.
    It is important to note in our organization that 67 percent of all residential real estate firms consist of a sale force of five or less agents and only 3 percent of our firms represent a sales force of 50 agents or greater.
    Many of the troubles being experienced in the current crop of corporate failures can be traced to rapid expansion and consolidation of business. Congress has determined that when the lines of separation are breached, as in accounting and in consulting, too many conflicts of interest may arise. We believe that that is why commerce and banking should remain separate. Real estate brokerage, leasing and property management are purely commercial activities.
    Bankers will argue that the central tenet of Gramm-Leach-Bliley was the section to grant powers to banks. We disagree. The purpose was for Congress to grant securities and insurance industry powers to financial holding companies and national bank subsidiaries. Gramm-Leach-Bliley authorized the regulators to grant banks expanded financial powers, not whole industries.
    Although bankers have argued that this is the first test of Gramm-Leach-Bliley, in fact there has been a rule finalized to allow financial holding companies to act as finders, bringing parties to a transaction together. It specifically excludes finder activities that require a real estate license.
    Another proposed rule would allow financial holding companies greater entry into electronic data processing and new technologies to assist in delivering of existing bank products. These are what we believe Congress intended were incidental to our complementary powers.
 Page 69       PREV PAGE       TOP OF DOC
    The diagram here on my, if we have got it, on my right shows the current reality of competition in the financial services arena. Currently, we have a balanced marketplace of commerce, banking and financial services. Both the real estate brokerage and the financial holding companies, banks, have diversified their business lines into financial service areas that have served and serve as a buffer between commerce and banking, as we heard from the previous speakers. This was the intent of Congress throughout the deliberations of the Financial Modernization Act.
    Let me make this perfectly clear, Mr. Chairman. Real estate companies do not offer banking services. We do not take deposits, we do not offer savings accounts, we do not offer checking accounts or certificates of deposits. We do not offer ATM machines. Nor do we have deposit insurance or access to the federal discount window. We do offer real estate brokerage, leasing and property management.
    In addition, as you heard from some of your previous speakers, some real estate firms also offer mortgage lending operations. It is in this area where real estate brokers and banks compete. This is no different than General Motors financing the purchase of an automobile. In fact, close to 45 percent of mortgage originations today are from commercial banks. The next highest groups originates half that amount. And the realtor affiliated mortgage originations offer an origination of about 5 percent of the total market.
    These are very special relationships governed by the affiliated business arrangement provisions of RESPA, Real Estate Settlement Procedures Act. That act requires very specific consumer disclosures and maintains an arm's length relationship between the affiliated providers.
    So why do bankers seek this rule? Although they argue that the local licensing would of course be followed by the banks, actions sometimes speak louder than words. Maybe we can look to the experience of the insurance industry since the enactment of Gramm-Leach-Bliley. There have been several instances of national banks joined by their regulator, the controller of currency, seeking preemption of state consumer protection and insurance laws.
 Page 70       PREV PAGE       TOP OF DOC
    The state of Massachusetts recently filed suit against the OCC for preempting state laws on the sale of insurance by a bank. Even Chairman Oxley of this committee has questioned the OCC about the propriety of their actions. These are good reasons for Congress to take a long, hard look at how banks operating real estate brokerage firms would be governed.
    Real estate today is one of the most locally regulated industries in America. There are far too many questions and hurdles that arise on the proposed rule to let them be decided by banking regulators rather than by local and state authorities. This rule would profoundly change the real estate industry. What bankers are seeking under the proposed rule is nothing short of nationalizing the real estate industry.
    Does Congress want the Federal Reserve, the Treasury Department, the Federal Trade Commission or other regulators to be the regulators of the housing industry in land and local matters? If so, Congress should enact legislation to accomplish that goal. By declaring real estate brokerage, leasing and property manage financial or incidental thereto, the regulatory would do just that.
    Yes, the bankers will argue that they only seek to enter the market to be competitive while abiding by all of the local real estate regulations. But their actions and insurance show a different approach that is sanctioned by the regulators at the federal level.
    In closing, on behalf of these three large organizations, I would ask that you pass H.R. 3424 with its overwhelming cosponsor support. And I thank you, and I will stand for questions.

    [The prepared statement of Martin Edwards Jr. can be found on page 128 in the appendix.]

    Chairman BACHUS. Mr. Bailey?
 Page 71       PREV PAGE       TOP OF DOC

    Mr. BAILEY. Chairman Bachus, Representative Waters and the members of the subcommittee, my name is Robert Bailey. I am president of the California Association of Realtors and the broker/owner of Bailey Properties Real Estate, a family owned and operated independent real estate company established in 1974. We are located in Santa Cruz, California.
    Bailey Properties currently has three real estate offices and a property management and vacation rental office. The firm now includes over 102 associates, 17 support staff who serve clients throughout the entire Monterey Bay region. Our firm is the largest real estate firm in our market in both size and market share.
    Thank you for inviting me today to present testimony on H.R. 3424, the Community Choice in Real Estate Act, on behalf of the California Association of Realtors. The California Association of Realtors consists of over 100,000 members. We are the largest trade association of any type in the state of California. We are the second largest real estate trade association in the country, second only to the National Association of Realtors.
    Our members make up one-seventh of the entire membership of the National Association. To put that in scope, within California, CAR members handled over 90 percent of all residential real estate transactions last year, totaling in excess of 534,000 sales.
    The California Association of Realtors is unique even for a trade association. We are an association where each and every member has an equal voice, where each and every member, if they can articulate their position well enough, has the ability, the power and the right to stand at the microphone and literally change the direction that we go within California and the way we go as an industry, whether you are a member from a rural part of the state or a large city, whether you are an individual practitioner or an associate with a major firm.
 Page 72       PREV PAGE       TOP OF DOC
    This is an important point when you gauge the response we have received from our members on the issue of banks entering the real estate industry.
    The leaders of the California Association of Realtors first brought this issue to the attention of the members in January 2001. We received an immediate an overwhelming response, a response that far exceeded any that we had received before. There has never been an issue, whether legislative, risk management or bottom line driven, on which our members have never been so vocal. The closest we have come is the realtors current involvement in the housing affordability crisis that we are suffering throughout our state.
    Over 40,000 members of the California Association of Realtors sent letters, e-mails and faxes to the members of the California delegation expressing their concern regarding the potential for banks entering the real estate industry through the ownership of firms that would broker, lease or manage property.
