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U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 9:39 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.

    Present: Chairman Bachus; Representatives Oxley, Weldon, Roukema, Baker, Castle, LaFalce, Royce, Lucas, Barr, Kelly, Riley, Toomey, Cantor, Grucci, Hart, Capito, Tiberi, Waters, C. Maloney of New York, Watt, Bentsen, Sherman, Sandlin, Moore, Gonzalez, Kanjorski, Hooley, Carson, Lee, Hinojosa, Lucas, Shows and Crowley.

    Chairman BACHUS. The hearing will come to order. This is the Subcommittee on Financial Institutions and Consumer Credit. Without objection, Ms. Velazquez will be deemed to be a Member of the subcommittee to rank immediately after Mr. Kanjorski for this hearing and subsequent hearings until her election is ratified by the full committee. And without objection, it is so ordered.

    The first order of business is opening statements. Without objection, all Members' opening statements will be made a part of the record. At this time, I'll recognize myself for an opening statement.
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    The subcommittee meets today to continue the important work of overseeing implementation of the historic Gramm-Leach-Bliley financial modernization legislation enacted during the last Congress.

    Last month, in collaboration with the Capital Markets Subcommittee, we reviewed rules promulgated by the Federal financial regulators governing merchant banking operations authorized by Gramm-Leach-Bliley.

    This morning, we will consider a recent proposal by the Federal Reserve Board and the Treasury to permit financial holding companies and financial subsidiaries of national banks to offer real estate brokerage and real estate management services.

    Title I of Gramm-Leach-Bliley allows financial holding companies and banks through financial subsidiaries to engage in a broad range of activities that are considered, quote, ''financial in nature'', end quote, or incidental or complementary to such financial activities. Among those financial activities specifically enumerated in the statue are banking, insurance and securities.

    Title I also authorizes the Federal Reserve and the Treasury Department to define additional activities that they deem to be financial in nature or incidental to such activities and therefore permissible for financial holding companies and financial subsidiaries. And in that regard, we mention changes in the marketplace or changes in the delivery of financial services.

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    On January 3 of this year, the Federal Reserve and the Treasury published in the Federal Register a proposed rule that would add real estate brokerage and real estate management to the list of activities considered financial in nature or incidental to financial activity.

    The proposal established a March 2nd, 2001 deadline for public comment. This proposal in no way changes the prohibition in Gramm-Leach-Bliley against banks or bank holding companies making real estate investments or being involved in real estate development. So we don't need to confuse those two activities. We're dealing here with brokerage.

    Out of a belief that 2 months was simply not enough time for considered review of a proposal with potentially far-reaching consequences for consumers and providers of real estate services, I wrote to the regulators on February 1 urging them to extend the period for public comment.

    On February 21, the Federal Reserve and the Treasury announced a 2-month extension of the comment period until May 1. With the expiration of the public comment period yesterday, the regulators must now begin the laborious task of reviewing and analyzing what I have been told has been a heavy volume of written comments to determine how to proceed with their proposal.

    My hope is that by holding today's hearing, this subcommittee can play a constructive role in the deliberative process in which the regulators are currently engaged. In addition to giving Members an opportunity to make the regulators aware of Congressional concerns with the proposal, the hearing will provide a forum to a broad cross-section of affected industry and consumer groups, some of whom strongly support the proposed rule and others which are just as adamantly opposed to it.
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    My own reservations about the proposed rule are twofold. First I believe the wholesale entry of banks into the real estate business, while not in and of itself undermining safety and soundness, may serve to erode the long-standing separation between banking and commerce that Congress most recently reaffirmed in Gramm-Leach-Bliley.

    Second, I have concerns about whether the statutory criteria that are supposed to guide the regulators' determination of what activities are financial in nature or incidental to such activities have been properly applied in this instance.

    And I think part of our questioning today will be a determination about what is financial, what is commercial, and what we do when there's a mix of those two.

    I recognize, however, that there are strong views on both sides of the issue. Legitimate arguments can be made for permitting banks to offer real estate-related services. Certainly the fact that some depository institutions, including federally-chartered credit unions and thrifts, as well as State-chartered banks in a number of jurisdictions, are authorized to engage in real estate activities while others are legally barred from doing so raises issues of competitive equity that should be addressed, must be addressed.

    In this connection, I would say that if we continue down the road we're going, State charters look better and better, national charters have more and more disadvantages, and we could find ourselves with a national banking system that is inadequate.

    Before recognizing the Ranking Member for an opening statement, I want to welcome our witnesses to today's hearing and remind both them and the Members that because another hearing is scheduled for 2 o'clock in this room, we're going to try to strictly go by the 5-minute rule on oral testimony and on Members' questioning.
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    Finally, let me conclude by saying both the banking industry and the real estate industry have served us well, and we need to keep that in mind as we conduct this hearing and try to fashion our concerns in an effort to continue their good service to consumers.

    Ms. Waters, you are recognized.

    Ms. WATERS. Thank you very much, Chairman Bachus, for holding this hearing. I look forward to hearing the testimony of the witnesses. And in the interest of time, I will keep my remarks to a minimum.

    As the Ranking Member of the Financial Institutions Subcommittee, I believe we have a duty to oversee the regulations' implementing provisions of the financial modernization legislation that became law last Congress.

    I also believe that it is important for us to monitor the expansion of banking activities in general to ensure that the regulations are appropriate to carry out the intent of Gramm-Leach-Bliley Act, and that the expansion of these activities falls within the purview of the Congressional intent.

    We are here today to discuss the proposed rule that would permit financial institutions to engage in real estate management and brokerage. These activities would be deemed financial in nature under the Gramm-Leach-Bliley Act.

    I have to say that during the many times that various financial modernization proposals were considered over the last decade, I've never advocated for the mixing of banking and commerce.
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    It is interesting that on this issue both Congressman Bachus and I have signed a letter expressing strong concerns with the proposed rule. I've also sent a similar letter in which I was joined by a number of my colleagues from California allowing banks into the real estate business would be a true breach of the division between banking and commerce.

    During consideration of financial modernization, we considered this issue, and Congress decided to maintain the separation. We decided the interests of consumers would not be served by allowing Microsoft-NationsBank-Gap conglomerate to exist. We certainly did not want to model our banking policy after the Japanese system, which serves as an example to all of what can happen when the separation between banking and commerce is breached.

    I am very concerned that the Fed and Treasury would be embarking on a slippery slope if real estate brokerage activity is considered a financial activity. Where would it end? Would appliances, cars, and anything purchased with a credit card be deemed financial in nature?

    With that in mind, I look forward to hearing the views of the witnesses, and I thank you in advance for your testimony. I yield back the balance of my time.

    Chairman BACHUS. Thank you.

    At this time, I recognize the Chairman of the Full Committee, the gentleman from Ohio.

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    Mr. OXLEY. Thank you, Mr. Chairman. And good morning and welcome to Governor Meyer and Under Secretary Hammond and our other witnesses.

    As Chairman Bachus indicated in his statement, the Fed and the Treasury have acted deliberately and thoroughly in their handling of this proposal, and I commend Chairman Bachus for holding this hearing and giving this subcommittee an opportunity for the Fed and the Treasury to discuss further the issues raised in their proposal.

    This issue, like so many others, must be viewed in the context of the Gramm-Leach-Bliley debates that have led to this hearing. These debates, while contentious, resulted in a law that passed Congress by an overwhelming margin and with strong bipartisan support.

    As I consider this proposal, I ask myself two basic questions. First, is it consistent with the Gramm-Leach-Bliley Act? And second, does it promote fair competition within the financial services industry? Generally corporations may engage in any lawful activity. However, financial holding companies and financial affiliates of national banks may engage only in activities authorized under the Gramm-Leach-Bliley Act.

    GLB significantly expands the activities of financial holding companies beyond the activities permissible at that time for bank holding companies. When we wrote the list of activities that are financial in nature into the statute, we tried to incorporate all existing activities of the banking, securities and insurance industries without authorizing the complete mixing of banking and commerce or indeed try to provide a definitive list.

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    At the same time, we recognize there might be activities we failed to include. To address this possibility and the need for the industry to evolve over time, we created a specific process to allow the Fed and the Treasury to periodically update the list of activities that are financial in nature or incidental to such activities.

    This proposal represents the first significant application of the process we created. Striking a balance between the separation of banking and commerce and the promotion of competition is never an easy task. For years I watched the insurance, securities and banking industries battle each other to protect themselves from competition. Those efforts continue to this day, most recently by opposition to the repeal of the 70-year-old ban on the payment of interest on business checking accounts.

    But there continues to be broad agreement in Congress that our financial services laws must be updated on a regular basis to account for changes in the marketplace and to foster full and fair competition.

    It takes courage for an industry to adapt to a new regulatory structure, particularly when that structure creates many new competitive opportunities. Competition, however, ultimately makes the industry stronger, because it forces the industry to meet new challenges and to provide more and better services for consumers. I have seen the positive impact of the competition between these former adversaries has had for both consumers and the overall safety and soundness of the financial services industry.

    At the same time, competition must be fair, with adequate consumer protections against tying or other coercive practices. I agree with the Treasury Department that in moving forward on this proposal, the regulators must work closely together to ensure that this and other rulemaking under the financial-in-nature authority are consistent with the criteria and legal process Congress prescribed and the public interest.
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    And I might add, Mr. Chairman, that indeed the legislative record will have a significant impact I trust on the decisionmaking process by Treasury and the Fed.

    I have full confidence that the Fed and Treasury will discharge the duties entrusted to them by Congress in the Gramm-Leach-Bliley Act and look forward to a spirited discussion of their proposal this morning.

    Mr. Chairman, thank you. And I yield back the balance of my time.

    Chairman BACHUS. Thank you.

    Other Members of the subcommittee will now be recognized for 3 minutes for opening statements. I have Mr. Sherman, Mr. Weldon, Mrs. Roukema and Ms. Kelly. If there are other Members who wish to making opening statements, if you'd advise us. And at this time, I'll go to Mr. Sherman.

    Mr. SHERMAN. Thank you, Mr. Chairman. I'd like to pick up on some of the earlier opening statements. My colleague from Los Angeles points out that we shouldn't call a transaction a financial transaction simply because it's financed with a credit card. When I bought this tie, I used a credit card. I didn't think I was engaging in a financial transaction.

    The Chairman of the full Committee correctly points out that we gave to the regulatory agencies the right to update the list as changes occurred. And yet this proposal was made less than a year after Gramm-Leach-Bliley was enacted into law and does not seem to arise from any change between late 1999 and late 2000 in the nature of real estate or banking, but rather a desire to amend and to add to Gramm-Leach-Bliley that which Congress did not put there.
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    I do want to thank you, Mr. Chairman, for holding these hearings. You and I and many others asked Chairman Greenspan and the Secretary of the Treasury, Mr. O'Neill, to delay these regulatory proposals until May. I would like to put Gramm-Leach-Bliley Section 103 Paragraph 4, into the record here.

    I don't have time to read it. But it lists all of the areas that exemplify financial transactions. And one thing is clear from looking at that list. It involves intangible property, choses in action, investments, situations where you get a certificate of deposit or an insurance policy, a piece of paper. The law is very clear, and I have to confess to being a lawyer. There's a difference between intangible property and real estate, which is the most real, the most tangible property.

    And if we are going to say that real estate is to be put in the same category as intangible assets and what the old law called choses in action, then we really have gone to the Japanese system that my colleague from Los Angeles pointed out.

    That may or may not be in good public policy, but it's not public policy that should be made by regulatory agencies. If we are going to dramatically expand Gramm-Leach-Bliley, it ought to be done here in this Committee, and there shouldn't be a end run around the authority of Congress where we are told that less than a year after we pass a bill it needs to be updated by putting something into it that many of us who supported the bill never intended. Thank you.

    Chairman BACHUS. I thank the gentleman.
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    Mr. Weldon.

    Mr. WELDON. Thank you, Mr. Chairman. I want to thank you for calling this hearing. I share some of the concerns you stated about this proposed rule. Unfortunately, I have another important hearing I have to go to.

    I just wanted to share with the witnesses that I will be reviewing your testimonies and monitoring the actions taken by the Fed on this issue very closely. And I yield back.

    Chairman BACHUS. Thank you.

    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman. In the interest of time, I have submitted my statement for the record.

    I want to support my colleagues who have indicated to the regulators that it was not the intention of Congress, or at least in our interpretation, to break down the firewalls between banking and commerce. Some of us were very specific about maintaining those firewalls, and we interpret this regulation as doing exactly the opposite.

    It is unfortunate that this is the first regulatory interpretation of Gramm-Leach-Bliley that attempts to make this unusual expansion. I urge the regulators to listen carefully to the 40,000 critics of their regulatory rule, particularly the critics on this subcommittee and this Congress.
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    It would be unfortunate if we have to modify or further examine this law, because of regulatory interpretations expanding what authority was intended and, in fact, granted by the Congress. Thank you.

    Chairman BACHUS. Thank you, Mr. Kanjorski.

    Mrs. Roukema.

    Mrs. ROUKEMA. Thank you, Mr. Chairman. And again, in the interest of time, I would ask that my full statement be included in the record.

    But I do want to specifically associate myself with the issues you raised, Mr. Chairman, in your opening statement, and very specifically, the concerns regarding safety and soundness in the separation of finances and commercial activity.

    And as the Chair of the Subcommittee on Housing, we will be looking at the Real Estate Settlement Procedures Act, the RESPA. And there are reforms that we are going to be looking at this year with respect to RESPA. But the implications here I think are specific, and we will be looking at that measure as well. And I thank the Chairman.

    Chairman BACHUS. Thank you.

    At this time, Ms. Kelly, unless there's a Member of the Minority. Ms. Kelly.
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    Ms. KELLY. Thank you, Mr. Chairman. I will submit my statement for the record. I just want to say that in the Gramm-Leach-Bliley, when we gave the discretion to the Fed and Treasury to determine what kind of activities are financial in nature, I think some of us were a little surprised that this proposal to allow the financial subsidiaries of banks to engage in real estate activities came out in January.

    I think the proposal raises a number of questions about how an activity is determined to be financial in nature and I think we have a number of questions—I certainly do—for the Fed and the Treasury about this proposal.

    I thank you very much, and I look forward to the testimony.

    Chairman BACHUS. Thank you. That concludes the opening statements of the Members. Am I correct?

    At this time I will introduce the first panel. Laurence J. Meyer, Governor Meyer, Member of the Board of Governors, Federal Reserve System, and Under Secretary Donald V. Hammond, who is the Acting Under Secretary for Domestic Finance, Department of the Treasury.

    We welcome you two gentlemen, and at this time, without objection, your written statements will be made a part of the record and you will each be recognized for a 5-minute summarization of your remarks. And at this time, Governor Meyer.

