Federal Reserve Board governor Laurence H. Meyer laid out the debate for the House Subcommittee on Financial Institutions and Consumer Credit. In 1999, when Congress passed the Gramm-Leach-Bliley Act that reformed the banking industry, it amended the Bank Holding Company Act to allow banks to engage in activities the Fed, in conjunction with the Secretary of the Treasurer, determine to be "financial in nature or incidental to a financial activity."

Not surprisingly banking officials argue that real estate and property management are financial or incidental to financial activity, while real estate officials argue they aren't. According to Meyer, most of the comments received by the Fed and the Secretary of the Treasury have been against the measure, mostly from real estate brokers.

Meyer told the subcommittee that the Federal Reserve Board hadn't come to a decision on the matter. "While we do not relish being in the middle, we believe that a debate on these matters is the best way to identify and sort through the issues and to reach an informed decision, and is precisely the type of debate envisioned in the GLB Act," he said.

Also testifying was National Association of Realtors president Richard A. Mendenhall, who said the proposal is wrong on several counts. He said it violates Congressional intent, goes against federal policy about mixing commerce and banking, and puts independent real estate companies at a competitive disadvantage.

He said if approved, banks would potentially be allowed to use profits from taxpayer-insured programs to subsidize real estate operations, giving them a competitive advantage. That could force the industry to consolidate, he said, giving consumers fewer choices. He also said real estate brokerage is a commercial activity, not a financial one. "Banking industry representatives say that because a home is financed, real estate brokerage is incidental to banking. Banks have it backwards. It is the mortgage that is, in fact, incidental to buying a home," Mendenhall testified.

He said every real estate transaction has two parties--a buyer and a seller. "The seller requires no financing for his part of the transaction. Therefore, right off the bat, 50% of the transacting parties handled by real estate firms involve only the marketing and selling of the property," he testified. He also noted that according to an American Housing Survey, nearly 20% of all home purchases are made without financing, further limiting the "financial" definition of real estate transactions.

"This means that this proposal, if adopted, places the Federal Reserve in the embarrassing position of permitting financial holding companies to engage in a commercial activity where 70% of the consumers involved in the transaction require no financing at all," he said.

He told the committee consumers are afraid they'll be treated unfairly by banks under the proposal, because banks would have access to their financial and personal information when they're dealing with them as real estate customers.

Philip Burns, chairman and CEO of Farmers & Merchants National Bank of West Point, Neb., testified on behalf of the American Bankers Association. He said allowing banks to sell real estate will actually increase consumer protections.

"Competition improves efficiency, pricing and service levels--all to the benefit of homebuyers," said Burns. "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."

Burns said even though the real estate industry is trying to block banks from entering the business, many realtor firms already offer banking services, citing firms including Long & Foster, Century 21, Coldwell Banker, GMAC and Prudential, all of which he said combine financial services like loans and insurance with real estate brokerage. "This is exactly the type of marketplace change that Gramm-Leach-Bliley was designed to have the regulators address," said Burns "I also note that credit unions can and do engage in real estate brokerage."

He said existing regulations that apply to realtors to protect consumers would also apply to banks engaging in real estate brokerage, so consumers wouldn't face risks. "Banks already must meet tough privacy requirements, and are subject to anti-tying regulations," said Burns. "And because brokerage and management are agency activities, they pose no risk to the soundness of the bank."