    The size and passion of our members' response surprised us until we realized that they were not speaking solely as realtors but also as consumers. The shelf life of this issue within our state association has also surprised us. The passion at which our members continue to respond a year and a half later is exceedingly strong and has not diminished.
    The input I have received, though, goes well beyond our industry. In my role as president of the California Association of Realtors, I spend time traveling the state meeting not just with our members but also with members of local chambers of commerce, rotary clubs, lion clubs, and next on my agenda next week is a group called SIR, which is the Seniors in Retirement. I will be speaking to 120 members of that organization, which they have explained to me will average in age of 80, and they have asked me specifically to put this as one of my talking point.
    In each of these presentations, I have included a reference to the bank's request. The response I have received mirrors that of realtors. I think that goes to reinforcing my point that our members are not looking at this just as practitioners. They are not looking at it just as realtors. They are looking at it as consumers.
 Page 73       PREV PAGE       TOP OF DOC
    The public at large is only now beginning to become aware of the potential effects of banks owning and operating real estate companies. California is not unique among state trade associations. There is a broad-based support from agents and realtors across the country. Though I can only speak on behalf of California, I believe that this is an issue that affects not only realtors but consumers across our nation, and I hope that this is an indicator of not only our state but the sentiment of consumers and realtors across the nation.
    And I would encourage the subcommittee to move forward on the bill. This concludes my remarks, and I would welcome any comments or questions. Thank you.

    [The prepared statement of Robert Bailey can be found on page 81 in the appendix.]
    Chairman BACHUS. Ms. Burleson?


    Ms. BURLESON. Chairman Bachus, Representative Waters, members of the subcommittee, I am Mary Frances Burleson. I am president and CEO of Ebby Halliday REALTORS. We are based in Dallas, Texas. We cover nine counties, from the Red River to south of Dallas and Rockwall and Tarrant Counties. And we have more than 1,200 outstanding associates and 130 staff. We are the number one independent company in the state of Texas and number 10 independent company in the National Association, in the NAR, in the country.
    I am also president of the Texas Association of Realtors, and we have 59,000 members. I am also a member of NAR. And I have been a director or NAR for 10 years. I am also a member of the Realty Alliance.
 Page 74       PREV PAGE       TOP OF DOC
    Now, in terms of our marketplace, we are very active. We provide a lot of benefits for our clients. We also have a mortgage company called Home Team Mortgage. We opened it five and a half years ago. Now, at that time, we joint ventured with GMAC to do our operations center, which does the underwriting and loan processing. We have our own loan officers.
    Eighteen months ago, we decided to sever our relationship with GMAC, so we no longer have a joint venture; we own our own operations center. So we do our own loan underwriting and processing. First Tennessee is our warehouse loan, and after 30 days our loans are sold primarily to Wells Fargo.
    So we are in business, in the mortgage business, and have been for five and a half years. So we want to be the masters of our own fate. We think we add better service to our clients and to our associates. We have loan officers in 20 of our 25 offices, and so we think we provide great service to our clients.
    In talking about the membership in the NAR, I get a great deal of benefit. I attend meetings twice a year. I have been on all the committees and task forces. I go get information about the marketplace for risk reduction, risk management and about the marketplace and take it back home to our company to provide a better service for our company.
    The Realty Alliance. As you have heard, there are 45 companies which are members of the Realty Alliance. The principals meet twice a year, our CFOs meet once a year, our marketing directors meet once a year. We meet together to share information, to learn to do things better and take the information back home to do better business. So we are there by choice, and we think it is a very good place to be. But we are members of both of these associations, and we get a lot of benefit from them.
    Ebby Halliday Realtors. This is our 57th year of business—57 years. Ebby Halliday's still very active, the broker, and I have been with the company for 44 years. I have seen every kind of market you can name—18 percent interest down to what it is today. We are very concerned about our marketplace. We do not mind competition, but we want the playing field to be level. We do not want it to be uneven. We think the banks getting our business would make the playing field very uneven.
 Page 75       PREV PAGE       TOP OF DOC
    Our company very much supports H.R. 3424, the Community Choice in Real Estate Act. We do not want the banks in our brokerage business. You have heard today that a lot of us think we can give great service and we do. Every one in the brokerage service has to give great service.
    Chairman BACHUS. They are telling me that maybe move the mike back a little bit.
    Ms. BURLESON. Back? Sorry.
    Chairman BACHUS. They are recording it back there, and it is kind of—
    Ms. BURLESON. Thank you. I have never been told I talk too loud. Thank you. But we believe that we can go toe to toe, but we do not think it is a level playing field where they get in the business.
    So if they were get in the business, if they are allowed to get in the business, what will we do? We will do what we do now: Give great service, continue training our agents, work hard at everything we do.
    I have a very favorite motto in my business life: Early to bed, early to rise. Work like H-E-L-L. Advertise, economize and Internet-ize.
    Today's marketplace is very, very demanding, our agents are very demanding, and the public is very demanding. You have already heard the response from a lot of people sitting at this table today. So we have to continue what we are doing but to do it even better than we have ever done it before, advertising and marketing. That is why we go to national meetings. We keep learning, we keep asking questions.
    Among our peers, what are their questions and concerns about the H.R. 3424? Am I doing it still? Sorry.
    Chairman BACHUS. Actually, I think it is the mike. Let's switch mikes. I believe that is just the mike.
 Page 76       PREV PAGE       TOP OF DOC
    Ms. BURLESON. Switch mikes? Okay.
    Chairman BACHUS. Turn that one off.
    Ms. BURLESON. As the president of the TAR, Texas Association of Realtors, this year, I have to travel 16 regions. When I travel these 16 regions, realtors are very verbose, and they are very opinionated, as you have already heard Mr. Bailey. They are very emphatic. They say, ''Go and do what you can to get H.R. 3424 passed.'' They want this to be passed. They do not want the banks in our business. So I am speaking on behalf of the Texas Association of Realtors and Ebby Halliday Realtors.
    Thank you for your meeting today, Mr. Chairman, and thank you for being here, and I will wait for your questions.
    Chairman BACHUS. Thank you.
    Ms. Holland?


    Ms. HOLLAND. Good afternoon, Mr. Chairman and members of the subcommittee. My name is Elizabeth Holland, and I am the chief executive of Abbell Credit Corporation, a 50-year-old family business focused on real estate investment, development and management based in Chicago, Illinois. Abbell Credit manages a 1.6 million square foot portfolio comprised of a shopping center, an enclosed mall and office properties, including Merle Hay Mall in Des Moines, Iowa and Westgate Village Shopping Center in Toledo, Ohio.