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    Mr. MEYER. Thank you. Chairman Bachus, Chairman Oxley, Congresswoman Waters and other Members of the subcommittee, thank you for the opportunity to testify on behalf of the Federal Reserve Board with respect to the joint invitation by the Board and the Secretary of the Treasury for public comment on whether real estate brokerage and real estate management are activities that are financial in nature or incidental to a financial activity, and hence permissible for financial holding companies and financial subsidiaries of national banks. The agencies published the request for comment on January 3, 2001. Because of the significant public interest in the proposal, we extended the public comment period through May 1, 2001.

    The recently enacted Gramm-Leach-Bliley Act allows a financial holding company to engage in, and affiliate with companies engaged in a broad range of financial activities. The activities specifically authorized by statue include lending; insurance underwriting and agency; providing financial advice; securities brokerage; underwriting and dealing; and merchant banking activities.

    In addition, the GLB Act permits financial holding companies to engage in other activities that the Board determines in consultation with the Secretary of the Treasury, to be ''financial in nature or incidental to a financial activity.'' The GLB Act includes this flexibility as a result of Congress's recognition of the practical difficulties of comprehensively defining in legislation a complex concept like ''financial activities'' for a marketplace that is continuously evolving.

    With the real estate and other recent proposals, the Board and the Treasury are exploring this new standard. The GLB Act establishes certain factors that the Board and Treasury must consider. But otherwise, it leaves to the agencies significant discretion and very little guidance regarding what is and what is not a financial activity.
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    The factors that the agencies must consider are very broad. For example, the agencies must consider whether the proposed activity is necessary or appropriate to allow a financial holding company to compete effectively with any company seeking to provide financial services in the United States, efficiently deliver financial information and services through the use of technological means, or offer customers any available or emerging technological means for using financial services. In addition, the agencies must consider changes or reasonably expected changes in the marketplace in which financial holding companies compete, as well as changes or reasonably expected changes in the technology for delivering financial services.

    One thing that is clear is that Congress intended the ''financial-in-nature'' test to be broader than the previous test for authorizing new activities for bank holding companies under the Bank Holding Company Act. Before passage of the GLB Act, bank holding companies were permitted to engage only in activities that the Board determined were ''closely related to banking.'' The closely related to banking test was tied to the activities of banks.

    The GLB Act neither specifically authorizes nor specifically forbids financial holding companies or financial subsidiaries of national banks to engage in real estate brokerage and management activities.

    Soon after the passage of the GLB Act, three trade associations asked the Board and the Treasury to determine that real estate brokerage activities are financial in nature and one asked the agencies to define real estate management activities as financial in nature.

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    The Board and Treasury responded to these requests by seeking public comment. We have found the public comment process to be a useful means of gathering information from experts, practitioners and analysts with an understanding of the relevant issues and activities. Our final rules often include significant modifications as a result of the comments we received on the proposed rules.

    As I indicated earlier, the comment period on the proposal was open for approximately 120 days. The speakers on the next panel, which include members of the trade associations that represent various parts of the banking, real estate and housing industries, will detail their positions for and against the proposal. Their remarks will give you a good sense of the comments that we are receiving and reviewing.

    These are difficult issues, and both sides feel very strongly about their position. While we do not relish being in the middle, we believe that a debate on these matters is the best way to allow the agencies to identify and sort through the issues and to reach an informed decision, and is precisely the type of the debate envisioned in the GLB Act.

    Thank you.

    Chairman BACHUS. Thank you.

    At this time, Mr. Hammond.

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    Mr. HAMMOND. Thank you, Mr. Chairman. Chairman Bachus, Ms. Waters, and Members of the subcommittee, I appreciate the opportunity to appear today to discuss the Joint Federal Reserve-Treasury Rule Proposal on whether to permit financial holding companies and financial subsidiaries of national banks to engage in real estate brokerage and real estate management under the Gramm-Leach-Bliley Act.

    The 4-month public comment period for this proposal ended yesterday. And based on the substantial number of comment letters that we have received, there clearly is wide public interest in this proposal. We received comments from several of the Members of this subcommittee and witnesses as well at today's hearing, and I note that the hearing transcript will be made part of our rulemaking record.

    Because the rulemaking is pending, I will not be able to discuss the Treasury's views on substantive issues involved in making a final decision about the proposed rule. Instead, my remarks will briefly describe the process and factors we considered in making the proposal and where it stands today.

    The Gramm-Leach-Bliley Act permits financial subsidiaries to engage in a broad range of specific activities as well as other activities the Treasury determines in consultation with the Federal Reserve Board to be financial in nature or incidental to a financial activity. We and the Board are working cooperatively in making these determinations as the Joint Proposal clearly demonstrates.

    In making determinations, the Act requires us to take into account among other factors the Act's purposes, changes in the marketplace in which banks compete, changes in the technology for delivering financial services, and whether the activity is necessary or appropriate to allow a bank and its subsidiaries to compete effectively with any company seeking to provide financial services in the United States.
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    The current process started informally more than a year ago when the Treasury and the Board received requests from the American Bankers Association, the Financial Services Roundtable, and the New York Clearinghouse Association asking that we determine that real estate brokerage and real estate management activities are financial in nature or incidental to a financial activity.

    In March of 2000, Treasury issued an interim final rule setting forth specific procedures for requesting determinations under the Act, and we invited the ABA and the Financial Services Roundtable to resubmit their requests to conform to these procedures.

    The American Bankers Association did so in July, and a month later, Freemont National Bank submitted a request as well.

    After due consideration of the requests and consultation with the Federal Reserve Board and its staff, in December we agreed with the Board to issue a Joint Notice of Proposed Rulemaking with a 60-day comment period. That proposal was published on January 3rd.

    Because of wide public interest and requests for an extension, we jointly decided to extend the comment period another 60 days to give the public ample opportunity to consider the proposal and comment on it.

    Since the comment period is now closed, we are beginning the comment review phase. We are in the process of reading and analyzing the comment letters, and we will give serious consideration to all the views expressed.
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    Mr. Chairman, let me highlight just a few points about the proposal itself. In assessing the requests we received, we concluded that a threshold case can be made that direct competition exists between real estate brokers and banking organizations. According to information provided by the Conference of State Banking Supervisors, 26 States appear to permit their State-chartered banks or subsidiaries to act as general real estate brokers.

    In addition, banks and bank holding companies participate in most aspects of the typical real estate transaction other than brokerage.

    Banks and bank holding companies also engage in a variety of activities that at first glance seem functionally and operationally similar to real estate brokerage, including finder activities and securities and insurance brokerage. Buyers and sellers of real estate increasingly may look to a single company to provide all their real estate-related needs.

    The proposal also notes that existing Federal and State laws should operate to mitigate any potential adverse effects of combining banking and real estate brokerage.

    In addition, because the proposed real estate brokerage services are activities conducted as agent with no principal risk involved, the proposed brokerage activity does not appear to present significant financial risks to banking organizations or their depository institution affiliates.

    We expressed some doubts in the proposal as to whether all aspects of real estate management are financial in nature or incidental. For example, our proposal would preclude a financial subsidiary or financial holding company that provides real estate management services from itself repairing or maintaining the required real estate.
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    In conclusion, Mr. Chairman, we intend to carefully consider the issues raised by all the commentors, including the views expressed at this morning's hearing. As we move forward, the Treasury will work closely with the Federal Reserve to ensure that this and other rulemakings under the financial-in-nature authority are consistent with the criteria Congress prescribed, the legal process and the public interest.

    Thank you very much. I'll be happy to answer any questions.

    Chairman BACHUS. Thank you.

    Let me ask both panelists this question. Have you considered the consumer and the benefit to the consumer by this proposal and if any protections are going to be necessary as part of the proposal?

    Governor Meyer.

    Mr. MEYER. Well, certainly we've considered the benefits of the consumer in the form that when there's increased competition for financial services——

    Chairman BACHUS. Would you pull the mike a little closer?

    Mr. MEYER. When there is increased competition for financial services, consumers typically benefit. That's one aspect.

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    Second, there is an evolving system where consumers often prefer to have one-stop shopping. And so there are synergies between activities. And that's another potential benefit that consumers might obtain if they were able to do real estate brokerage as well as all the other real estate-related transactions at banks, as they are allowed to do in some other places.

    In terms of protections, of course there are a lot of protections that are already in place through State licensing laws and qualifications, as well as Federal anti-tying laws, and we have certainly taken those into consideration.

    Chairman BACHUS. Have you come up with any concrete proposals on what protections may be necessary for the consumer other than what's already in the law?

    Mr. MEYER. No. We haven't come up with any proposals of additional protections that we thought jointly would be necessary with this proposal.

    Mr. HAMMOND. I think it's important to note as we look at the proposal that what we've put forward is a threshold test for public comment.

    What we've done is we've ascertained, based on the requests received, that certain evidences of activity incidental to financial services are evident in real estate brokerage. What we haven't done is fully considered the entire record. That's what the public comment period is all about.

    We have obviously looked at some of the provisions, such as anti-tying laws, other consumer protections, were factored in to meeting the threshold test. But as we are all aware, that this is a proposal and not a final rulemaking at this point in time.
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    Chairman BACHUS. What makes the sale of a house financial as opposed to commercial?

    Mr. MEYER. That's what this whole process is all about. That's what we're trying to sort through. And it's very important, because this is our first attempt really to draw that line. So I can't fully answer that question, because that's what we have to sort out in finally reaching this decision.

    But I would point out two considerations. One, sometimes we want to approach this from the standpoint of a philosophical dividing line. And one of the Members of the subcommittee noted that a financial asset is an intangible asset, and real estate is a tangible asset. That would be a philosophical drawing line.

    Now you could have written that into the Gramm-Leach-Bliley Act and said it's very simple; that's what it is, period. But you didn't. You wrote a much more subtle, much more flexible, much more nuanced piece of legislation. And you told us to consider as well such aspects as the competitive nature of the financial services industry.

    So in particular, and Mr. Chairman, your statement at the outset was very balanced, as we are trying to be with the proposal that is outstanding. And you yourself noted that we also have to take into consideration whether these activities are appropriate or necessary in order to allow banks to compete effectively in the financial services industries when other depository institutions have authority to do this, when other non-bank financial institutions have the opportunity to offer these services.
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    So both those competitive issues on the one hand, and the philosophical issues on the other, have to be weighed.

    Chairman BACHUS. My final question is the broker often represents the seller as opposed to the buyer. In fact, they normally sign a form saying they're representing the seller. The bank at the same time is going to be representing the seller in getting the highest price they can get. But then they're hoping to represent the buyer in getting a loan for the buyer. So they're trying to get the buyer the best price, but they're trying to get the seller the most value.

    Is there a conflict of interest or potential conflict of interest in that they are financing the arrangement for the buyer, but they are actually acting on behalf of the seller and trying to get the highest price? And it is to their advantage to actually get the very best value for——

    Mr. MEYER. This is a very good example of issues on the other side that had been brought up that there might be some adverse consequences to consumers of allowing banks to offer real estate brokerage, and specifically these conflicts of interests. And those are some of the issues that we will have to take up as we consider this fully.

    Chairman BACHUS. Mr. Hammond.

    Mr. HAMMOND. I think that kind of conflict or apparent conflict is an interesting question as well, because you can also look at it from the standpoint of the financial institution being interested in the seller's interest and the buyer being able to obtain financing. So you run into the inherent question of do they in fact apply the appropriate standards in underwriting the loan as you go forward.
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    So it is not clear to me, as in many aspects of this proposal, there is a lot of gray area that needs to be carefully considered. That's why the comment period I think is so welcome in this regard.

    Chairman BACHUS. There was a similar argument in Gramm-Leach-Bliley. I argued unsuccessfully that financial institutions shouldn't be allowed to write insurance, title insurance insuring their own portfolios. In fact, they were insuring themselves. I lost that argument. But I saw a conflict there.

    At this time I recognize the gentlelady from California.

    Ms. WATERS. Thank you very much.

    Let me just start by asking, I understand that you have received somewhere between 40 and 45 thousand comments in opposition to the proposed change. What role does that play in the final decisions to move forward with this? I mean, how do you factor in the comments?

    Mr. MEYER. Of course, the comments play a very important role. They help to identify the key arguments in favor and opposed. But on the other hand, we do not weigh the number of responses on either side. We weigh the substance of the responses.

    But what this does indicate is that this is a very controversial proposal. We should very, very carefully deliberate on it, and we should think long and hard about how we proceed on it.
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    Ms. WATERS. As I look at your testimony, Mr. Hammond, Under Secretary, Treasury, Acting Under Secretary Donald Hammond, you correctly point out that in making determinations, the Gramm-Leach-Bliley Act requires you to take into account the Act's purposes, changes in the marketplace in which banks compete, and you kind of talked about the purposes. And you talked about the gray areas. And you talked a little bit about what you think was intended and the area that gives you the opportunity to move in.

    What changes in the marketplace would be applicable to this consideration? Are there changes in the marketplace?

    Mr. HAMMOND. We think that there has, in fact, been an evolution in the marketplace that raises some interesting questions over time as to the bundling of financial services, particularly with regard to real estate transactions.

    As you look at the level playing field from a competitive standpoint, one can make an argument that financial institutions could be disadvantaged in certain circumstances vis-a-vis non-insured financial institutions by virtue of the ability to offer real estate brokerage services.

    It was that bundling of services combined with the overall competitive landscape which brought us to the first threshold test, which was is this something worthy of putting out for public comment?

    Ms. WATERS. What changes in technology?
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    Mr. HAMMOND. I think what you're seeing—our sense is that we are seeing a lot of internet-based financial shopping. We are seeing the capability to do one-stop shopping, which consumers have expressed interest in, certainly in certain environments, and the ability for institutions to enter that marketplace is somewhat dependent upon their ability to offer a full range of services.

    Ms. WATERS. When you talk about one-stop shopping, do you have on the record—have you done hearings? Have you done something that places on the record this so-called preference for what you call one-stop shopping, or is this just kind of your basic feeling about it?

    Mr. HAMMOND. That's a very good question. I think it reflects the nature of where we are in the process.

    Ms. WATERS. Have you done something that would lead you to believe that the real estate industry does not have the ability to have the technology that would appeal to its clients or customers in some way that the banks would have?

    Mr. HAMMOND. I'm sorry. I must have confused you in that I'm not talking about the inability for the real estate industry to take advantage of certain technology. What we're looking at based on the requests that we received was, is there a legitimate question about the ability of technology and the need to bundle financial services going forward to put people on a level playing field?

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    We are in the comment period at this point in time in the process. That is exactly the type of information we hope to get out of the comment period is those types of observations as to is this really in consumers' best interests? Is there a competitive inequality?

    But based on the requests that we received, we felt that they met the threshold test for putting this issue out under the statute and seeking public comment on it.

    Ms. WATERS. Lastly, and I thank you very much, Mr. Chairman, this is rather soon after the Act that you are moving with this consideration. Don't you think that it's too soon? And what caused you to move so rapidly to give consideration to this change?

    Mr. MEYER. The timing of the proposal reflects requests that were made by three trade associations. So they made the request, and we appreciated that we had a difficult job ahead of us under Gramm-Leach-Bliley of defining what financial-in-nature is, setting those boundaries. And this looked like an appropriate opportunity for us to begin to work on those issues. And that's really what determined entirely the timing of it.

