A proposal announced recently by the Federal Reserve Board that would allow banks to delve further into the real estate industry has put local Realtors on the defensive, while bankers are viewing the idea with cautious optimism as a chance to expand their services.

Earlier this month, the Federal Reserve Board voted to seek public comment on a proposal that would permit financial holding companies to act as real estate brokers and managers. The proposed rule would determine that real estate brokerage and management services are financial in nature, or incidental to financial activity, and are therefore permissible for financial holding companies, according to a statement issued by the board.

The wording for the rule itself is currently being developed by the secretary of the treasury with the board and will be published in the future. Comments on the proposal are being taken until March 2, 2001.

On the national level, the National Association of Realtors immediately took a negative stance on allowing banks to enter the world of real estate brokerage. Locally, however, officials in Massachusetts are still forming their opinions, though reactions appear to fall along the same industry lines as those nationally.

“This is definitely not a surprising development, given the ensuing regulations of the Gramm-Leach-Bliley Act,” said Daniel J. Forte, president of the Boston-based Massachusetts Bankers Association.

Signed into law on Nov. 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act represents some of the most sweeping reform of financial services regulation in more than 60 years. This legislation repealed Glass-Steagall Act Depression-era restrictions and permits the creation of new financial services holding companies that can offer new financial products and eliminates legal barriers to affiliations among banks and securities firms, insurance companies and other financial services companies.

Absent from the act is language that permits banks to enter into the realm of real estate and other commercial services. The idea has been debated by Congress over the past few years, which ultimately chose to limit banks’ involvement in those areas.

Should the proposal take effect and allow banks and other financial institutions to expand into real estate, Forte said he does not see a sudden surge into the market by Massachusetts banks.

“It’s really another part of financial services delivery,” Forte said. “We’re not all going to be rushing in to do it, but there will be some niche markets out there. [Banks] need the opportunity to provide ancillary services like real estate sales, but it will all depend on what their customer bases are, just like anything else.”

While bankers view the proposal as positive, Realtors are taking a decidedly different view of the matter, arguing that banks and real estate offices shouldn’t mix.

“If you walk into Cambridge Savings Bank, you want to know that it’s secure, and that your deposits are not being invested in some risky venture,” said Fred Meyer of University Real Estate in Cambridge and 2000 president of the Massachusetts Association of Realtors. “I don’t think you’d want your money invested in a business like a real estate brokerage. And when you walk into a real estate office, you’re expecting different activities as well. They should be kept separate.”

Meyer argued that the Gramm-Leach-Bliley Act has set clear guidelines about what banks and other financial institutions can and cannot offer, and those guidelines should be followed.

“Those are financial services,” he said, referring to offerings such as insurance that are now available. “They involve investment. But there were strong feelings to keep investment separate from commercial activities.

“If this goes through, where does it stop?” Meyer asked. “The next thing you know, banks will be allowed to open flower shops. There has to be some line-drawing.”

“Should this regulation take effect, consumers would be the real losers,” said 2001 NAR President Richard A. Mendenhall in a press statement. “Real estate brokers’ loyalty is to buyers and sellers. Their success depends on the quality of service they provide their customers. On the other hand, banks’ expertise and vested interest lies in making loans, not providing real estate services.”

Risky Business
Forte said concerns about banking associates suddenly trying to pass themselves off as real estate experts are largely unfounded, as he sees banks most likely forming alliances with real estate agents than going into the business on their own.

“Most banks will probably go forward with proven agents in the field,” Forte said. “They’re not going to turn tellers into real estate brokers; it would be more relationship-based, nothing built from the ground up.”

Forte also said there shouldn’t be worries about banks getting involved in high-risk real estate ventures, since banks are still heavily regulated by the government. “The goal of the regulations is to make sure that we get involved in these new activities in a safe and prudent fashion. We just want to serve the customer with a creative product array.”

He added that “it’s somewhat ironic” that real estate companies like Coldwell Banker, GMAC and The DeWolfe Cos. can offer financial products like mortgages, while financial institutions that offer mortgages cannot offer real estate services.

“If someone in a risky business like real estate wants to branch into a safer one, that’s not dangerous,” Meyer said. “But it’s dangerous if a federally insured business wants to enter into a risky area. That doesn’t work. If someone’s in their 20s and decides not to invest in dot-com stocks but utilities as well, that’s one thing. But you don’t want a widow who needs the money to invest in those dot-coms.”

Meyer said a possible silver lining to the situation, should the proposal be accepted, is that the banks’ foray into real estate may lead to a jump in the number of MAR members. “It might be good for expanding the membership. As a public policy, I don’t think this is a good idea,” he said.

Forte said he has not had a chance to gather opinions from his membership and the MBA has not yet issued an official opinion on the matter.

“We haven’t really focused on it yet,” said James Cunningham, president of Pittsfield-based Berkshire Bank. “We’ve had a lot going on, and this really hasn’t been on the front burner. But that’s not to say we won’t look at it in the future.”

At Boston’s Capital Crossing Bank, President and co-CEO Richard Wayne said the proposal represents a lot of potential for his bank and others.

“We certainly have a lot of expertise in the area of real estate, and as our bank continues to grow we will be looking to diversify,” Wayne said. “At first blush, it seems very appealing, though we really haven’t thought about it.” He added that dealings in real estate could add significantly to a bank’s fee income, as well as money held in the form of deposits and reserves.

Locally, Forte said members of his association would be willing to meet with MAR officials to discuss any concerns about the proposal before filing any comments on the Federal Reserve Board’s proposal, although nothing like that has been scheduled.

At the national level, a spokesman for NAR told Banker & Tradesman that officials from the organization were meeting late last week to begin work on a strategy for addressing the issue.

Realty Industry Not Sold On Banks Being Brokers

by Banker & Tradesman time to read: 5 min