    I am here on behalf of the International Council of Shopping Centers and am the chair of the organization's Economic Issues Subcommittee. The ICSC is the global trade association of the shopping center industry and has 40,000 members in the United States, Canada and more than 77 other countries around the world.
 Page 77       PREV PAGE       TOP OF DOC
    Thank you for inviting me here today to express ICSC's views on the Community Choice in Real Estate Act and for holding another hearing on this very important issue.
    The ICSC strongly supports H.R. 3424. In addition to the technical arguments that real estate brokerage and management activities do not constitute financial activities under the Gramm-Leach-Bliley Act discussed in detail in our written statement, we are very concerned about the potential negative effects that the proposed rules could have on many shopping center developers and managers.
    For example, if a developer goes to a bank with a proposed project for construction or bridge financing, two scenarios could occur, both of which are highly problematic. In the first scenario, the developer agrees to contract with the bank to provide real estate brokerage and management services. The bank would receive a 5 percent management fee on the gross income of the project once it is operating, as well as a 3 percent brokerage commission on all leases. In this case, the bank's objectivity in reviewing the financial soundness of the project is now suspect, if not completely lost, because the bank will profit from the operations of the finished project.
    In the second scenario, the developer does not plan on having the bank participate in the leasing and management of the finished project, which is currently what happens in the marketplace. In order to secure financing to build the project, the developer provides the loan officers with extremely detailed information, including demographic support, proposed tenants, design and configuration on the site, current competition, as well the weaknesses and potential pitfalls of the project.
    The developer provides this information to give the bank comfort that the proposed project will be successful. This full and frank disclosure properly facilitates an objective credit analysis by the bank prior to issuing a loan. However, if a bank can compete for brokerage and management contracts, it could discuss a proposed project with a preferred developer, one that would allow the bank to provide it with such services should it get the opportunity to develop the project.
 Page 78       PREV PAGE       TOP OF DOC
    This potential scenario would most likely keep the original developer, and others like it, from fully disclosing the project's potentials and pitfalls and limit the bank's ability to accurately assess the risk of the project, to the detriment of its depositors.
    Gramm-Leach-Bliley continues to prohibit banks and their subsidiaries from making real estate investments or being involved in real estate development. The Proposed Rule, on the other hand, would permit such institutions to engage in real estate management and brokerage activities. While these two rules may at first appear to be compatible, there are many overlapping or identical activities that are performed by property managers and real estate developers and investors.
    Successful property management in the retail context involves many of the same functions as a real estate developer. A good management company must continually reevaluate the projects for further development and redevelopment in order to stay competitive within the market through renovations, tenant additions, expansions and property acquisition, as well as engage in municipal and governmental entity relations and negotiations.
    The role of a property manager, like that of a developer, is to keep the project competitive by continuing to develop and redevelop the project over time. If a financial institution is allowed to engage in property management, it would have to fulfill these responsibilities and would, in essence, be engaged in real estate development, an activity that is prohibited under Gramm-Leach-Bliley.
    Furthermore, a management firm's compensation is usually based on a percentage, typically 4 to 5 percent, of the gross receipts of a property. By taking a percentage of the gross revenue as the management company, a bank's fees will rise and fall based on the performance of the property. It will be invested in the performance of the real estate the same way as if it had an equity interest in the property. This interest would appear to constitute an investment in real estate, an activity that is clearly prohibited under Gramm-Leach-Bliley.
 Page 79       PREV PAGE       TOP OF DOC
    For these reasons, as well as those included in our written comments, the International Council of Shopping Centers strongly supports the H.R. 3424 and opposes the proposed rules. Thank you for opportunity to address you today. I would be happy to answer any questions.

    [The prepared statement of Elizabeth Holland can be found on page 160 in the appendix.]
    Chairman BACHUS. Thank you.
    Mr. Taylor?


    Mr. TAYLOR. Good afternoon, Chairman Bachus and Representative Waters and distinguished members of the Subcommittee on Financial Institutions and Consumer Credit. My name is John Taylor, and I am the President and CEO of the National Community Reinvestment Coalition, NCRC. NCRC is a national trade association representing some 700 community organizations and local public agencies who promote fair and equal access to credit, capital and banking services. NCRC member organizations represent over 18 million consumers nationwide.
    I thank you for the opportunity, Mr. Chairman and other members of the panel, to be here to testify on the critical issue of whether we should allow banks to own real estate firms.
    NCRC opposes allowing banks to enter the real estate industry. Under no circumstances should any further co-mingling of industries occur in the absence of updating CRA, the Community Reinvestment Act.
 Page 80       PREV PAGE       TOP OF DOC
    NCRC maintains that the addition of real estate to the array of products now offered by financial holding companies will lead to greater consolidation of bank market power and result in fewer choices for consumers. Our worst nightmare in a consolidated financial market that includes real estate brokerage is a bank offers favorable loan terms to its real estate affiliate, giving it significant advantage over a competing real estate business that does not have an affiliate. And the number of product choices offered to customers of non-affiliated real estate business decreases, resulting in higher-cost loans.
    If we allow for the consolidation, Mr. Chairman, via cross-industry ownership of banks and real estate terms, we will end up with fewer and bigger firms, less competition, less choice and higher prices for consumers.
    I must raise an issue that I think has been on the front page of every paper in the last month and that has to do with corporate greed. In May, when I testified before Senator Johnson's subcommittee, I cautioned against allowing banks into yet another market when we had just seen most of our country's largest lenders at the front of the, quote, Enron Ponzi scheme, end quote.
    Now we have just learned that one of our largest financial holding companies may have conspired with Enron to make the company look financially healthier than it actually was at the same time that the holding company's securities and insurance arms were used to prop up Enron.
    I hope in the end this is not true, but the point is Congress should keep the few remaining firewalls to protect the American consumer from financial institutions that are trying to serve too many masters.
    When Congress repealed Glass-Steagall without instituting safeguards, it legitimized stealthy operations of financial conglomerates that are driven purely by greed and profits at the expense of the everyday consumer, investor and depositor. To borrow a phrase from my friend, Alan Greenspan—well, I call him my friend, I do not know if he calls me that—quote, ''an infectious greed seemed to grip much of the business community.''