    Ms. WATERS. Did you at any time consult any of the players on both sides of the Act about their feelings about moving at this time? And I know that you've gotten requests to extend the comment period. But did you consult or talk with anybody about whether or not this was too soon? Whether or not we should wait to hear from others on the issue before moving with this?

    Mr. MEYER. To my knowledge, we didn't talk to Members of Congress about whether or not it was appropriate or not to move on requests that we got as to whether activities were financial or not. It seems to me that was our responsibility under the Act when we get these requests.
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    We either have to say, no, we're simply not prepared to fulfill our responsibilities under the law to determine whether or not this activity is financial, or we have to engage in a public comment period to try to sort out the issues.

    Ms. WATERS. But then you know that if any of the Members here, and particularly any of the Members of the Majority party feel that there are areas that need to be clarified, need to be made clear, that a simple amendment passed perhaps without a hearing anywhere would clear it all up just like within minutes?

    Mr. MEYER. Congressional intent is very important here. I completely agree that regulators should not overstep the boundaries of their authority. We tried to do an exhaustive search to try to see whether or not there was clear legislative intent.

    There was nothing in the law that either expressly allowed or forbid it. And indeed, the law gave clear directions about how we were to respond and what standards we were to apply to requests. And that's really what we're trying to do here.

    Ms. WATERS. Thank you, Mr. Chairman.

    Chairman BACHUS. Mr. Baker.

    Mr. BAKER. Thank you, Mr. Chairman. I really tried very hard to stay out of this, but I unfortunately cannot constrain myself any longer.

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    Mr. BAKER. I was a realtor. I was a homebuilder. I was president of a homebuilder's organization when I was rational before losing my mind and coming to this occupation.

    My son is now a realtor. So I'm making all these confessions in advance of my statement, really no question. I think there's a simple solution, Governor Meyer. If you took the Fed's original merchant banking rules and applied them to the real estate business, everybody would go home happy. You simply couldn't do it at all. And I'm not clear where merchant banking rules are applicable to this set of issues.

    But there is one legitimate concern I have as to an affiliation, not a subsidiary. I know that direct investment in real estate would be prohibited with the subsidiary structure. I'm not sure if there was an affiliation under the proposed rule with a real estate brokerage firm that chose to get into direct investment that it would not open up the holding company to exposure of risk of loss where those types of activities. That's just a general question. I don't know the answer to it. But I wanted to raise it, because I think that's something that does deserve legitimate evaluation.

    However, in talking with most realtors, including my son, who was the first to call me about your proposed regulation, the criticism is that it's big versus little, not merchant banking, not commerce and finance. Most folks in the real estate business don't get into those discussions.

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    It's the ''Bill Gates'' syndrome. When we had it during Gramm-Leach-Bliley, it was my word that Bill Gates is going to own every bank in America. And that obviously has not transpired. But if it is big versus little, and we're worried about the aggregation of financial assets in a limited number of hands which would then preclude small operators from the marketplace, I would point to the real estate industry as a prime example.

    There are ten large firms in this country which in aggregation were responsible for 800,000 transactions in 1999 at an aggregate sales volume of $200 billion. One firm was responsible for 362,000 transactions for an aggregate sales volume of $95 billion.

    Now, if I were a realtor in Louisiana, I would be very worried because we didn't have $95 billion worth of sales in Louisiana last year and may not for the next decade, given what we've been through in the 1980's in the oil patch.

    My point is, is if it's big versus little, we've already got that problem. Now if we throw that out the door and we want to talk about commerce and finance or banking and finance or commerce and banking or whatever the concern might be of a particular group, let's analyze what the real estate industry is doing today.

    I have advertisements—I just got them off the internet this morning—of a couple of really nice firms. I do business with them. I think they're probably very professional. They have, you know, ''push your button here and if you don't have time to look at houses, we'll e-mail you back with floor plans.''

    There's even a firm in Southern California that has a camera that goes in and does a 360 degree view of the neighborhood so you can stand at the front door, look down the street, and see what the neighbors look like, look inside the house. I mean, it's fabulous technology. All this is available today.
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    But, if you don't want to deal with all these other folks, like lawyers at closings, or insurance agents at the time of sale to insure the home, you know, all of that business, firms are doing all of that as a real estate brokerage operation. Full service. And we don't have the sales volumes on those insurance sales or those loan-closing transactions or the legal services fees being paid, but I would bet it's pretty significant.

    I think I have discovered a public policy crisis. The breach has been made between the barrier between commerce and finance, and it's happening in the real estate market. Civilization is in peril.

    Now I would merely point out that if we are going to wave the flag—and I'm a realtor, and I'm in real trouble back home with my realtors for this statement—and that's the principal reason driving this debate, and all of us being so antsy about it. They're doing it. If A can do it to B, B ought to be able to do it to A. If you don't like the threat, quit doing it yourself. That's the bottom line.

    In talking to the small, independent realtors who do a few hundred thousand dollars or a few million dollars in business each year, they don't like the big boys doing this either, the big realtors that is. They are in jeopardy. And all the mergers and acquisitions we thought were going to happen as a result of Gramm-Leach-Bliley with financial institutions has happened between the big boys. We still have 8,500 banks, the bulk of which are small. They're not going to Bunkie, Louisiana and getting in the crop loan business. And the big realtors aren't going to come to Baton Rouge and gobble up all my small realtors.

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    A professional organization who delivers a professional service will continue to prosper and do quite well in a competitive environment.

    Now I don't know how we got on all this banking and finance and commerce and finance and all of those concerns. That's not the debate. It's whether the big banks are going to come to our home towns and gobble up small realtors. If that is the issue, big realtors are going to gobble up small realtors. That's the more likely aggregation than anything else. And I am concerned about that.

    I am very concerned about financial assets of the big people in this country, like the Wal-Marts, buying up the hardware stores, the linen store, the feed and seed store, and exporting the home town payroll to wherever that place is located. I think that's bad public policy. So I'm worried about big versus little.

    I don't think the rule as proposed has that effect. But I have an open mind. Thank you.

    Chairman BACHUS. Would you like to answer his question?


    Mr. MEYER. I would point out that these are two issues that are relevant and that we have to factor in. One is what is the impact on the competition in this industry. And it can be fairly subtle in terms of what the impact is going to be.

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    And second, as you point out, we have to talk about competitiveness in the market for financial services. And that isn't just what other banks are doing. It's not just what other financial services firms are doing, but what real estate firms are doing as full service providers of both real estate brokerage, mortgage loans, and so forth.

    Chairman BACHUS. Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I'm I guess a little confused about what the Fed and the Treasury's role here is. And let me see if I can clear that up before I get into any substantive questions.

    Mr. Hammond, you indicated that you can't discuss the substantive considerations that will lead you to a final rule on this or to throw out the rule. That you had the authority to make the rule, which I don't argue with. The bankers' groups requested that you make this rule. And you found a threshold case to make the rule.

    I guess I had always thought that when the Fed and the Treasury proposed a rule that they were advocating, there was somebody inside your body who advocated for the proposed rule. Is that or is that not the case here? Are we engaging in what would in effect be a rule promulgated for debate purposes to clarify the law, or are you all advocating this rule? I still don't know even after hearing your testimony and after hearing your responses to the questions that have gone so far.

    Mr. HAMMOND. I think that's a very good question, because it gets to the heart——
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    Mr. WATT. Give me a very good answer, then.


    Mr. HAMMOND. All right. I think it gets to the heart of the question of what we are confronting here. This is a very different type of rulemaking from my standpoint in that this is not a regulatory action in the traditional sense where a regulatory agency is looking at a practice and trying to determine whether or not it is appropriate within the construct of its broader mission, say, safety and soundness.

    As I look at it, this is a rulemaking designed to interpret the statute. The statue granted certain authorities. It gave the gatekeeper responsibilities for those authorities to the Treasury and the Federal Reserve. A request came in——

    Mr. WATT. But it sounds like you all have thrown a rock and you're hiding your hand now. And I guess the question I'm asking is, is there an advocate inside the Fed or are there advocates inside the Fed or the Department of the Treasury for this rule, or are you all just putting it out there because you think you have to do it in the context of the law?

    Mr. HAMMOND. We think, at Treasury at least, we think it very clearly met a threshold standard, that the request came in, met enough of the statutory requirements to put it forward as a proposal.

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    I will hedge my comments to the extent that since the time the Treasury has put out the rulemaking, the Administration has changed. And so those that were incumbent upon making the initial decisions to put forward the proposed rulemaking, those positions are in the process of changing.

    Mr. WATT. But the composition of the Fed really hasn't changed, and the Treasury really hadn't changed except for I guess the leadership. You're saying that the change in Administration is likely to change your position on this? Why didn't you withdraw it and start over again after you got a feel for what was going to happen here?

    Mr. HAMMOND. I was trying to answer your question about whether or not there is an advocate within the Treasury Department, and I think the answer to that question, speaking just with regard to the Treasury Department is, is that we went through a process leading up to——

    Mr. WATT. The answer is probably yes or no?


    Mr. HAMMOND. It depends what you mean by ''advocate.'' At what level in the organization.


    Mr. WATT. OK.
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    Mr. Meyer, maybe we can find out whether there's an advocate at the Fed, since we've been so successful in finding out whether there is one in Treasury.

    Mr. MEYER. I think in most cases when we put out a proposed rule, while it doesn't have to require an advocacy and it only has to meet a standard that has to be reasonable enough to put it out and get public comment, most of the time it really is backed up by some sense of advocacy.

    I think in this case, as this was the first attempt to deal with a very difficult issue, there were really more questions.

    It met, as Mr. Hammond noted, that threshold test. There were reasonable arguments that could have been made in support of it.

    But we also did recognize that this was going to be a difficult issue and that we were going to benefit enormously from the comment period.

    That's all we needed to do. I can't really talk for my colleagues and to say I could pin them down and say that they were 100 percent in favor of this proposal or just wanted to put it out to get comment.

    At this point, once a proposal is out, the situation changes quite a bit, because it's incumbent upon us to become very objective and to be very open minded as we receive those comments. And that's the reason why I cannot come here and take any advocacy position today, because I am open minded, and I am going to be reviewing those comment letters on their merits.
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    Mr. WATT. Mr. Chairman, I didn't do very well. I still don't have a clue of whether this is an academic discussion or whether this is a serious rule that somebody is advocating for.

    So if I could just use 30 seconds more, Mr. Chairman, I hope you all will pay close attention to the wording of the statute, whether an activity is necessary or appropriate to allow a financial holding company and the affiliates of a financial holding company to compete effectively with any company seeking to provide financial services in the United States.

    I take that to mean that that's about competition between financial services companies, not competition between financial services and realtors, unless realtors are providing a financial service——

    Mr. MEYER. Mortgages.

    Mr. WATT. Got the point. OK. So unless there is competition already between those who can and cannot inside the financial services institution or unless real estate companies are themselves providing competition, then I think you are treading on very thin ice. And so I'm assuming that you all being as impartial as you are and not having an opinion on this will evaluate this carefully.

    Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you.
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    Ms. Kelly.

    Ms. KELLY. Thank you, Mr. Chairman.

    I have a concern that involves the affiliates of the banks. Given the anti-tying rules as they're written now in Gramm-Leach-Bliley that would prevent the banks from conditioning credit loans on the use of other banking services, if the banks were to become brokers, I want to know what would prevent self-dealing within the bank. That is, if the broker is a part of the bank, an affiliate of the bank, what would prevent them from offering the bank affiliates REIT, for instance, a property? And that's effectively removing the property from the full market forces. It's self-dealing, and I want to know if there is any—it seems to me that there is a potential here in that regard to weaken the market.

    And I also wanted to know if there's any kind of a self-dealing firewall that you've thought about.

    Mr. MEYER. I think that would come under 23A. I mean, 23A requires that those kinds of transactions between a bank and affiliate be on market terms and not more favorable than the bank could do with a non-affiliated firm.

    So I do believe there are protections already in existing statutes to deal with this.

    Ms. KELLY. My concern is that in the brokerage market, a property will come on, and we all know that these are very often, they aren't done—somebody doesn't just come in and sign a contract with a broker. They'll just call up and they'll say, I'm thinking about selling this ten-story building and I'm just wondering, would you like to come and appraise it? And then we'll give—you've got a bank affiliate that's going to get that.
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    And then what's going to happen is the person who is the broker, who plays golf with the friend over at the REIT, is going to pick up the phone and say I think I've got a ten-story building that's going to come on the market, and maybe you want to take a look at this. That's what I'm concerned about. I'm concerned that this ten-story building will never get out into the market. That has the potential to weaken the market. Because some of these things may never get out into the market. They may just be passed from one affiliate to the other of a major bank.

    Mr. MEYER. The banks cannot own real estate.

    Ms. KELLY. I understand that.

    Mr. MEYER. Except under merchant banking.

    Ms. KELLY. But an REIT can. There are investments there.

    Mr. MEYER. Yes, but banks can't own REITs because they own real estate.

    Ms. KELLY. But, the affiliate structures own and invest in the REITs. Under securities, no?

    Mr. MEYER. No, they can't. Because they own real estate, and banks cannot directly or indirectly do that.
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    Ms. KELLY. I'm still—I'm sorry.

    Mr. BAKER. Will the gentlelady yield?

    Ms. KELLY. By all means.

    Mr. BAKER. Let me ask you a question. What happens when a bank repossesses property and they call it REO? Does the bank own real estate? I'm just curious about that.

    Chairman BACHUS. There is a prohibition in the Act against——

    Ms. KELLY. There's a prohibition in the Act——

    Chairman BACHUS. ——Investments or development of real estate activity.

    Mr. MEYER. That applies to financial subsidiaries. Financial subsidiaries are expressly prohibited from engaging in real estate development or investment.

    Ms. KELLY. But affiliates are not, sir.

    Mr. MEYER. Not under that particular statute, but it is not a permissible activity for banks or affiliates of banks. Banks cannot own REITs. They are allowed to advise. They are allowed to act as advisers to REITs, but they cannot own them.
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    Ms. KELLY. I'm sorry, but I'm still a little confused by your answer. I think perhaps this is something that's a little more thorny. I would like to see a strong firewall against self-dealing if this is going to happen at all.

    I have serious concern that within the larger structure of a gigantic banking financial services corporation that there could be self-dealing.

    We have written in Gramm-Leach-Bliley the firewall that protects the consumer. But in a sense, if there is self-dealing with a broker and an REIT, for instance, through affiliates, there is nothing written as far as I can find in the Gramm-Leach-Bliley Act. And I think perhaps we need to look at this, because it does have the potential to affect the entire real estate market.

    Mr. MEYER. Why don't you allow us to be in contact with you and work on this a little bit more closely, make sure we understand thoroughly your position, and see if we can provide you with information on this?

    Ms. KELLY. Thank you very much. There is one other question I have. There was an opinion written in The American Banker by William Seidman that expressed concerns permitting banks to engage in real estate brokerage and management activities that might ultimately lead to the mixing of bank and commerce. And that's been a disaster in a couple of areas, in the Asian economies in Japan and Thailand. I want to know if you feel that that's a legitimate concern here.