 Page 81       PREV PAGE       TOP OF DOC
    I would add that that infectious greed in corporate financial conglomerates is what is driving this debate. And until we rebuild the firewalls demolished by Gramm-Leach-Bliley, it would be a tragedy to open the floodgates to get another market.
    Unlike any other business, banks hold a special status: They are the stewards of the American public wealth. We taxpayers guarantee that consumers cannot lose their deposits in banks; however, we depositors know that their personal savings are being put at risk when the infectious greed spreads to their financial institution.
    When Congress enacted FDIC insurance, it held banks to a solemn promise that they would be manage safely and meet credit needs and deposits of all the communities in which they did business. There was a reason why Congress kept banks out of the other financial businesses for over 60 years. Congress thought that a head-long rush into other lines of business would risk people's life savings in imprudent schemes.
    The terrible news of the last few weeks reaffirms that congressional wisdom of 60 years ago cautions us against allowing banks into yet another industry, namely real estate. Didn't the savings and loan industry devastate itself with bad real estate deals?
    All this being said, I am somewhat confused as to the financial industry's argument that they need real estate brokerage included as a financial activity in order to stay in business. Banks today already enjoy a business relationship with real estate companies. You have heard some of the testify earlier. Long & Foster, for example, has a joint venture with Wells Fargo Mortgage Company. This venture offers loans through what is called Prosperity Mortgage.
    Prosperity loan offices sit in the offices of Long & Foster. I am trying to imagine them recommending other lenders as you walk in. But you did hear Mr. Eastment testify that only 16 percent of his business came from that. He did not testify that it was the biggest growth area, a 33 percent growth factor, that that lender, that Prosperity Mortgage was in fact the single largest mortgage lender in Long & Foster. So the other 84 percent, was it, 84 percent was a series of other lenders, but the single largest one was in fact that very special relationship they have with Wells Fargo through Prosperity Mortgage.
 Page 82       PREV PAGE       TOP OF DOC
    In our opinion, there is more to this. We believe Wells Fargo wants to do what is now prohibited by law; namely to get their hands on Long & Foster client lists, to cross-sell their checking and savings products, credit cards, insurance, auto loans, refinance loans, annuities, estate planning, et cetera.
    Greed has also driven Wells into the area. I mean a bank like Wells Fargo is now in the payday lending business. I am trying to imagine the relationships they have with Golatta National Bank and Ace Cash Express, things that really are done at the expense of consumers.
    Can you imagine a business such as an FDIC-insured, a CRA-regulated, a federally overseen bank offering the antithesis of basic banking services, the most expensive kind of basic banking services you could possibly find, and that is payday lending. And now we want to open up the floodgate to allow them to get into the real estate industry. I think we need to learn from these experiences.
    I would now briefly like to elaborate on how CRA must be updated to cover all the activities that financial institutions are now permitted to undertake. As you know, CRA only applies to depository subsidiaries of financial holding companies. Other parts of the holding companies have no obligation to serve the entire community in which they serve. It is a travesty to each underserved rural area and inner city neighborhood that CRA basically ends with checking products and lending activities.
    When Congress passed Gramm-Leach-Bliley, it took the opportunity to give banks what they wanted, an end to Glass-Steagall, but it missed a tremendous opportunity to extend community reinvestment requirements to all bank affiliates, insurance companies and securities firms.
    Chairman BACHUS. Mr. Taylor—
    Mr. TAYLOR. Yes, sir.
 Page 83       PREV PAGE       TOP OF DOC
    Chairman BACHUS. —if you could wrap up. Maybe take another 30 seconds.
    Mr. TAYLOR. I was just about to do that, Mr. Chairman.
    Chairman BACHUS. Thank you.
    Mr. TAYLOR. Thank you for helping me segue. I did, in closing, wanted to just point out what we have just learned from that segment of the real estate industry that has developed these special relationships where they do have mortgage companies. And I would just like to quickly have you and the rest of the committee take a peak at this chart that we have over there, which says, ''Home Purchase Lending to Blacks and Hispanics.''
    And the dark color blue—I think it is blue—that is CRA-regulated banks, regular financial institutions. The red is those hybrid lending institutions that have developed these real estate relationships or have been dominated by real estate relationships. You can see the experience thus far in looking at how those institutions operate. From a consumer perspective, it does not hold great promise for blacks and Hispanics.
    And the next chart, if it is up there, if blacks and Hispanics is not the issue for you but perhaps income is, you will see here too those hybrid financial institutions with those special relationships with real estate firms lagging well behind the rest of the industry. And this portends a shift on emphasis on what is important, we think.
    So just as a calculation, we found that if the rest of the banking industry operated along the same lines that you have heard some of these firms mention here that have these hybrid relationships, there would have been 227,012 fewer loans to borrowers in the year 2000.
    I will end by saying, Mr. Chairman, again I thank you for the opportunity to weigh in. Being a consumer representative, if I were not the last one speaking at the end of day, I would not think I was at a congressional panel. But let me say that we really urge you to get this bill out of this committee and get it on the floor. You have got 245 members behind this. Mr. Kanjorski tells us that there is probably another 100 waiting to sign on.
 Page 84       PREV PAGE       TOP OF DOC
    This is the firewall that did not get created when you passed Gramm-Leach-Bliley. I do not want to sit here and say, ''I told you so,'' whether we are talking about Enron or all the promises of like, ''Let's follow the industry, this is where the insurance and banks want to go. We need to do this because this is where the industry is going.'' And you heard that in the earlier testimony, this is where the industry is going. Well, pass Gramm-Leach-Bliley with the industry and all the insurance companies and the banking business. It did not happen.
    So I am not going to say, ''I told you so,'' Mr. Chairman, but I am going to plead with you to create this firewall, the first firewall, that really needs to say, ''This is not what was intended when you passed GLB and enough, members of Congress,'' and we were all there for those conversations, and specifically this was the thing that was constantly recognized as this was not the intention in passing GLB. Thank you, Mr. Chairman.

    [The prepared statement of John Taylor can be found on page 197 in the appendix.]

    Chairman BACHUS. Thank you. Mr. Taylor, I noticed that you had run for Congress.
    Mr. TAYLOR. I did. I do not know how you guys can do it.
    Chairman BACHUS. I think you are well qualified.
    Mr. TAYLOR. I am not a good enough fund-raiser is what I basically learned from that experience.
    Chairman BACHUS. You can go back to Massachusetts and tell them that when Greenspan testified before the committee, the stock market dropped 200 points. While you were testifying, it went up 440 points.
 Page 85       PREV PAGE       TOP OF DOC
    Mr. TAYLOR. As a matter of fact, I have a meeting—is that true, it just went up that?
    Chairman BACHUS. Yes, just while you were talking. No, I mean—
    It did go up.
    Mr. TAYLOR. Well, I want that in the record, sir. But I also want in the record it is Massachusetts, and all you Texans, Massachusetts, go home and practice that word. It is an important state. But I like the accent otherwise. Sorry, sir.
    Chairman BACHUS. Thank you. No, you are fine.
    At this time, Mr. Bentsen?
    Mr. BENTSEN. Thank you, Mr. Chairman.
    Two questions for Ms. Burleson and Mr. Edwards and Mr. Bailey. And I told my colleague from California after he made that remark about Texas that that was all right because we would get him back on the gas prices down the road. But the Fed came out with this rule in December of 2000, if I recall correctly. Treasury has subsequently come out with a—postponed until I think early next year a final rule. So the way it is structured under Gramm-Leach-Bliley you have to have both parties come up with a joint rule.
    Have your organizations or you all individually had any discussions with the administration on their views on this subject? Do you have any indication of where Secretary O'Neill or the Bush administration is going on this, other than just their delay?
    Mr. EDWARDS. I guess I will try to answer that, Mr. Bentsen, by saying at the beginning of last—at the end of 2001, we had an indication, a strong indication from the secretary that he would promulgate the rule when Congress recessed. And that is why the legislation was introduced.
 Page 86       PREV PAGE       TOP OF DOC
    It was coincidental, I think, that when we reached 218 cosponsors on the bill that morning Mr. O'Neill postponed the ruling until the end of the year. And so I do not have any other reading other than I have been told keep going and get the legislation passed, as Mr. O'Neill told me personally, ''I would like to see congressional intent.''
    And so I thought, and as someone who has been around a little bit of legislation, that when we reached the congressional intent of at least 218 members of this body that that was a pretty good message. And so the message was that we would postpone any further activity on it until the end of the year. I take that as he is waiting for this body and the Senate to pass the legislation. That is the only way I can answer it.
    Ms. BURLESON. No. I have not had any conversation at all with the administration about it.
    Mr. BENTSEN. Mr. Taylor, I am going to stray off the path here a little bit, but since you raised the subject of CRA and since we are talking about Gramm-Leach-Bliley, I recall that you and I sat on a panel together shortly after it was adopted back in, I guess that was, 1999. And I know you raised significant concerns about the CRA provisions within the bill.
    Over the two or three years that the law has been enacted and the rules have been promulgated with respect to CRA, has your analysis indicated a decline in CRA activity by covered institutions? Has it been flat? Have your worse fears been confirmed? What have you found?
    Mr. TAYLOR. Yes. Unquestionably, we have found what we feared the most. There is a real malaise, I think, in the attitude of lenders as it relates to CRA in a way that we have not seen in a long time, in a long time. And it predates the change in the White House. It really, I think, is very much connected to the sense that there is not—you need not be concerned and that banks, for the most part, have sort of figured out how to get by.
 Page 87       PREV PAGE       TOP OF DOC
    And so what you are seeing is a lot of satisfactory ratings from the examiners. You are seeing not as many outstanding, and you are seeing a great inflation which starting in 1992 when 11 percent of all financial institutions received a failed rating, dropped down now to 2 percent or less, depending on the agency that is regulated.
    But more importantly, just from all of our members and the experiences they are having in discussions with banks in making investments in underserved neighborhoods and working class people, they are all reporting back to us that there is a new attitude. And, you know, there are exceptions to that, sir, but for the most part I would say that that is the sad picture that is developing.
    Mr. BENTSEN. Thank you, Mr. Chairman.
    Chairman BACHUS. In approaching this hearing, we had several rumors that we were not going to allow certain people to testify, certain interest groups, and that we were going to knock people off the panel and they have been invited and uninvited. And so as we were just doing this hearing a few minutes ago I wanted to make sure that did not happen and I wrote a note to the staff which said that, ''Did we knock anybody off the panel?'' And the note I got back was, ''No, but we still can.''
    I am not sure which one we want to knock off.
    Mr. SHERMAN. Mr. Chairman, when you say the panel, do you mean the panel down there or the panel up here?
    Chairman BACHUS. I do not know if it was the first panel or the second panel. But both panels, no one was knocked off. We do not do it at this late time.
    I have a letter that I want to introduce for the record, and I will do so at this point. It is from the Association of Real Estate Licensed Law Officials. And it simply says about the proposed rule, I will just quote two or three sentences: ''Failure to require bank real estate sales to be subject to state and real estate license laws opens the possibility for a rollback of strong consumer protection laws currently in place. And then they ask the question and they say that there are presently no federal legislation or regulatory bodies designed to protect the consumer from an unlicensed, federally sanctions real estate sales.
 Page 88       PREV PAGE       TOP OF DOC
    And in fact the current situation with the insurance industry claiming federal preemption over state consumer protection laws causes us a great concern over the future of real estate commissions to protect the public interest. It is therefore this association's position that any regulation must require all entities selling real estate in the state to be subject to the jurisdiction of state laws and regulations pertaining to real estate. Federal preemption could clearly lead to a rollback of protections afforded to consumers in this, the biggest transaction of most people's lives.''
    And I would like to associate myself with those remarks. We have found that preemption could in fact have some dangerous consequences.
    [The following information can be found on page 220 in the appendix.]
    Mr. Sherman?
    Mr. SHERMAN. Well, it is a shame that this hearing has been so brief. I look forward to tomorrow's session. You all will be back here.
    Ms. Holland, you bring up some interesting points. A lot of people have a lot of takes on the thrift crisis of the 1980s. My take on it was that you had a chance to get federal insurance, on the one hand, and experience the risks, the joys, the expectations of enormous profits—did I mention risks—of real estate development.
    And as you point out, in the shopping center business, which you clearly understand very well, many of the risks and joys of ownership and development seem to be experienced by the realtor/manager. A 5 percent share of all the revenue, that is better than being a 5 percent owner, which after all is just a 5 percent interest in the remaining 95 percent.
    And what concerns me is that banks we count on them to do something that is very awful and that is turn people down. That is a role they play. They play it all too well, some of my friends. They play it with individual home buyers. They play it with—I mean I am sure most of the members you represent have all been turned down. And, thank God, or there would be a shopping center everywhere.