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    Mr. MEYER. First of all, the issue is whether this constitutes a mixing of banking and commerce. That's what this rulemaking is all about. But, let's put that aside and talk about just the activity itself. Would this be a risky activity?

    I think you have to understand that this is an agency activity. This is not owning the real estate and the potential losses that could come from changing the value of that real estate.

    Now, I was here not too long ago, and we were talking about merchant banking activity. Now there's an activity that's risky. But the Members of this subcommittee seem to want to have fewer restrictions on it, seem to want to have less capital than we wanted to propose against it, but we said now that's a risky activity. That's subject to significant losses, because they hold those assets on their books.

    Now, a real estate agency is a very different activity, and I don't think we should confuse what's going on with the Japanese banking system with providing banks with an opportunity to engage in real estate agency activities.

    Ms. KELLY. It's the potential for changed value that I'm exactly addressing with my prior question. Thank you very much.

    Chairman BACHUS. Thank you.

    Mr. Bentsen.

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    Mr. BENTSEN. Thank you, Mr. Chairman.

    Governor Meyer, let me go you one better, though, because you're right in bringing up the merchant banking. But as I recall over the last several years, it was the Federal Reserve that was very adamant about any attempt by this subcommittee or any other committee to provide any level of mixing of banking and commerce, whether it was a 5 percent rule or a 20 percent rule.

    And the argument was always on the basis that—at least this was the Chairman's argument, and I don't want to hold you to his opinions—but the argument was always on the basis, well, if you start at 10 percent, it will be like Section 20, and then you'll come back, and once you hit that cap, then the institutions will come back and they'll want more.

    And what I see in this proposal is in this I have to say rather tenuous argument by the nature of the prohibition in Gramm-Leach-Bliley to real estate investment, that somehow that meant that we open the door to real estate agency services. I'm not sure I recall that as being our intent. But I'm not sure any of us recall exactly what we were doing when we were writing the bill.

    Mr. Baker, I think, does.


    Mr. BENTSEN. And I think that Mr. Baker would go further in banking and commerce, and I agreed with him in some of those issues.
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    But as much as the rule says that you still specifically preclude investment, if this were to go forward, how long before the institutions are back saying, ''Well, gee, we need to go one step further in real estate investment? And, oh, by the way, you know, you in Congress or Congress has given us merchant banking rules and allowed us in merchant banking and affiliates and subsidiaries, and through our affiliates through the holding company structure, we can engage at least in some real estate underwriting.'' And I don't know exactly what the rules are with respect to underwriting REITs or not.

    So I think what my concern is that your proposal and some of the comments really are taking us down the road of banking and commerce, which is contrary to where the Fed was before.

    And we know that the Treasury—and I won't hold you to this, Mr. Hammond, but we know the Treasury has had mixed minds on this over the years.

    But I have to say, the argument that because some financial institutions have it as provided by law either under the thrift charter or under State laws, doesn't necessarily give you regulatory fiat to then change the Holding Company Act, in my opinion.

    And I appreciate the fact that the gentleman raised the issue of REO and creditor issues related to property, but there are rules associated with that. And, for instance, banks are allowed to hold oil and gas properties that are debtor properties. But there is a time limit on the period in which those properties can be held.

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    And on the issue of engaging in lending and the like, why is there a difference between a real estate asset and an automobile asset? I mean, banks are lending to automobile buyers. They're lending to automobile dealers. They're lending, arguably, from time to time, to the automobile manufacturing industry. So why is there not a tie there? Why is there not a tie to inventory management? Banks lend to widget manufacturers for their inventory management. Why would it not at some point be appropriate for banks to engage in actual inventory management?

    So I think a lot of these arguments are rather tenuous that are put forth, and I really have to say that—and this may be where we want to go—but I'm not sure that I see where the Fed and the Treasury have the authority to expand this far in what I think really is going into banking and commerce.

    And again I say I'm one of the Members who was willing to explore that. But I think that this is where you may be headed. Now it may not be your intent. But I'm curious. You know, why is this different than automobiles? And what are you going to do if you go through with this when they come back and they say, ''Well, we need more authority now to underwrite and we need to go back to where the thrifts had authority?''

    Mr. MEYER. I think those are two very, very interesting questions. The first is, how could the Federal Reserve, given our opposition to the mixing of banking and commerce, even consider this proposal? I think the answer to that is, we didn't get to consider this on the basis of the bill that we would have written. We got to consider it under the bill that you wrote.

    And you wrote a very nuanced bill with a lot of flexibility. On the one hand, you considered and rejected a broad mixing of banking and commerce. But in three ways, you provide opportunities for mixing banking and commerce.
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    We've talked about merchant banking. And by the way, in that case, we were saying we want to differentiate this from the broad mixing of banking and commerce. We want restrictions on routine management, or you had restrictions on routine management. We wanted to put them into the regs. We wanted to put into the regs something specific about holding periods, and you told us, loosen up. This mixing of bank and commerce, this is OK within the merchant banking authority. OK, that's one.

    Number two, you put into the bill something called ''complementary activities''. What are they? They're non-financial activities that are related to financial activities. You put that in there, clearly a mixing of banking and commerce, but in some way related to the synergies and strategic direction.

    Mr. BENTSEN. Well, if I might interject. And I want to hear the rest, but I may interject that as you recall, at least my understanding was at the time it was viewed as a compromise to deal with the evolving marketplace where technology might cause financial institutions and the ability to provide services to have to engage in other activities.

    I'm not sure real estate is a new technology that's come about.

    Mr. MEYER. OK. And the third is the way in which you set out the factors for consideration for an activity to be judged financial. It wasn't simply is it an intangible asset as opposed to a tangible asset? It was also the nature of the competition within the financial services industry. So you gave us a difficult task. It really is a difficult task. This is not an easy one at all.
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    But you gave us the authority and the discretion to try to sort out these issues under that language.

    Now the next question you ask, well, where will it all lead? Well, we considered this proposal under its own merits. Dealing in real estate development and investment is quite a different story. That involves the holding of tangible assets, the ownership of those tangible assets. That's quite a different story than the agency activity that we're considering today.

    And then with respect to automobiles, again, the equivalent for automobiles would be an agency activity where the bank didn't hold automobiles, didn't own the automobiles, but acted as an intermediary between buyers and sellers. That would be the analogy. Could it go in that direction, and that's a legitimate question: Where would you draw the line? But it is not at all owning real estate—an automobile dealership. That would be clearly forbidden.

    Mr. BENTSEN. But—and my time——

    Chairman BACHUS. I'm going to——

    Mr. BENTSEN. Well, I'll talk to you about it another time.

    Thank you, Mr. Chairman.

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    Chairman BACHUS. Mr. Riley.

    Mr. RILEY. Thanks, Mr. Chairman.

    To follow up on what Mr. Bentsen was saying, I think he makes a legitimate point. The one thing that we were adamant about in our Gramm-Leach-Bliley bill is that we do not want to mix banking and commerce.

    If we start down this slope, which I think is a very, very slippery slope, I don't know how you ever crawl back up. You can make a legitimate case—and I was in the automobile business for a while. And I promise you, there is more financial activity in an automobile dealership than there is in any real estate brokerage company in this country.

    If you can make a legitimate case that you can have a financial instrument, which is another point that I want to discuss with you. If I just buy something from you, is there a financial transaction, or is that complementary? How that be classified? If there was no mortgage? Could a broker do that and not mix commerce and banking? I don't think so.

    But to elaborate I guess, if you get to the point that we allow any financial transaction to make a determination whether or not that is financial in nature, then I think what we've done is essentially allow total mixing of banking and commerce.

    When my wife uses a credit card to buy groceries, that becomes a financial instrument that the bank has control over, and you could even make a case that the bank loans her the money to buy her groceries. Well, does that mean that a bank, because of this involvement with the credit card company, has the option then to go and own a grocery store? Should they be able to own an automobile dealership?
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    I don't know where you stop. Actually, I think it's harder to make a case for real estate brokerage than it is for an automobile dealership because there is so much involved in insurance and financing and everything that the bank would normally be associated with.

    But there are so many things in real estate. If I lease a piece of property from you, I don't think that becomes financial in nature. If you and I have a transaction between ourselves, that is not financial in nature. So if we allowed this to happen, I cannot consider—it's hard for me to realize any point where any transaction that you did with any other business in this country wouldn't be financial in nature.

    Because fully 30 or 40 percent of the real estate transactions in this country do not involve mortgages. And if that's the case, then should a broker be able to sell directly without a mortgage? I don't think so.

    So I think you have a weaker case to make with real estate brokerage than you probably would with automobiles, as Mr. Bentsen said, with a grocery store, with a Visa card, with almost anything.

    We need to go back, and if we need to redefine what we did with Gramm-Leach-Bliley, then maybe this subcommittee should do it. But again, the one thing that we were adamant about is that we do not want to go down the road that Asia went. We do not want to mix commerce and banking. And this, to me, would open the floodgates for opportunities to consider any transaction that a bank might be a participant in to become financial in nature, and then you have total mixing of banking and commerce.
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    Mr. MEYER. It's the very purpose of this proposal to sort out precisely those kinds of issues about where to draw the line. And I am completely sympathetic with your view that you don't want to get on this slippery slope. You don't want to say anything that's financed you can own because it's financed.

    Mr. RILEY. Right.

    Mr. MEYER. That's absolutely clearly unacceptable. The difference here might be that we're really talking about an agency activity that doesn't involve owning the real estate.

    Mr. RILEY. So you're saying if there was an automobile leasing company or an automobile brokerage company, then that would be financial in nature?

    Mr. MEYER. Not leasing, but——

    Mr. RILEY. Well, I think that's utterly ridiculous.

    Mr. MEYER. I don't know that anything like that exists. But that's what we'd have to consider.

    Mr. RILEY. Sure they exist. And if they don't exist, when you open this door, they will exist within 6 months. And that's why I'm saying, if we need to redefine in this subcommittee what we meant, then maybe we should look at it here and give you some better direction.
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    But I think once we make this kind of breach of what the trust in this subcommittee tried to——

    Mr. MEYER. It would be very helpful for us to understand better what the subcommittee meant when it said that we should take into account what activities are necessary or appropriate to allow banks to compete effectively in financial services.

    Mr. RILEY. Well, I think what Mr. Bentsen said is right. There is evolving technology out there today that is a part of and inherent in and a part of a financial holding company. And as that develops, we don't want to do anything that would hinder that type of technological advantage that that company might develop.

    But on the other hand, there was never any question, at least in my mind, with other than Mr. Baker, my good friend here, about whether or not you should mix commerce and banking. And I think this subcommittee was very adamant in our opposition to it.

    And if we need to redefine that, I think that is a better approach than trying to take each individual, specific item that could possibly come up over the next 5 years and have a specific ruling dealing with one specific trade group or whatever.

    Mr. HAMMOND. In my mind, if I might add just to that, it strikes me that in the course of the discussion, the confusion arises over whether there is a bright line standard or a bright line principle within Gramm-Leach-Bliley which says that there shall be no mixing of banking and commerce.
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    Then within the statutory language itself, it is much more flexible, much more open to interpretation, and lays out standards dealing with competition and competition in financial services. So what you have is a bright line principle that is in some regards at odds with the construct within the statute.

    Mr. RILEY. And I appreciate that. I honestly do. And I know you have a difficult task in trying to accomplish and interpret what we mean. But it seems to me that the more obvious way to handle this is for this subcommittee to come back and revisit it and give you specific information on how we would like for you to handle it rather than you having to make an interpretation on any and every possible thing or contingency that might come up over the next 2 or 3 years. Because they're going to continue to come. If you make this exception, I promise you, you will have 200 other exceptions that will be requested within the next year.

    It makes more sense to me for this subcommittee to go back and redefine what we did if we need to rather than your agencies having to go in and make these kind of determinations.

    Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you. We might let the Housing Committee take those issues up.


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    Chairman BACHUS. Mr. Gonzalez.

    Mr. GONZALEZ. Thank you, Mr. Chairman.

    My questions are not as interesting as the others, because they don't have real case scenarios. But really process and policy as you go about this, because we have delegated that responsibility to you. So we're looking to you to do your jobs.

    The first, how you perceive the role of Congress in the rulemaking process. And this is a good example. We really don't know. And I'm not sure where you think we should come in, at what point should we be consulted? When should we consult? When do we have an active role?

    Question number two really has to do with what you need to take into consideration. And this is kind of fundamental, I guess, but it's regarding changes in the marketplace, changes in technology, and then what's happening out there in the marketplace to allow banks to be competitive with other entities that somehow are providing some service.

    When we say ''changes'', I've always anticipated that that's the reason we passed the Act. As things existed at that time in 1999, and then prospectively, what other changes might occur. Do you see that if you could not specifically say there's been a change in the marketplace, technology or anything happening with other entities that provide financial services since 1999, that you would not be able to promulgate any rules that would allow financial institutions to get involved in other activities?

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    So I guess I want your timeline. Where do you draw that, if any? I assume that you don't. But that was just an assumption. But listening to the debate or the discussion, I now have a question.

    Another consideration is, as you go about this rulemaking, if in fact you determine that wherever the financial institution now will have some activity that it could result in market domination, undue influence, conflict of interest, does that basically kind of trump all the other considerations? Or is it going to be a decision that's made and you say, hey, that's the marketplace? If that happens, that happens.

    The last part of my question goes back I guess to what the other Members have already touched on, and that's conceptually I'm thinking. As you determine other areas for financial institutions, affiliates, subsidiaries and so on to venture, do you then have an ever-expanding universe? In other words, once you identify that new activity, then do you have the potential for other things to be related complementary to and so on that didn't exist before? It will be a nexus, what I'm saying, to the next step, which I think some Members have already touched on.

    But I'm just thinking again in the way of policy and how you go about this, because this is the first question before you. But it will set a standard. And we will be looking to you as to what precedents you're going to be establishing now as you fulfill your duty, which we did delegate to you.

    Mr. HAMMOND. I think it's very clear as we look at applying the statutory construction that in whatever final outcome we reach, we have to clearly delineate how we address those very important issues.
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    It's important for us to be clear on what those standards are and how they're being applied, and it's important for us to explain the rational basis for any decision going forward.

    It's my understanding with regard to your first question with regard to the timing that the statute does not speak to in terms of from Gramm-Leach-Bliley going forward, but in fact talks about changes in the marketplace in a more general construct. That's certainly been the way we've been looking at it at this point in time.

    With regard to the competitive questions, I think that's something that we very much want to look at. Competition is an important element in this rulemaking process. How we look at those competitive standards and what that means is going to be a key part of the deliberative process going forward.

    With regard to your third question regarding add-ons or supplemental activities, if I understand it, kind of a domino effect or chaining of activities, once again, I think you have to look back to the underlying construct of the statute: Are they, in and of themselves, related to—incidental to the financial activities of the bank?