 Page 89       PREV PAGE       TOP OF DOC
    It is easier to turn people down. They come in, they want a loan, and maybe they are willing to pay—I mean you measure what they are willing to pay over what somebody else is willing to pay for that money in basis points. I mean most people out there in the real world did not know you could measure percentages in percentages.
    And so to be talking about not—because the profit margin is not, say you make an 8 percent loan, 8 percent. Well, it is a 8 percent loan or cost of funds is 7 percent. That is a 1 percent payoff for the bank. You are talking about real estate commissions that are 5 and continue on after that, and I wonder whether—now, if you were doing this deal with a private mortgage banker and that mortgage banker let you build a lot of bad unsuccessful shopping centers and your member went broke and the mortgage banker went broke, I would be very sad, but the Treasury would not lose a penny.
    On the other hand, regardless of the legal niceties we discovered in the 1980s that when the insurance fund is hit it is a hit to all taxpayers and all consumers, I just wonder whether making loans under those circumstances could be regarded as a low risk, low upside risk, low downside risk business?
    Ms. HOLLAND. Making loans in the context—
    Mr. SHERMAN. Making loans knowing that you are going to get the realty contract, you are going to be—I mean you described two situations where you were involved in renting the individual stores, and I think you ascribed it at a 5 percent revenue share. And then a second activity that you also described involved in management. Perhaps you could clarify that as well.
    Ms. HOLLAND. Sure.
    Mr. SHERMAN. But you described two pieces which seemed not to be measured in basis points but rather mentioned in full percentages.
 Page 90       PREV PAGE       TOP OF DOC
    Ms. HOLLAND. Exactly. There is no question that if a bank is presented with a proposal from a developer to do a construction loan, so all we have is dirt, we have nothing to mortgage yet, and they are looking at a project and they know that from this developer not only are they going to get to lend money to him at a higher than mortgage rate because it is a riskier proposition, there is nothing to mortgage yet, but they are also going to receive at the end of the day, once the project is refinanced with a mortgage, once it is completed and it is leased, then the mortgage lender comes in and assumes the mortgage and buys out the construction financier that that same bank that issued that construction finance, that took that initial risk is going to receive 5 percent of the gross revenue as a management fee and 3 percent of the leasing income as a leasing fee, as a broker that—
    Mr. SHERMAN. Okay. So banks today they make the construction loan, that is at a higher than average interest rate.
    Ms. HOLLAND. No question.
    Mr. SHERMAN. Then they aspire to make the permanent loan, in effect, to take themselves out of the first loan or—
    Ms. HOLLAND. Some do, generally, though, in a bigger project representative it would be either a life insurance company or the collateralized, mortgage-backed security market that would create the mortgage.
    Mr. SHERMAN. So there is a first loan, there is going to be a second loan the bank may or may not be interested, and then you mention a 3 percent and a 5 percent fee. Can you describe which of those two—
    Ms. HOLLAND. Sure. How we see the proposed rules affecting our business is that once a bank can participate in both the brokerage, meaning leasing to the stores, as well as the management of the property, they are going to receive fees for that work. And, generally, in the industry, they will receive a 5 percent management fee on the gross revenue of the shopping center, as a well as a 3 percent brokerage fee on the leases that they sign with stores.
 Page 91       PREV PAGE       TOP OF DOC
    Mr. SHERMAN. So there is a 5 percent fee in your business for the person that hires the janitor and makes sure that the place is clean, another 3 percent fee that shows the space to Judy's Dresses and tries to say, ''Hey, you ought to lease this spot here and do not worry about that Macy's competition.
    Okay. That would be, in banker's terms, 800 basis points. Okay. Go ahead.
    Ms. HOLLAND. And so, obviously, the credit analysis that a bank would engage in, if they were not going to participate in the process of the final projects, it is much more circumspect. It is a much more jaundiced eye. It is questioning, well, you know, there is a shopping center across the street that has a lot of the same tenets that you are talking about putting in here. Why is yours going to succeed and not theirs?
    But when the bank knows that we are going to get 800 basis points at the end of the day on the final project, and we are going to get it as long as this project continues to do business with us, because Leases have come up for renewal, tenants move, they go out of business. Obviously, that analysis probably goes to nil, I would imagine.
    Mr. SHERMAN. My greatest fear before today was that a federally insured deposit institution would make a home loan to my former brother-in-law. My greatest fear now is that they are going to make a shopping center development loan, which poses a much greater risk to the insurance fund.
    I have run out of questions, but clearly we want—where we take as taxpayers the risk, we want banks to be saying yes or no without another side to the same company, always pushing for a yes, a side that could be far more lucrative just as we saw the stock brokerage firms. The stock brokerage does not make any money, what makes money is the underwriting and the consulting. We might be in a circumstance where lending money to shopping centers is just the loss leader with the emphasis on lost and the expected profits and in the management fees and the leasing fees. And thank you.
 Page 92       PREV PAGE       TOP OF DOC
    Chairman BACHUS. Mr. Gutierrez?
    Mr. GUTIERREZ. Thank you much, Mr. Chairman. Appreciate it. I want to first say that I am happy you called a hearing. Thank you very much. Look forward to having a full committee hearing on this legislation, which I have cosponsored.
    Chairman BACHUS. You were not here but this hearing actually was not my idea. It was Chairman Oxley's.
    Mr. GUTIERREZ. Well, I want to thank Chairman Oxley, for the record then.
    I guess, you know, one of the things that we can bring to Congress, which I hear many members bring to Congress, is their own personal experiences. And it seems to me that if there is a somebody that understands the community, and it needs to understand that community in order to thrive in that community as a real estate broker, a real estate agent.
    And they bring with them a plethora of insurance and other products in order to make that fail, much like when you buy a car they might have insurance there, they might have a repair, they might have a warranty, they might do a number of things.
    And so it has been my experience that they understand communities. Are there bad real estate agents? Sure. There are bad bankers, there are a lot of bad people in a lot of different areas of our great society. But for the most part, I think they are an integral part of a community, and they understand what goes on in that community. And I am very, very concerned about just what happens when we continue to dilute the Community Reinvestment Act.
    And so I just have one follow-up question that I came down here to ask Mr. Taylor. I was listening to your testimony. Fortunately, this hearing is being televised so I could stay in my office and watch everybody's testimony and I read your testimony. But you said something when I got here that—you said that financial institutions, to paraphrase, feel less and less warm and anxious and having to be responsive to CRA.