    And so, you have to make sure that you maintain a discipline in how you look at and evaluate each of those proposals. But I don't doubt that that's an incredibly difficult continuum as time goes on as you look at more and more issues and their various relationships.

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    Mr. GONZALEZ. Where do we come in as far as Members of Congress and this subcommittee in the rulemaking process, in your mind?

    Mr. HAMMOND. I think that's always—agencies always look to Congressional intent in implementing any statutory delegation of authority. Obviously with new delegations, there's more consultation involved in the process to try to divine the intent and to make sure that it's consistent with the underlying purposes of the statute.

    I think obviously when you're dealing with something that is brand new, you have probably a higher obligation than you do in a situation where you have existing statute for some period of time.

    Mr. GONZALEZ. Time's up. Thank you very much.

    Chairman BACHUS. Let me say this for the record. I think it's important because of some of the questions.

    At the present time, with the Gramm-Leach-Bliley, you are charged with continuing to look at whether or not our national banks are competitive, and coming to us with proposals when they're disadvantaged.

    So the fact that there's some resistance to this particular proposal, I hope won't have a chilling effect on your statutory charge to continue to bring to us other issues that might be more receptive.

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    I hope you're following what I'm saying, because we very much are anxious to have a strong national banking system. And part of Gramm-Leach-Bliley was to allow banks to be competitive with other financial institutions, and I think we all agreed that they were at a disadvantage, at least as passed, we did, and we charged you all with continuing to look and make proposals.

    And the fact that there's some resistance, it's still a charge that you have.

    Mr. Barr.

    Mr. BARR. Thank you, Mr. Chairman.

    I share a little bit of the confusion I think that's been indicated by some of the other Members. I think Mr. Watt, for example. And I'm a little bit curious as to why the Board and the Department are jumping into this with both feet right now, so early in the process. That process being Gramm-Leach-Bliley is still a very new animal.

    We have been asked, for example, to look at going back and taking another look at the privacy regulations, the privacy aspects, and a lot of us feel that the best course of action is to just give Gramm-Leach-Bliley a little bit of time to sort of settle in and filter out, and then come back and take a look at it. Let's let it work itself out a little bit.

    There's nothing in the statute, despite the very broad power, to make the determinations that you all are considering that's given to the Department and to the Board that requires either the Board or the Fed to initiate these proposed rules, is there?
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    Governor MEYER. No. But what we have done here is to respond to a request. Now we could have said, it's just too early, and although we have authority and responsibility to entertain requests for new authorities, we're not going to fulfill that responsibility because the bill is new.

    That didn't seem to me appropriate.

    Mr. BARR. Well, I think the way you've cast that sort of colors it a little bit. It's not that you're telling people we're not going to follow our responsibility. Certainly the only response to that will be well of course you have to follow your responsibility. So I think your characterization of it presupposes the answer you'd like to have, which is justification for putting the proposed rule out.

    The Board and the Treasury could simply say, we're not abrogating our responsibility to make a determination of the statute; we just think it's premature. That wouldn't be abrogating any responsibility, would it?

    Governor MEYER. No. But I think that in this case, we recognized that these choices were going to be difficult, these were going to be nuanced decisions.

    Mr. BARR. Why rush into it then?

    Governor MEYER. Nothing is a rush. We're taking our time and at some point we have to begin to sort out these issues and these requests.
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    Mr. BARR. Well why would you choose as the starting point for sorting out these issues, two proposed rules that presuppose that the services that the banks are requesting are indeed proper financial services related to or are incidental to.

    Because that's the way the rules are cast, the proposed rules are cast, they presuppose that. And I suppose you all could have come out with a more neutral proposal or a proposal on the other side.

    Why did you cast them this way if your intent was simply to get information to begin sorting out the process?

    Governor MEYER. Well, I think it would have been unusual to put out a proposal to say that we don't think these are permissible activities.

    Mr. BARR. With a new animal here, why would that be any more unusual than this?

    Governor MEYER. This seemed like the appropriate way. There was a threshold case that could be made. There were reasonable arguments that could be made.

    We put it out in this form to get the discussion going, to get the feedback from practitioners, from market participants from both sides to help us sort out the issues and hopefully make a very informed decision, and also begin to draw the line that we're going to have to draw on what constitutes financial——
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    Mr. BARR. Why are you going to have to? I thought there was nothing in the statute that requires?

    Governor MEYER. It says that we are supposed to rule on new activities. If we get new requests, it seems to me, we're supposed to consider them.

    Mr. BARR. So you do read into the statute an obligation?

    Governor MEYER. Not an obligation to put out a proposal in any case, but to consider those requests.

    Mr. BARR. But there's no requirement in the statute to propose a rule simply because you get a request?

    Governor MEYER. No.

    Mr. BARR. OK.

    Under Gramm-Leach-Bliley Section 103, it looks like it says that the ''Board shall not determine that any activity is financial in nature or incidental,'' and so forth, ''if the Secretary of the Treasury notifies the Board that the Secretary of the Treasury believes that the activity is not financial in nature or incidental,'' and so forth.

    Treasury did not communicate that to you, is that correct? I mean, Treasury never made that determination, did they?
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    Governor MEYER. That's correct.

    Mr. BARR. OK.

    The next paragraph then says ''The Secretary of the Treasury may recommend that the Board find an activity to be financial in nature and incidental to a financial activity.''

    Did Treasury do that?

    Mr. HAMMOND. Reach a final conclusion with that regard? No.

    Mr. BARR. Under that language there, Treasury recommendation, which is under the paragraph entitled ''Proposals Raised By the Treasury,'' it says, ''The Secretary of the Treasury may, at any time, recommend in writing that the Board find an activity to be financial in nature or incidental to a financial activity.''

    Did the Secretary of the Treasury do that?

    Mr. HAMMOND. I don't believe we reached that point in the process, no.

    Mr. BAKER. [Presiding.] Mr. Barr, you've expired your time and since we've got a vote pending, may I move on to another Member now?
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    Mr. BARR. I beg your pardon?

    Mr. BAKER. I said your time has expired, and since we have a vote pending, I'd like to move on to another Member to try to get more Members in before the vote.

    Mr. BARR. OK, could I just get a definitive answer on that? So the answer is no, the Secretary did not make that recommendation?

    Mr. HAMMOND. No, we did not. Correct.

    Mr. BAKER. Thank you, Mr. Barr.

    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    I think some of the previous questions from Members of this subcommittee indicate that we have done several things. Maybe the Congress made a gross error in delegating legislative authority to the regulator and to the Secretary. I am probably predisposed to believe that we shouldn't have done that. And maybe it would be right that you send back this law and, I think, make that determination.

    Let me ask this question. Did you make a determination whether or not there was an unconstitutional delegation of authority by the Congress to the regulators or the Federal Reserve or the Treasury?
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    In fact, listening to your answer, Mr. Hammond, I sort of thought that you felt you had an obligation to start legislating here.

    Mr. HAMMOND. No, we have certainly not looked at the constitutional question that I'm aware of.

    Mr. KANJORSKI. Well, should you not maybe look at that? With the predisposition of the Supreme Court today being more conservative regarding what the Executive Branch and independent agencies can do, maybe you should sit down and say, look, it is up to the Congress, not the regulators to define what is commerce and what is financial services.

    Mr. HAMMOND. Well, I think we——

    Mr. KANJORSKI. And by forcing you to do that in the Act, we have delegated that legislative authority to you.

    Now, putting that question aside, I think you could understand the intent of the Act from the committee hearings and conference reports where the issue of commerce and financial services was addressed.

    It was not like we did not address that issue. And, as I recall at that conference, although I was ill at the time, I think we agreed to absolutely maintain that firewall.

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    So the question seems to pose itself, and I think Mr. Barr and Mr. Gonzalez addressed that. What happened that suddenly what we all presupposed, at least on the side that wanted to maintain the firewall, that somehow this moved from a commerce to a financial services problem.

    Now, having said all those things, I approach this issue in an entirely different direction. I think we want competitiveness in the banking system. We want to level the playing field. But in some of your comments earlier, I got the indication that you are driving toward the least common denominator.

    You are saying because 26 States allow some of this activity to go on, we are going to have to allow all the States to do it under the Act.

    If that is the case, we are going down that slippery slope anyway. I am sure I could find some State legislature or regulator in this Union willing to allow banks to sell automobiles and finance them out of the bank.

    So we are going into that business. And if we can persuade any one of the 50 States to approve something else, then you are going to say this is now competition, and you have to approve it?

    Why not look at the other side? You are not talking to us about the interests of the consumer. As you know, the banks can pretty much take care of themselves, and so can the realtors. But, there are more than just California consumers, and there are more than just New York City consumers.
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    There are consumers in Pennsylvania. Where we have gone in the last 10 or 15 years in this country? In fact, we have wiped out most small bankers. Well, we said that was necessary, so we accepted it. We have also wiped out most independent insurance agents, or soon will wipe them out. Now we are going to wipe out the realtors. I think you could extend this thinking to the legal profession, too. I am sure there are so many financial transactions that banks can buy legal firms and run them. I have no doubt about that.

    What is going to be left in our local communities for leadership? Everybody is going to be working for three or four huge, gigantic institutions that are 100, 500 or 1000 miles away from their community.

    Aren't the consumers the people that live in these communities? I have personal experience from it. I know when I entered Congress, we had 40 or 50 community bankers in my district; today, we have five or six.

    I know when we would have a United Way fund drive, we could call on the insurance agencies, call on the lawyers, and call on the realtors. They are, however, starting to disappear, because of, as Mr. Baker pointed out, larger institutions.

    Now we can not change the march of progress and time, but we do not have to rush down that road with the conviction that we are going to homogenize this country to such an extent, and the communities that are made up of the consumers be damned. That is what you are doing with this proposal.

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    Mr. BAKER. Mr. Kanjorski, if I may, you've exceeded your time. Mr. Hinojosa is the last Member to be heard. We might be able to wrap this up if we get Mr. Hinojosa in here real quick. We've got about 9 minutes left till the vote, and then we'll recess.

    Thank you, Mr. Kanjorski.

    Mr. HINOJOSA. Thank you, Mr. Chairman.

    I want to identify with and agree with Chairman Baker on the interesting challenge before us here in our Financial Services Committee.

    I have an open mind on this proposal before us on the proposed rule.

    As I looked at Under Secretary Hammond's remarks, you say that in making determinations, the 1 year old Gramm-Leach-Bliley Act requires us to take into account, among other factors, the third bullet: changes in the technology for delivering financial services, and fourth, whether the activity is necessary or appropriate to allow a bank and its subsidiaries to compete effectively.

    And I like competition, and so I want to keep an open mind before I make a decision.

    I was one of the ones who said that I wanted to think out of the box at a time where technology facilitated internet shopping, and has made it popular, at a time when one-stop capital shops are being sought out by homebuyers, at a time where homes have sold for more than what the asking price for the home started out.
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    An example is that I've been renting a townhouse and very near two blocks from my home here on the Hill, a refurbished home went on the market, and within 10 days it sold for not the asking price of $300,000, but for $340,000.

    There were bids taken, and by the time it was over, it sold for more.

    So times are changing, as Chairman Baker pointed out, and those of us who have very close relationships with realtors, like I do with my son, who is a realtor, I find it difficult to just simply say that we have to continue to do business as in the past.

    So I repeat, I like the competition, but what and how do you feel about taking care of the low-income and the middle-income families who, in many cases, are not the customers that the big banks are going to seek.

    How are we going to take a look at the Community Reinvestment Act so that big banks can put back into the business the moneys that they are taking from everybody in that community, so that if this proposed rule should get 51 percent of the votes out of this subcommittee and move forward, that they too can benefit from this competition.

    What are your feelings about that?

    Mr. HAMMOND. I think that, in general, competition benefits all consumers, and to the extent that you foster an environment of fair and open competition, everyone stands to benefit in the marketplace.
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    With regard to your specific questions, I think those are issues of addressing the low- and moderate-income communities, those are issues that are addressed in other aspects of the legislation and other existing statutes.

    And they factor into any decisionmaking as they would factor into the competition questions.

    But specifically, the standards with regard to those communities are addressed in different statutory requirements.

    Mr. HINOJOSA. Time is running out. We need to go vote. I want to be sure that there is specificity, that there is specificity that says, just like in the Community Reinvestment Act, that all banks are going to put back into their community. And so I want to be sure that I'm vocal, that if I am to support this, that we look at how banks are going to make sure that they welcome the low- and the middle-income families into being served.

    Mr. BAKER. Mr. Hinojosa, we're down to about 4, 3 minutes, 30 seconds.

    Mr. HINOJOSA. Thank you, Mr. Chairman, I appreciate the opportunity to say what I had on my mind.

    Mr. BAKER. Thank you, sir.

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    I wish to thank both the gentlemen for their tolerant participation this morning.

    Just a couple of comments for the record. And I should state, not on Chairman Bachus' behalf, but clearly on my own. If we're going to clear this up, we need to look at credit unions who, through service organizations, can have brokerage operations today under current law.

    I don't know that the subcommittee is aware of the credit unions' violation of common sense.

    Second, if we're going to be risk adverse, we need to look at the 25 percent equity position a bank may take under current law in a private corporation, or worse yet, the 40 percent position it can take in a foreign corporation, which certainly is going to be suspect.

    Finally, we need to understand that, in the history of this subcommittee, we not only voted for a commercial basket in which a bank could own part of a commercial firm with certain permissible activities—obviously a breach of commerce and finance—which was inexcusable. But, we also passed on this Committee, although it did not become law, a reverse basket where commercial enterprises could own banks. Now that was absolute heresy which never made it to the floor.

    We have a lot of equalizing we need to do in this seriously flawed marketplace. If we're not going to pursue the rule which the Fed is proposing today, then this subcommittee needs to be instructed to correct the errors of the past.
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    With that comment, I'd like to call this subcommittee hearing to recess, and we will return, and Chairman Bachus will return momentarily.


    Chairman BACHUS. The Subcommittee on Financial Institutions and Consumer Credit hearing on Federal Reserve and Treasury rulemaking will now come to order.

    Let me introduce members of the second panel. I appreciate your attendance and your patience.

    Our first panelist, going from your right, is Mr. Richard A. Mendenhall, President of the National Association of Realtors.

    The second panelist is Mr. Phillip M. Burns, Chairman and Chief Executive Officer of Farmers & Merchants National Bank of West Point, Nebraska on behalf of the American Bankers Association.

    The third witness is Mr. Robert F. Nielsen, President, Shelter Properties, Inc., of Reno, Nevada, on behalf of the National Association of Home Builders.

    Mr. Frank Torres, Legislative Counsel for Consumers Union.

    Mr. John Roebuck, Chairman of the Board, National Auctioneers Association.
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    Mr. Richard J. Parsons, Executive Vice President, Bank of America, testifying on behalf of the Financial Services Roundtable.

    We appreciate your attendance.

    Mr. Mendenhall, if you will lead off.


    Mr. MENDENHALL. Thank you, Mr. Chairman.

    Good morning. I'm Richard Mendenhall, President of the National Association of Realtors. I am from Columbia, Missouri, where I own three real estate firms specializing in single family and commercial brokerage and property management.