 Page 93       PREV PAGE       TOP OF DOC
    And you also spoke when you were talking in your testimony about Wells Fargo and their relationship with Long & Foster, I believe it was. Given what you know about financial institutions and their current relationship and financial institutions and their prospective relationship with real estate, what do you think the impact would be on CRA and investment in low-and moderate-income communities?
    Mr. TAYLOR. Right. Let me start by, again, reiterating this chart in which we were able to look at the sort of snapshot of those real estate firms that are in, essentially, through these hybrid relationships, these special ventures they have created through working with mortgage companies, what the record has been thus far compared to mainstream financial institutions. And it is not good as it relates to working class people, and it is not good as it relates to minorities or people of color.
    You know, the chairman mentioned that I ran for Congress. That is how I spent the beginning of my summer vacation. I ran for Congress in Moakley's seat, who is a great man, and I learned a lot through that, and I have a newfound respect for all of you. Sad that you have to spend so much of your time in fund-raising and that you have to run every couple of years. It just seems like you have to—it is just one continuous campaign with apparently some legislation in between.
    But I am saying this because I think the regulators in the White House, in the executive offices really take their cues as it relates to CRA from your folks, how important or how unimportant it is to you. I felt we took it on the chin with Gramm-Leach-Bliley. We allowed the insurance industry without having any safeguards or even having them report to see to it that they fairly allowed policies to go to communities of color and to working class Americans, just a report so that we can get an idea of how those policies are going out.
    We have had a stiffening, in my opinion, in the regulatory agencies that cries out for this Congress to be vocal again about the importance for fair credit and for access to credit and capital and for treating all Americans fairly and allowing them to participate in the capitalist system. It is not coming from anyplace else but from here and from community leaders.
 Page 94       PREV PAGE       TOP OF DOC
    And as I sit here in the audience and I listened, I mean I listened to the panels and we finally get a, one community representative. I do not know if I was on that list to be scratched but thank you for not scratching me. But, you know, when I ran for Congress, I talked to a lot of people, and they have a lot of faith in you folks and a lot of faith that you are here representing their interests and what you really care about is what is important to American consumers. And I sit here and what I hear is an industry, two major industries like dueling packs.
    You know, I am sitting there beside the head of the ABA and the head of the NAR and these massive packs that have massive influence, and I am listening to their representatives on either side fight this battle, and all of them talk about consumers, when all it is about is about getting wealthier and finding ways.
    I mean interestingly enough, it seemed like the real estate people who really wanted to do this were the well-healed real estate people who were perhaps ready for an acquisition by a financial institution. I do not know, but it was all about money and making more money and not about what was in the interest of the consumers, and they really rely upon you as the people who are going to look for that.
    Because it was not at this table, with all due respect to the people in the industry, and I think you have done well representing the industry, we need more people speaking for consumers here so that you are in fact hearing how this relates to what is most important, and that is ultimately what is the impact on the consumer?
    I am sorry I am the sole rep, I am sorry I do not have the skills and talent to absolutely convince everybody here that we should go out and pass this bill tomorrow. But you asked me a question and I am really answering it because what I am saying is that I think CRA, there is a bill in Congress now, and several members of this committee have signed on to it—35 members of Congress—to expand CRA to the affiliates and subsidiaries of financial institutions.
 Page 95       PREV PAGE       TOP OF DOC
    If the real estate community got into this business, by the way, as an affiliate, they would not be reported under CRA. They would not have any obligation. As a subsidiary, the bank would get to choose whether to count the actions and performance of the real estate firm for CRA purposes. So if it works in their favor, ''Yes, well, we will count—this is what our real estate firm did, for CRA purposes. I mean it is like allowing someone to sort of effect their grade.
    And so, Mr. Gutierrez, I apologize for the long answer, but there is a bill in Congress that would make a great, great difference and create the kind of level playing that really consumers desperately need, that would bring private mortgage companies into this arena of making sure that they are not discriminating and ignoring LMI, low-moderate-income areas.
    It would allow us for the first time to get a really good view on small business lending and what is happening with financial institutions as it relates to what small businesses are, who they are making their loans available to by income, by census check, by gender, by race, for the first time.
    And the only thing prohibiting this at this point and the only one standing between that being a reality is my friend, Alan Greenspan, Regulation B. And he has told me personally if you guys would do it, he would go along with it. But he believes that is the job of Congress. So I do not know if he has passed that message along to you but allow me to be the messenger for my good friend, Alan Greenspan.
    Mr. GUTIERREZ. Let me just, because the time is up and I know that the chairman has been very gracious in extending the time and I am happy he has, let me just say that the bill was introduced by Mr. Barrett of Wisconsin and it has 35 cosponsors of the bill, so now people know at least we are not in collusion with one another and asking each other's questions, because it is clear you did not know who was introducing the bill. But we are working on the bill because CRA is important to us.
 Page 96       PREV PAGE       TOP OF DOC
    And while I support the real estate industry in this matter, I wanted to come down not to ask the real estate industry because I know they are very well represented because they get to come by my office and I greet them warmly and attentively every time they come and meet with me, including my own real estate broker back in the city of Chicago who does a great job. But I wanted you to have an opportunity that I know is not always afforded the proponents of CRA. I want to thank you for your work and say that we are going to continue to do the work.
    And just one last question. Is there something that the public that might be watching or that members of Congress that might be interested, is there a bible on CRA that I could go and say,''Oh, I want to look at Chicago and I want to look at Boston, Massachusetts or I want to look at L.A.''—just I had an argument with my wonderful staff person, and I told her you were from Massachusetts, but now she believes me—that we could look at and kind of look at what their performance on CRA is?
    Mr. TAYLOR. Yes. First off, I do want to point out that I am extremely aware and appreciative of your having sponsored that bill and at least from what my staff tells me they actually provided input. They really did not do that, but in any event, yes, there is. We regularly analyze the top lenders in America and we try to look at it over a good period, anywhere from three to four years. And in fact we have done that every three to four years, and we can tell you which lenders are doing what by race, by income in all the major cities, major markets in America, and we would be glad to supply that information to you.
    Mr. GUTIERREZ. Thank you.
    Mr. TAYLOR. You are welcome.
    (AFTER 6PM)
    Mr. GUTIERREZ. Thank you, Mr. Chairman, even though you did not want the hearing. Thank you very much even more.