    I've been a realtor for over 25 years and I'm the fifth generation in my family in the real estate business.

    I'm pleased to represent the nearly 760,000 members of the National Association of Realtors who participate in all aspects of the residential and commercial real estate market.

    First, let me thank you sincerely for holding this hearing today. The issue before us is an extremely important issue and raises many concerns as it affects not only the banking and real estate industry, but more importantly, consumers.
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    As you know, over 175 of your colleagues in the House of Representatives have written letters to the Federal Reserve and Treasury expressing their concern about their proposal to classify real estate brokerage and property management as financial activities, and therefore permissible for financial——

    Chairman BACHUS. Mr. Mendenhall, would you pull the mike a little closer. And let me ask all the gentlemen to do that.

    Mr. MENDENHALL. Be glad to.

    As you know, reclassifying real estate leverage and management as financial activities therefore makes them permissible activities for financial holding companies and financial subsidiaries of national banks.

    The National Association of Realtors opposes this proposal. We oppose it because it violates congressional intent. At no time during the debate of the Gramm-Leach-Bliley Act did Congress, nor the banking industry, for that matter, suggest that real estate brokerage and property management were financial in nature, or should be included in the newly defined activities.

    It was clear that the issue at hand was to permit banks to engage in securities and insurance activities. Also clear was congressional intent to maintain the separation of banking and commerce.

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    In fact, on at least three occasions, Congress debated and voted decisively to keep them separate. Real estate brokerage, as a commercial activity, was considered off the table.

    The Gramm-Leach-Bliley Act is perfectly clear. As you can see from the chart to my right, a chart of permissible activities, real estate brokerage and property management are conspicuously absent.

    Furthermore, since 1972, the Federal Reserve has maintained that real estate brokerage and property management activities are not closely related to banking.

    Banking industry representatives say that because a home is financed, real estate brokerage is incidental to banking.

    To apply this standard to all activities deemed attractive business opportunities for banks will most certainly lead to banks entering all other commercial activities.

    Will bankers soon be selling cars, boats, washing machines, and other tangible products that involve financing?

    The act of financing real estate or any other tangible asset or durable goods simply does not transform that asset into a financial instrument. Banks have it backward. It is the mortgage that is in fact incidental to buying real estate.

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    Let me put this in perspective. There are two parties to every real estate transaction; a buyer and a seller. The seller requires no financing for his part of the transaction. Therefore, right off the bat, 50 percent of the transacting parties handled by real estate firms involve only the marketing and selling of the property.

    These sellers are not shopping for a loan or any other lender services.

    The other 50 percent represent the buying side. You might assume that these buyers require a mortgage. However, according to the 1999 American Housing Survey, approximately 20 percent of home purchases are made without financing.

    This means that if this proposal is adopted, it places the Federal Reserve in the embarrassing position of permitting financial holding companies to engage in a commercial activity where 70 percent of the consumers involved in the transaction require no financing.

    I'd like to repeat that again. Seventy percent of the consumers involved in the transaction would require no financing.

    Some say that the real estate industry is afraid of competition. On the contrary, we welcome competition as long as the rules are fair. I would point out to you that a financial holding company and national banks already have at their disposal Federal advantages and subsidies, as listed on our second chart. Pitting federally-subsidized, highly advantaged entities with a high barrier to entry against unsubsidized, less-advantaged real estate firms with a relatively low barrier to entry is a recipe for trouble.

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    Cash-rich banks could use profits from taxpayer insured operations to subsidize real estate functions, freeing more resources to consolidate market power.

    Some real estate firms would be forced to close their doors. With less competition, consumers would be at risk and disadvantaged. Consumers will be hurt by this proposal in a number of ways, including limited choice, unfair treatment, and possible increase in cost.

    However, the concern that resonates most when asked is the treatment of their financial and personal information under a bank-owned brokerage scenario.

    In conclusion, I've identified some of the reasons we oppose the proposal before us today.

    We hope that the Treasury Department and Federal Reserve will agree with us and deny the petitions to define real estate brokerage and property management as financial activities.

    We also encourage Congress to reaffirm its commitment to maintain the separation between banking and commerce. This is not only necessary, but essential if we are to ensure that the real estate market, one of the largest sectors of the economy, remains fair and competitive.

    We must protect consumers and their rights to the greatest selection of providers in buying or selling of their property.

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    I would like to thank the subcommittee for your time and attention to this critical issue.

    Chairman BACHUS. Mr. Burns.


    Mr. BURNS. Thank you.

    Mr. Chairman, first I would like to thank you for holding this hearing.

    The issues we are here to discuss are not new, in fact, they have been debated in this legislative body for years.

    What is new is that in 1999, Congress enacted the Gramm-Leach-Bliley Act. The fundamental tenets of that Act are to promote competition among providers of financial and related services and to ensure that financial services holding companies can adjust to the marketplace.

    Congress recognized that regulatory flexibility was vital in a dynamic marketplace. Congress expressly left it to the Fed and the Treasury to determine what additional services could be offered by banking organizations.

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    In putting forth the proposal on real estate brokerage and management, the Fed and the Treasury are following exactly the process Congress created when it passed Gramm-Leach-Bliley only 18 months ago.

    In my small town in Nebraska, I would like to offer my customers the same services as our competitors, and that includes real estate brokerage and management. In fact, the ability to offer real estate services may be more important for smaller banks like mine in rural areas.

    In these communities, the bank is perceived as having the best information on properties offered for sale, including farmland acreage. Small banks would likely partner with existing real estate brokers in order to provide these services.

    In my statement today, I would like to make three key points:

    One, competition will be enhanced by bank involvement in real estate brokerage;

    Two, consumer protections would be even greater with bank involvement; and

    Three, the regulatory process should be allowed to work as Congress intended when it passed Gramm-Leach-Bliley.

    And I would like to briefly touch on each point.

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    The benefits of competition are well known. Competition improves efficiency, pricing and service levels, all to the benefit of homebuyers. Not all banking organizations will choose to offer real estate services, but those that do will enter the market because they believe they can do a better job serving customers.

    While realtor opponents of competition try to block bank participation, many realtor firms offer both real estate and banking services.

    Congressman Baker, earlier in his comments, made reference to looking up ads by realty firms this morning on the internet, and today I have brought a sample of such an ad, which is to my right.

    The ad on display here, from Long & Foster, this area's largest brokerage firm, makes no bones about providing end-to-end services. This ad touts Long & Foster as being more than a great real estate company, but also a great mortgage, title, and insurance company too.

    The ad goes on to say, ''Imagine the convenience of buying a home, securing the mortgage, arranging the title work, and getting homeowners' insurance all in one place.''

    And Long & Foster is not an isolated example. Century 21, Caldwell Bankers, GMAC, Prudential, and many others all combine financial services like loans and insurance with real estate brokerage.

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    This is exactly the type of marketplace change that Gramm-Leach-Bliley was designed to have the regulators address. In that regard, I note that credit unions can and do offer real estate brokerage.

    Importantly, bank involvement is consistent with safe and sound banking. All consumer protections that apply to independent realtors would also apply to bank affiliated real estate agents, including all State licensing, sales practices and continuing education requirements.

    Banks already must meet tough privacy requirements and are subject to anti-tying regulations. And because brokerage and management are agency activities, they pose no risk to the soundness of the bank.

    After more than 20 years of debate, Congress recognized the importance of regulatory flexibility when it enacted Gramm-Leach-Bliley. Congress could have excluded real estate brokerage and management explicitly, as it did for real estate development, but it did not.

    Rather, Congress left that decision to the Fed and the Treasury. Thus, the National Association of Realtors is now asking Congress to intervene in the very process Congress created only a year-and-a-half ago.

    The Fed and the Treasury should be allowed to follow the process that Congress created.

    In conclusion, increased competition benefits customers. It is a catalyst for innovation, more customer choice, better service and competitive prices. My customers would certainly benefit if my small bank could offer real estate services.
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    Again, Mr. Chairman, I'd like to thank you for this opportunity to testify.

    Chairman BACHUS. Thank you.

    Mr. Nielsen.


    Mr. NIELSEN. Chairman Bachus and Members of the subcommittee, my name is Bob Nielsen, and I'm President of Shelter Properties, Incorporated, a company which builds and manages multi-family properties.

    I'm also Chairman of the National Association of Home Builders Housing Finance Committee, and past chair of the Federal Government Affairs Committee.

    I'm here on behalf of the 203,000 members of the National Association of Home Builders to express our views on this proposal.

    We oppose the proposal and believe that real estate brokerage and property management are inherently in nature, anti-competitive, and would adversely effect consumers.

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    For these reasons the proposal arguably violates both the letter and the spirit of the law.

    First, I'd like to speak to the proposal as it relates to financial holding companies and national banks engaging in real estate management services.

    The term ''real estate management'' encompasses numerous activities. As a property management company owner, we perform such functions as preparing and overseeing marketing plans, finding tenants, negotiating leases and renewals, developing operating and capital budgets, preparing maintenance and repair schedules, purchasing equipment, materials, and supplies, supervising employees or contractors that perform repair, maintenance, and landscaping work, collecting rents, and holding security deposits.

    I submit that these functions are intrinsic to the day-to-day operation of a commercial enterprise. Classification of these activities as financial, or incidental to financial activity, blurs the line between banking and commerce so as to render it non-existent.

    If this proposal is allowed to go forward, it would be difficult to predict what activities would not fall under such a heading.

    Allowing financial holding companies and national bank subsidiaries to engage in real estate management would also create an unfair competitive environment for real estate management firms not affiliated with banks.

    It would deprive the current participants of their right to compete in the marketplace without undue influence by banking entities.
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    I, as a real estate property manager, must disclose proprietary data on rental market conditions and projections, business plans, and data on specific properties. This would be a sensitive situation for a real estate development firm that has a property management unit in that data on both development and management operations could be required to support loan decisions.

    This information, if shared by the bank with its property management affiliate, could give that entity an unfair competitive advantage over other firms in the market.

    Also, this proposal would create conflicts of interest when banks must make decisions about financing involving companies with competing property management operations. Banks may be unwilling to provide financial services including loans to competitors, or may provide such services at terms that are less attractive than those extended to its property management affiliate.

    Second, I will address the proposal that would allow bank holding companies or national banks to engage in real estate brokerage.

    Real estate brokerage involves bringing together parties for the purposes of accomplishing a real estate purchase, sale, exchange, lease or rental transaction. Again, these activities are commercial in nature, not financial.

    Just as with real estate management activities, the financial components of real estate brokerage are incidental to the commercial elements of the transaction.
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    Real estate brokerage activities do not satisfy the test of being financial or incidental to financial activity.

    Finally, this proposal would be harmful to consumers. Despite the assertion that consumers benefit from one-stop shopping, there is a significant risk to consumers who utilize brokers affiliated with banks.

    Consumers utilizing these services might not have access to independent sources of information that they would have if they used an independent real estate broker.

    Also, a consumer could reasonably fear that they might not be approved for financing of a real estate purchase if they do not use the brokerage and other services of the affiliates of the banking organization.

    Again, we believe that going forward with this proposal would be inconsistent with the congressional intent in passing Gramm-Leach-Bliley.

    We are grateful you have had this hearing today and listened to our views. We hope that the subcommittee can utilize its oversight authority to reaffirm its commitment to maintain the separation of banking and commerce.

    Thank you very much.

    Chairman BACHUS. Mr. Torres.
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    Mr. TORRES. Chairman Bachus, Members of the subcommittee, Consumers Union appreciates the opportunity to be here today. I've got realtors to the left and bankers to my right, and maybe I'm stuck in the middle with some of you on some of the issues that are related to the proposed rule.

    Chairman BACHUS. You also have an auctioneer there.

    Mr. TORRES. That's right, but that kind of skews the perspective then perhaps a little.

    I do want to raise three points about the proposed rule today.

    First, we believe that it's questionable if this type of activity is permissible under Gramm-Leach-Bliley.

    Second, the existing marketplace might not be perfect for consumers, but allowing banks in won't necessarily change things or automatically provide benefits for consumers.

    Third, if banks are allowed to be real estate agents, then there need to be safeguards like those Congress included in the Gramm-Leach-Bliley Act for the retail sales of insurance by financial institutions.
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    I guess the threshold question here is whether Congress intended that banks be allowed to engage in this type of activity when it passed the Financial Modernization Law.

    Many Members, including some today on this subcommittee, have said, no.

    During the financial modernization debate, much concern was raised about the mixing of banking and commerce. Consumers Union, at that time, testified that ''We opposed permitting federally-insured institutions to combine with commercial interests because of the potential to skew the availability of credit, conflict of interest issues, and general safety and soundness concerns from expanding the safety net provided by the Government.''

    You let the banks get a toe in now, as Congressman Bentsen said, or perhaps someone else, they'll keep on coming back to the well. The next thing you know, they've plunged in and they're swimming across the Atlantic and the taxpayer gets to pay for the rescue mission when something goes wrong.

    What can a consumer expect if banks are allowed to engage in real estate activities? We've heard a lot about benefits. Are we going to see cuts in commissions? Are we going to see lowered costs, perhaps reduced fees? No selling of junk products and the protecting of my personal information?

    The banks' track records make us a little skeptical. Banks are still charging consumers a lot of fees for their bank accounts, unless of course you maintain a large balance, which many consumers don't.
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    Banks continue to oppose life line banking accounts. Will they also shut out lower income people if they are allowed to participate in the real estate marketplace?

    Some banks are partnering with payday lenders that charge consumers in excess of 300 percent for loans. And they use existing national banking laws to avoid having to comply with State consumer protections.

    ATM fees have quadrupled. Credit card practices are out of hand and consumers continue to get hit with fees upon fees. Fannie Mae and Freddie Mac have both estimated that many consumers in the sub-prime market, where banks are participating more and more, can actually qualify for better loans.

    So to the extent that banks are already participating in the marketplace, through offering mortgage and home equity loans, some of their practices leave a lot to be desired.

    And what incentive will the banker's agent have to refer a customer to a better product that another institution may offer?

    And we're really skeptical about the value of one-stop shopping for consumers, especially those who don't have a lot of money.

    The financial services industry has opposed virtually every effort to improve the financial services marketplace for consumers, including attempts to curb predatory lending at both the Federal and State level.
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    Financial institutions have opposed changes to regulations protecting consumers who take high cost loans, and even expanding some disclosure laws that the Federal Reserve Board has proposed.

    It's ironic that the institutions who claim they want to get into this marketplace more oppose efforts to keep people in their homes by avoiding foreclosure and other problems that they have with predatory loans.

    Predatory lending absolutely needs to be addressed as part of this discussion, because it gives all of us an idea of what to expect from some of these financial institutions.

    We would say clean up your act first before we even begin this discussion of allowing banks into the marketplace.

    When confronted, some lenders say that they will restrict credit or even leave the marketplace altogether. Lenders made that argument in North Carolina, and North Carolina passed the Predatory Lending Law anyway, and it hasn't affected lending in that State.