    Chairman BACHUS. Thank you. And, actually, I will say that the majority invited three witnesses and the minority invited two witnesses. Mr. Taylor, you are one of our witnesses.
 Page 97       PREV PAGE       TOP OF DOC
    Mr. TAYLOR. Cool. Thank you.
    Chairman BACHUS. And when I was talking about knocking someone off the panel, we were trying to just keep five or six on a panel. We were not talking about any one certain person. I really actually said that for the benefit of one person in the audience who was afraid I was going to knock one of their witnesses off, but I did not. It was not on this panel either.
    Mr. TAYLOR. Mr. Chairman, I was looking for the opportunity to actually agree with Mr. Barr, because I have not had that experience in that past.
    Chairman BACHUS. No, and you will not again.
    Mr. TAYLOR. I am afraid that might be true.
    Chairman BACHUS. Let me ask a few quick questions, then we will adjourn. I know some of you probably have travel arrangements. One of the strong arguments for allowing banks into real estate, and I mean one that I think has some logic to it, is that you have these, I guess you call them, integrated financial services companies, like Long & Foster—is that the name—Coldwell Banker, Long & Foster, and they are doing all these services.
    I mean they are doing pretty much what they describe, one-stop shopping where they do the title insurance, they do the mortgage financing, real estate brokerage services all in one shop. And if they can do that, why not let the banks in it? I mean aren't they basically doing the same thing a bank would do?
    Mr. Edwards?
    Mr. EDWARDS. Mr. Chairman, I in my past years owned a mortgage company, and I will admit to you that I started off as a commercial banker and have been involved in two bank boards. I think I understand the difference between the two and just to say to you, yes, some of these integrated firms like Prosperity Mortgage are offering mortgage services. However, they are under, as Mr. Eastment talked about, they are under RESPA rules which requires full disclosure.
 Page 98       PREV PAGE       TOP OF DOC
    And I will add to that when I had a mortgage company and I borrowed money from a bank, loaned that money, whether it be Wells Fargo or First Tennessee Bank of Memphis, when I made a loan, as Mr. Chairman was talking about, I was responsible and they are responsible for those funds. I did not make those loans with insured deposits.
    And so they are at risk when they do that, and I was at risk, and if it did not work out, I made a 30-year loan with a 30-day warehouse loan, and there is a certain amount of risk involved in that that the federal government or the taxpayers were not at. So that form of business is an approved business model today that, as we pointed out, is working.
    But I am not in my business today—if they were in the banking business as a commercial broker, our business requires a lot of borrowing capital. And so what you would place us involved in is we would be now very similar to our folks at the shopping center, my firm would be borrowing money from my competitor. And I am sorry, that is not a level playing field that I am accustomed to.
    Now, if you in fact want to hand over, and I do not think you should, and insure it, hand over a federal bank charter to our commercial real estate firm where we are on the same capital level with First Tennessee Bank, then that is something else.
    But to answer your question directly, I think there is a great deal of difference between us being responsible for that capital and how it is paid back and the taxpayers.
    Chairman BACHUS. Let me ask Ms. Holland, one thing that obviously—the scenario you outlined is really disturbing, but do you have to share all that information with the bank to get financing? Do you have to tell them about who you have lined up to go in the shopping center or who you are negotiating with or who you have a—do you have to do all that?
    Ms. HOLLAND. Yes. Actually, at the construction finance stage, where the project is a one-dimensional photo with colored trees and beautiful bushes and well-dressed people walking by into the stores, you most definitely have to tell the bank who your tenants are going to be, what your expected rents are going to be, what the demographics are in the area where you are planning on building the shopping center, why those demographics support the project.
 Page 99       PREV PAGE       TOP OF DOC
    Because the bank at that stage currently, under current law, where they are not our competitors, knows that unless there is a life insurance company or the capital markets in the form of a CMBS that is going to take them out on opening day with all of their fees and attendant higher levels of interest than a standard mortgage, they are not interested in building your shopping center for you.
    Chairman BACHUS. So you in fact would be sharing your information with someone who would be in competition and that information would be valuable to them.
    Ms. HOLLAND. Most certainly, particularly under the scenario where I am a self-developer, self-manager, self-lessor, and if I have to go to the bank to say that this is going to be my project, and the bank says, ''Well, gosh, we could work with Liz or we could work with Larry and Larry is going to give us the brokerage and the management. Let's tell Larry about Liz's great project.''
    I will say this: Chairman Oxley asked that we have this hearing, and as I stated at the start of the hearing, this was not my idea of a reasonable time to have the hearing. I will say that I stand corrected in that I think this has been a very good hearing. I think that there have been issues raised on both sides that had not perhaps been thought out. And I will leave this hearing with some new concerns that I did not have going in with this proposal.
    Maybe any of the members that attended any part of this hearing or read the transcript of this hearing and I would think the regulatory body that proposed this rule that this will be reason for some further question and deliberation on their part. So I think the hearing has in fact confirmed the wisdom of the chairman of the full committee's desire to have a hearing at this time.
    I appreciate your attendance at the hearing. I do have other questions but the lateness of the hour I am going to submit them, not only to this body. The one thing we did not go into, did not get into this hearing is who would regulate this process. Would these individuals be—I mean there is not a federal regulator. Who would they be regulated by? And that question has not been asked.
 Page 100       PREV PAGE       TOP OF DOC
    Mr. SHERMAN. Mr. Chairman, if I can just commend you for holding these hearings and saying the only thing more exciting than a hearing on this bill would be a markup on this bill.
    Chairman BACHUS. I also do think that the OCC, maybe a real estate commissioner would be—certainly we should hear testimony from them at a later date before we proceed.
    Mr. Edwards?
    Mr. EDWARDS. I think you had the letter from the chairman of ARELLO, which is the Association of Real Estate Commissioners. I do think it would be a good idea, as a witness, to have possibly one or two state real estate commissioner, because I have had several of them come to say, ''This is an opportunity for unlicensed brokerage.''
    But I think that is an area that ought to be looked into, because I think that your letter that you received points out who is the regulator, who would be? Would it be the OCC or would it be the Tennessee Real Estate Commission? I do not know that we have answered those questions, nor would we know as an industry, if it were done tomorrow, what would go next. Who do you report to? So I think that that would be a good idea. Thank you.
    Chairman BACHUS. Okay. At this time, we will recess and—well, not recess, we will adjourn the hearing.
    [Whereupon, at 6:26 p.m., the subcommittee was adjourned.]