    Now Congress included some very good consumer protections on the retail sales of insurance products by financial institutions. Similar protections are needed if banks are allowed to engage in real estate activities.

    In addition, Congresswoman Roukema brought up the fact that we might be discussing, at some point this year, reforming the Real Estate Settlement Procedures Act and the Truth In Lending Act.
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    We think it is very vital that consumers have the information that they need so they can shop for loans.

    Perhaps what we need to be talking about is some sort of real estate consumer bill of rights that would affect anybody participating in this marketplace. Perhaps have suitability standards when it comes to lending.

    And if Congress really wants to examine how to benefit consumers, we should be talking about some of those issues during this discussion.

    Simply allowing banks into the marketplace won't be the solution to a lot of the problems that consumers have today.

    Thank you.

    Chairman BACHUS. Mr. Roebuck.


    Mr. ROEBUCK. Yes. Chairman Bachus, Members of the subcommittee, I am John Roebuck, Chairman of the Board of the National Auctioneers Association, and President of John Roebuck & Association of Memphis, Tennessee.

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    I'm accompanied today by NAA's legislative consultant, Curtis Prins, who is a former director of this subcommittee, and who is well known by many of you.

    The National Auctioneers Association is strongly opposed to the regulation issued by the Federal Reserve System and the Treasury Department, that would allow banks to engage into the real estate brokerage business.

    To illustrate NAA's strong, deep concern about the proposal, I should point out that, to my knowledge, this is the first time ever that my trade association has ever testified before Congress.

    We have not been here before because we believe that we should not testify unless it's something of a life-threatening nature to our industry.

    The proposed regulation will most assuredly cripple, if not kill, the real estate auction business as far as companies such as mine.

    Today, many of the NAA's auctioneers, 6,000 members plus or minus, conduct not only real estate auctions, but also operate traditional real estate brokerage business. All of our members are small businesses in the true meaning of the word.

    In our business, we face competition from other auction firms and real estate companies. The competition that we face, however, comes from companies that do not have an unfair competitive edge. However, if the regulation goes into effect, our industry will be faced with a whole new area of competition from banks who will clearly hold an unfair competitive advantage.
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    Banks have access to customers' deposits and cheap loans from the Federal Government and from other banks. Real Estate auction companies, such as mine, do not. Banks have access to financial information and customer lists that they used for marketing purposes. Real estate auction companies don't. Banks have the ability to attract customers with a variety of financial incentives; real estate auction companies don't.

    While I could list numerous reasons why banks will have an unfair advantage in competing with the real estate brokerage business, including auctions, I want to spend my remaining time trying to understand how the Federal Reserve and Treasury were able to put forth such a regulation.

    I'm just a small businessman from Memphis, Tennessee, and like the rest of the 6,000-plus members of the NAA, I'm confused by the process that led to the real estate regulation.

    I have great faith in the Members of Congress. They are elected by the people of their districts and States. They are accessible, concerned about their constituents' views and willing to listen.

    On the other hand, Government agencies are not made up of a single elected person, have narrow, if any, constituencies, and are hardly accessible. Certainly, the Fed and Treasury have asked for written comments about the proposed regulation, but that does not allow groups, such as NAA, to truly express their concerns.

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    Perhaps the most significant question surrounding this whole issue is this. If Congress wanted banks to engage in real estate activities, why didn't it grant those powers clearly and unmistakably? Surely, if Congress intended banks to have such powers, there would be no need for this hearing today. There would be a clear record of Congress granting real estate powers to banks and probably even a recorded vote.

    I ask this question of the two agencies: How many Members of Congress have sent comment letters saying that Congress, in passing the Gramm-Leach-Bliley, clearly intended banks to have real estate brokerage power. On the other hand, Congress has voted several times against allowing banks into the real estate brokerage business.

    Congress passed the Glass-Steagall Act in 1933, some 68 years ago. If it took that long for Congress to decide what businesses banks should be in, is it logical that Congress would take just over a year to hand over the authority to make legislative banking powers decisions to two unelected agencies?

    Mr. Chairman, I applaud you and other Members of this subcommittee who have written to the two agencies to question their actions. In your letter, you state ''far-reaching and controversial financial policies should be determined through legislation, not through regulation.'' Those 14 words are the clearest testimony that will be heard at this hearing.

    One of the tenets of President Bush's Administration is to return Government to the people. I truly hope that happens. But when the people see Government agencies legislate against a large segment of the people, then we must question if such a return is possible.
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    This regulation is not just to decide banking powers. It is far more than that. If this regulation is finalized, it will mean that Congress has given up two basic powers to legislate in the area of banking.

    I ask you, is this what you want?

    Thank you very much.

    Chairman BACHUS. Thank you, Mr. Roebuck.

    Mr. Parsons.


    Mr. PARSONS. Good afternoon, Chairman Bachus, Members of the subcommittee.

    I'm Rick Parsons, an Executive Vice President at Bank of America. I am testifying on behalf of the Financial Services Roundtable.

    The Roundtable is a national association representing 100 of the largest financial companies in the U.S. We are made up of 64 different banks and thrifts and a number of different insurance companies, as well as security firms and other diversified financial services companies.
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    The Roundtable appreciates the opportunity to discuss the proposal to permit financial holding companies and national banks to engage in real estate brokerage.

    The Roundtable strongly supports adoption of the regulation for three reasons.

    First, permitting holding companies to engage in real estate brokerage is good for consumers.

    Second, it is good for the financial industry.

    Third, brokerage is a financial activity consistent with the Gramm-Leach-Bliley Act.

    We believe that the consumers will be the real winners if this regulation is adopted. The rule will increase competition in the brokerage industry. More competition means more consumer choice, can mean lower prices and better service.

    The adoption of the rule is necessary to meet demand for one-stop shopping for homebuying services.

    A study conducted on behalf of the National Association of Realtors indicates that three out of four homebuyers say that getting all or some of their homebuying services through one company is appealing.
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    The NAR study concludes that 77 percent would consider using a bank for those one-stop shopping services in future transactions.

    The regulation enhances consumer privacy for brokerage customers. Customers of holding companies are entitled today to the Act's far reaching privacy protections and customers of real estate brokers currently have no Federal privacy protections.

    If adopted, the regulation will afford brokerage customers the same Federal privacy protections now afforded to bank customers.

    Now with regard to the threat of tying, existing banking laws, such as the Federal Reserve Act, and the Anti-Tying Statutes, are more than adequate to preclude these types of practices.

    Because of these laws, a brokerage customer of a holding company will enjoy greater protection than a brokerage customer of a less regulated competitor.

    Second, adoption of the regulation is prudent for the financial industry. Traditional real estate brokers are now competing with financial companies by offering financial services, such as loans and insurance.

    According to the 1999 NAR profile of its real estate members, 56 percent of its members with more than 50 agents are involved in mortgage lending. Federal thrifts and credit unions as well as State chartered banks in 26 States are now permitted to act as real estate brokers.
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    Yet, the only financial institutions that are uniformly not allowed to engage in brokerage are holding companies and national banks.

    A broker is an intermediary in a financial transaction. Banks and holding companies are permitted to conduct similar agency activities, including travel, securities, and insurance brokerage.

    Real estate brokerage poses little risk to the banking system.

    Finally, the Act permits the Fed to define certain activities as financial in nature, including the, ''transferring for others, financial assets other than money or securities.''

    The Roundtable believes that real estate brokerage is exactly that type of activity. Real estate is the largest asset owned by most Americans. For many, real estate is the most significant source of wealth. Real estate is conferred special status under tax laws reflecting our Nation's recognition of real estate as a storehouse of consumer net worth.

    For these reasons, we believe that real estate is a financial asset, and that brokerage is financial in nature. In determining whether an activity is financial in nature, Congress mandated that the Fed considered changes in the marketplace as well as the ability of financial holding companies to compete effectively with any company seeking to provide financial services in the U.S. This will provide parity.

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    We support the regulation, and believe that its adoption would be a winning proposition for consumers. The regulation will benefit consumers by enabling increased competition, more choice, and lower prices.

    Thank you. I will gladly respond to any questions.

    Chairman BACHUS. Thank you, Mr. Parsons.

    My first question, and I'll ask this to Mr. Burns and Mr. Parsons.

    Mr. Parsons, you mention brokerage is a financial activity. Would you gentlemen give me the distinction between a financial brokerage and a commercial brokerage?

    What is the distinction?

    Mr. Burns.

    Mr. BURNS. Mr. Chairman, there's been a lot of discussion about——

    Chairman BACHUS. If you will pull the mikes up——

    Mr. BURNS:——Financial activities and commercial activities. And I think sometimes there is a definite line and the issue is black and white.

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    Unfortunately, as in many cases in life, I think there is a grey area here. There are some types of transactions that have some of the characteristics of financial transactions and probably some characteristics of a commercial transaction.

    Chairman BACHUS. Yes. I guess what I'm saying is we talk about financial brokerages and commercial brokerages. Now, are you familiar with those terms?

    Mr. BURNS. No, I don't think that I am. I'm sorry.

    Chairman BACHUS. Mr. Parsons.

    Mr. PARSONS. Let me take a shot at that.

    It's the issue, I think, of our contention that this transaction is financial in nature, and I think that's the heart of the question that the Fed and Treasury are dealing with.

    The contention I think that we have is that this transaction involving a home is putting us, as an industry, the Roundtable members, as agents, as opposed to principals. Agents in that we are an intermediary in a financial transaction. We don't own the real estate.

    Chairman BACHUS. Oh, I understand that. That's true of all brokerages. I mean a brokerage brokers and, you know, a financial brokerage, my understanding is it brokers paper, it brokers intangible as opposed to a tangible——

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    Mr. PARSONS. And commodities.

    Chairman BACHUS: ——And a commercial broker brokers property, you know, whether it be an airplane or an automobile or a home.

    I mean, if you say that selling, brokering a home is a financial transaction, you would say that about an automobile too, wouldn't you?

    Now I'm not talking about owning a dealership; I'm talking about you could—that's a different matter—there's a distinction between owning an automobile, as an automobile dealer does, but what about a bank brokering automobiles between say the manufacturer and the public?

    Or brokering fine art, or brokering anything? I mean, if we allow commercial brokerage, it would have to be on everything, wouldn't it?

    Mr. PARSONS. Let me go back to something I said in my testimony, Mr. Chairman.

    I noted that the financial asset of a home is conferred special tax status. I think at least, you know, in our Tax Code, there's an indication that there is something different between this asset, which is such an important source of net worth for most of us, than the other examples that you just alluded to.

    And I don't know if that distinction helps, but I think that's the one that draws out, in particular, the nature of a financial.
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    Chairman BACHUS. Let's say that you were being allowed to broker a home or broker another item. What if you had—what if, Mr. Burns, you were a real estate broker for a piece of property that you held the mortgage for, and the mortgage was in default?

    You'd list the property for sale, but you're also the banker, and you have the mortgage, you're holding the mortgage on that home, and the mortgage is in default.

    Would your interests be in getting the best value, or would it be in paying off the mortgage or seeing that the mortgage wasn't in default.

    I mean, do you see a conflict there?

    Or what if that mortgage went into default on a piece of property, would you list property that you held a mortgage on?

    Mr. BURNS. No, I wouldn't necessarily assume that there is a conflict there. Depending on the size of the mortgage and the value of the property, it could well be that we need to get every penny out of that property that we can.

    Chairman BACHUS. Right.

    Mr. BURNS. I do know that there are real estate laws that regulate when a broker typically is hired by the seller of the property to market the property. And there's an agency relationship created there, and it's covered by State laws that apply to real estate agents.
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    And I think actually that it's covered in the real estate brokerage laws. And banks, if they are allowed to be brokers, will in fact be subject to all of those State laws and regulations that brokers are now. I think that's an important point.

    Chairman BACHUS. I agree.

    Let me ask the realtors a question. We talked about competition, and Mr. Mendenhall, I'll ask you this, competition in the marketplace.

    In my home town there are four gas stations on the corner; Texaco, Exxon, Amoco, and Philips. Is there competition?

    Mr. MENDENHALL. In my marketplace, I can tell you that there is.

    Chairman BACHUS. What if they are all $1.39 a gallon?

    Mr. MENDENHALL. There is not going to be competition at that kind of level, but I do want to speak to the issue of competition.

    I think the purpose, which we all talk about——

    Chairman BACHUS. Let me address that. I mean, if you have four gas stations on a corner, they're all selling gas for the same price, is that competition?
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    Mr. MENDENHALL. Yes, it's competition in my mind.

    Chairman BACHUS. Even if they're all selling it for the same price, they all go up the same? You know, we've all seen that.

    Is the 6 percent commission, which is standard in the industry, at least in Alabama, I mean is that competition?

    Mr. MENDENHALL. Well, first of all, I would say that I don't know what—I can't speak for Alabama, but I can speak for my own State, and tell you that real estate commissions are highly competitive.

    That in fact, in my own firm in the last 3 years, our real estate commission has dropped by 20 percent.

    And then I go to the testimony that was given by the person for the consumer. Credit card fees for banks have gone up in 1 year by 7.7 percent, penalty fees by 23.1 percent, and cash advance fees by 36.7 percent.

    So when somebody argues that they're going to get more market share, and that's going to make it more competitive, I just don't see that.

    Right now, the financial holding companies have 44 percent of all the loan originations in the country.
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    I have a mortgage company in my real estate firm. I'm not trying to say that one-stop-shop is not fair. What we were trying to say, on behalf of the National Association of Realtors, is that if you're going to have it, make sure it's fair.

    And that the people who are going to get into our business don't enjoy, don't have advantages that we can't also have. It is significant that they can borrow money cheaper that we can borrow it to run a real estate firm.

    So in effect, even if you had, in your example, the four gas stations of everybody selling at the same price, if they can run their business at less cost than I can because of their borrowing power, they have a significant advantage of that. And I think that's very important.

    Chairman BACHUS. With the number of Members we've got, what we may do is just expand the questioning to about 8 or 10 minutes.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman.

    I want to express my thanks to this panel of witnesses who I think all have enlightened us in various ways, and extend a special greeting to Mr. Parsons who comes from my hometown and, works for one of the institutions that is based in my congressional district.

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    I come away from this hearing troubled at some level, I guess. And I think I want to address my first line of questions to Mr. Mendenhall.

    Mr. Hammond, earlier today, testified that there were two rationales under which the regulators found that there was a threshold high enough to promulgate this proposed regulation.

    One of those I think you can't do anything about is that some States allow banks to be real estate brokers. I guess you don't have any control over that.

    But the second one is pretty well illustrated by a comment that you just made and by this Long & Foster ad over here, which is that realtors are in direct competition with financial services businesses.

    And I guess I know this. To some extent, I knew it at some level, because when I came to Washington, Long & Foster was my real estate company, and they arranged the loan, and they arranged the title insurance.

    But it's kind of striking to see that in an ad which says ''Long & Foster, more than a great real estate company, we're also a great mortgage, title, and insurance company too.'' That's in the headline.

    I guess I wasn't completely aware that that was going on. Is that, in fact—I mean, if there is a rational basis for the regulators doing this, it seems to me that that might be a compelling rationale, and that does seem to be sanctioned because there's something in the statute that talks about competition.
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    Are realtors regularly getting into the business now of mortgage, providing mortgages. This says ''Prosperity Mortgage Company'' is Long & Foster's company.

    Are you regularly getting into the business of providing title insurance. This says ''Midstate Title Insurance Agency, Inc.'' is a Long & Foster company.

    Are you regularly getting into the business of providing insurance. This says ''Long & Foster Insurance Agency, Inc.'' is the insurance provider.

    Is this something that's happening?

    Mr. MENDENHALL. The answer to that is yes, real estate firms are doing one-stop-shopping. But I want to emphasize that that is commerce versus commerce, not banking versus commerce.

    Mr. WATT. So this Prosperity Mortgage Company is not really a mortgage company of Long & Foster then? They're not making loans?

    Mr. MENDENHALL. They are making loans.

    Mr. WATT. Well how is that not financial?

    Mr. MENDENHALL. I'm not saying that that's not financial. What I'm trying to say is that when that mortgage company makes loans, they're not a bank; they don't accept deposits, they don't have the ability to do a financial transaction other than—in fact, in my company, which I can speak to the closely—half the loans we make we sell to the local bank.
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    Mr. WATT. All right, let me go to the other end.

    Mr. Parsons, I won't exempt him just because he's my neighbor.

    This ad points up an interesting and troubling aspect from the other end. Let's assume that banks are allowed to get into the real estate business.

    Would it be appropriate for Bank of America, for example, to have an ad like this, which says, ''I can be your lender, I can be your mortgage company, I can be your realtor, I can be your insurance company, I can be your title insurance company.'' I don't think we allow you to do that in North Carolina—but, you know, would that be appropriate?

    And the second step in that is, how close does that come really, what's the distinction really between providing a convenience and providing a tie?

    I know there's a legal distinction, but in the consumer's mind—and maybe we can get Mr. Torres to comment on this too—in the consumer's mind, can a consumer really distinguish, when he's in a hurry, trying to get a real estate transaction closed, moving, on the move, got nine million other things, how do we distinguish between what is a convenience and what is really a tie when an ad like this is what we're responding to.

    Mr. PARSONS. Two questions. Let me take the first one.

    And I think as you would expect, Mr. Watt, I would say, yes, Bank of America and all the members of the Roundtable should be entitled to have the same opportunity as the company mentioned, you know, in your comment, to be able to talk about convenience, one-stop shopping.
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    To your second question, specifically that that fine line perhaps between the tying and the real element of choice for the consumer, I really think there are several distinctions there, not the least of which are clearcut laws that are in place today around anti-tying.

    And I think second, is——

    Mr. WATT. Are realtors subject to those same laws?

    Mr. PARSONS. No, they are not.

    Mr. WATT. So if Long & Foster's mortgage insurance company mortgage company wanted to direct me there, Long & Foster could direct me there?

    Mr. PARSONS. I'm not sure I understand your question.

    Mr. WATT. If Long & Foster's agency wanted to direct me to Prosperity Mortgage Company, Long & Foster Mortgage Company, would they have the legal authority to do that?

    Mr. PARSONS. Well, I'm not a lawyer so I'm not sure that I could answer that specific question. I'd be happy to get some advice on that one.

    Mr. WATT. Mr. Torres will tell us quickly here.
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    Mr. TORRES. It's hard for consumers to comparison shop. And one thing in today's marketplace, and it's not going to get any easier if this idea of one-stop-shopping, you know, perhaps evolves in a way that consumers really aren't benefiting.

    How do you shop for a mortgage today if you want to shop for the interest rate, because it always changes. You can't fix it unless you plunk down a lot of money to make it stable so that you can go to Bank of America and say, ''Hey, I'm getting a 6 percent loan from Long & Foster, can you beat that?''

    The marketplace isn't set up that way today, so it's very difficult for consumers.

    Mr. WATT. But people are at least attuned to shopping for interest rates. I don't know that there's anybody that's really attuned to shopping for a title insurance company.

    The premiums are essentially the same, going back to the Chairman's question, is competition, competition, competition. If the price is the same for a title insurance policy, regardless of whether you get it in the bank or get it at the real estate company, aren't you always going to get it from the place that's most convenient, and isn't that always the first person to grab a hold on you and that might be the realtor, it might be the lender.

    In some cases, because I've gone and tried to—my experience is that it was seldom the lawyer, the lawyer got kind of, you know, cut out of the equation, although every once in a while, my clients would insist that a lender use the lawyer that he wanted to use, rather than the lawyer that the bank wanted to send him to.
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    I mean, there's a lot of implicit tying going on in here that I'm troubled about, I would have to say from the realtor perspective and from the lender perspective. And I'm even more troubled—I guess that's why I'm troubled at the end of this hearing—because I'm not sure I realized that realtors were doing all this, or at least had the legal capacity to do it all, and were permitted to do it all.

    But I'm not sure that I would consider that necessarily a compelling rationale, just because somebody else is doing something that I don't like, to say OK, somebody else in the industry ought to be able to do something I'm not going to like either. As my mom used to say, ''Two wrongs have never made a right'' in my opinion.

    But this is a difficult area. And I'm going to wrap up, Mr. Chairman. I know I'm over my time.

    I just, I'm troubled by this ad, and I'd be even more troubled, I'd have to say, if a bank were able to do the same ad, because I really do not think that consumers really are in a position to go through in this process, in a real estate process. I know how complicated they are. That's why I've always thought all this RESPA stuff was heavy-handed, because even after you get it, nobody understands it.

    The lawyers don't even understand it, you know.

    But I don't think people are going to go through and shop for any of this stuff. The first person that gets ahold of them, is going to have a captive audience.
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    That's basically what we are creating here I think.

    Mr. Burns is anxious to respond to me.

    Mr. BURNS. Well, personally in response to your initial question, Congressman, and it's an excellent one. Actually, under the Real Estate Settlement Procedures Act, it requires any mortgage lender, whether they are affiliated with a realtor or with a bank, that if we have an affiliation with somebody where we're providing the property insurance on the property or title insurance, that has to be disclosed.

    It has to be disclosed on a separate piece of paper and acknowledged by the customers, so customers are made aware of that.

    Mr. WATT. But you know, Mr. Burns, let me be clear. That's going to take place in a lawyer's office after the whole transaction has been approved and you had a closing, and the lawyer's going to stick a piece of paper under your nose and say, ''Sign it.''

    You know, I like to tell this story, and I'm going to quit, Mr. Chairman. It was only one real estate closing that I ever had where anybody ever got up and walked out of it. And they came back the next week. That's when we actually disclosed the annual percentage rate and the wife looked at the husband and said, ''I'm not signing this.''

    And he begged her for an hour in the middle of the closing, ''Please sign the documents, honey.'' And then next week, I guess, I don't know what he did for her over the weekend, maybe he gave her some flowers or something, but nobody's going to walk away from a closing at that point. It's just not going to happen.
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    So I mean, I hear what you're saying, but I've been there and I've done this. And I know it just is not going to happen. Nobody's walking away from a closing because all of a sudden they realize—I wouldn't have walked away from the closing, if I realized that Prosperity Mortgage, I don't know whether that was the company they were using, was affiliated with Long & Foster. I thought I had a reasonable rate, you know.

    But the first person who got a hold on me in Washington happened to be a Long & Foster agent. They were in control of that transaction, and I'm a Member of Congress. Now, imagine, and I've done this for 22 years, leading up to this.

    Now imagine somebody who has never been involved in the real estate business, a regular consumer, so to speak, and you've multiplied my confusion times one hundred, I guess.

    But maybe we can't solve all of these problems.

    Chairman BACHUS. You owe me about 10 minutes.


    Chairman BACHUS. Thank you, Mr. Watt.

    Mr. Bentsen.

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    Mr. BENTSEN. Thank you. Actually I think he owes me about 10 minutes.

    First of all, I think the answer to the second question, Mr. Parsons, would be price. And I think Mr. Torres that at least for some sectors of the public, there is greater transparency.

    But I would agree that for other sectors, particularly lower income sectors, the transparency has not existed where there is sufficient competition.

    But I want to go back to the Long & Foster example that is given, and I think we need to clarify some points.

    There's nothing under the law, prior to or since the passage I think, of Gramm-Leach-Bliley, that would preclude a separate company, a non-banking company from engaging in mortgage banking, or establishing a mortgage finance company, or any other type of finance company.

    And it is a little unrealistic I think to compare Long & Foster or some other company to a financial institution, primarily because Long & Foster, to my knowledge, does not have access to the discount window, it doesn't have access to the Federal Home Loan Bank system.

    Their mortgage company does have access to the other GSEs, Fannie and Freddie, but so to the banks and thrifts through their mortgage banking operation.
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    So there is I think that distinct difference.

    The other thing, and I don't know the answer to this, but I think it is unlikely that these mortgage finance companies are taking down the loans for their own account. And quite frankly, I don't think the banks are taking too many loans down for their own account either, maybe more so now than they have in the past, but most of these are going into the secondary market and into some form of mortgage-backed securities.

    So I think we need to be certain that there are those differences.

    The question I want to get to, and why I stuck around, because I kind of figured out what everybody was going to say beforehand, is what Mr. Parsons brought up, and I would like you to expand on this.

    You did actually as I was writing down the question, you started to talk about it in your testimony. And I think the two issues at play here, and I'm only going to ask you about one of them, what was our intent, and I'm sure you can find varying opinions with respect to that.

    The second issue, I think, is whether or not the regulators would have authority to expand the powers as such under the Gramm-Leach-Bliley for financial holding companies, that was otherwise expanded by legislation for thrifts under the Thrift Charter. And I'm sure there are varying opinions on that, and we won't resolve that issue; somebody else will across the street.
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    But the third issue, which I think we may or may not address, but if not us, the nine people across the street may address ultimately is whether or not real estate is a financial asset under the law.

    I'm not sure, based upon what you said, that you really fleshed it out enough for my interpretation, and I would add to that, and this sort of goes back to what my colleague, Mr. Watt, was saying about when he came to Washington, and goes to the realtor and they say, ''Oh, you can finance, you can get your mortgage us through us here and this through this here.''

    I mean, I went to buy a car the other day, and like every time I've bought a car, when you sit down to sign, to close the deal, they say ''How are you paying for this, and are you going to finance this, or are you paying cash?''

    Did you know we have some really good financing options that are available through, I won't say which company, because I don't want it to appear that I have some preference for one car versus the other or some car company because of our esteemed position here. But the fact is that I'm not sure that automobiles are, in and of themselves, a financial product.

    Automobile finance is a financial product, but automobiles are not. And I'm not sure that that same line of thought does not follow through to a piece of real estate.

    And while real estate, like other assets, can be used as a pledge, I'm not sure that it's necessarily considered legal tender, I'm not sure that it's necessarily considered the type of liquid asset that is easily tradeable, and so I'm curious in more detail where you believe it actually would be defined as a financial asset.
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    Mr. PARSONS. Thank you. A couple of thoughts on that one.

    You made a good point about real estate being used as a pledge, and I think that is an element of at least part of that discussion.

    And to expand on this notion of financial in nature, there are some related comments that are part of this existing Act, and that is such words as ''complementary'' or ''incidental'' to activities that are financial in nature.

    And to expand on that a little bit, if you look at the kind of activities that Gramm-Leach-Bliley allow banks and financial holding companies to currently do today, you have a role of finding that we can play; appraisal, title insurance, property and casualty insurance, loan brokerage, lending, closing, and escrow.

    And I think, you know, as you said earlier, that maybe this is one that will be, you know, debated in other forums as well.

    But in our review of this, what I think we conclude is that these activities collectively plus the fact that it is an asset that is so important and is probably the most important one to most Americans, collectively convert that into being a financial asset, at least part of this discussion.

    Mr. BENTSEN. The only thing I would say is, I'm not sure, I mean, escrow, closing, any of those, those are complimentary to any financial transaction and involve the movement of cash or other fungible assets like that.
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    But that is true whether it's involving real estate, residential or commercial real estate, whether it is involving some other asset, whether it is involving a merger or an acquisition.

    So I am not sure that they are on equal footing.

    Insurance, and believe me, I've got the scars from going through the insurance battles here, and I do think that insurance, in general, is a financial asset. I think that was well-proven.

    But again, I'm not sure, I mean, is jewelry a financial asset? Because jewelry can be used as a pledge.

    Somebody brought up fine art, and I know one of the institutions some years back tried to create a fine art index. It didn't work very well; it got caught in the bubble of the 1980s.

    But is fine art a financial asset or not? It certainly has value and has been used, in some cases, for a pledge.

    So I think, and I won't push you on this, but I do think that's a burden that you all have to overcome and I'm not sure the case has been made there.

    Mr. PARSONS. At the risk of repeating what I said to Chairman Bachus, there is one other distinction, and that is the treatment under the tax laws. And I think that does raise, you know, another element of question as to what that means in this discussion.
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    Mr. BENTSEN. Well, some of the economists tell us that the treatment of the tax laws is built as an incentive to enhance homeownership, and again, I guess you can look both ways. We also have tax incentives for people to save. We're debating a bill to enhance those tax incentives for people to save right now.

    But again, I'm not sure that the nexus is there.

    Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you. There are no other questions?

    I appreciate your attendance.

    Let me say this. The one thing that I would say to the realtors that I do consider that you may be walking uphill, and the reason for that is competition, you know, to understand America is to understand competition.

    I think we have a free market philosophy. Competition is what normally, most effectively at the cheapest cost, delivers goods and services to the American people.

    I think we've found, through all our experiences, that competition normally is a good deal for the consumer, for the American public.

    I think the question here is, is it unfair competition.
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    Mr. MENDENHALL. Exactly.

    Chairman BACHUS. I will tell you that the other problem is you do have—you've got Long & Foster, you've got Century 21, you've got Federal Thrift, you've got Federal Savings & Loan, and you have State chartered banks in I don't know, maybe it's four States, getting into the market.

    It is unfair to allow everyone but the banks into this market and allow other financial institutions into the market. And we are moving in that direction.

    If there's anything that the Fed can say, they can say that the marketplace is moving in that direction.

    I think, from your standpoint, you're going to have to find where it is unfair, it is bad for the consumers, and I think that ought to be where your focus is.

    Because it is a brokerage, as opposed to an ownership, I am not sure that you even believe it is going to threaten the banking institutions, because if they get in the business and they do not make a profit, they will be out of the business. So, you know, I think we almost assume that they will be profitable. If they are not, they will either take themselves out of the business or the regulators will take them out.

    Now we have all heard all of this about Japan, but in Japan, it was unwise banking practices, just as well as getting involved in commerce. It is an over-simplification to say they got involved in commerce and that is what pulled them down. They did a lot of things that they would not be permitted to do here under our banking laws.
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    This concludes our hearing. Thank you.

    [Whereupon, at 1:03 p.m., the hearing was adjourned.]