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Law Would Permanently Nix Lender-Broker Mix

Lawmakers in Washington are once again pushing a bill that would permanently bar banks from breaking into the real estate brokerage and property management businesses.

Debate picked up after the bill—the Community Choice in Real Estate Act (H.R. 111)—was introduced in the House by Paul Kanjorski (D.) and Ken Calvert (R.) earlier this month. On Friday, Hillary Rodham Clinton (D.) and Wayne Allard (R.) brought the same bill (S. 413) to the Senate. The bills are expected to be voted on in early Spring. In the mean time, bankers—led by the American Banking Association (ABA)—and brokers—led by the National Association of Realtors (NAR)—will renew lobbying efforts.

The issue has been an ongoing concern since 2001 when the first Community Choice in Real Estate Act was introduced as an answer to the 1999 Gramm-Leach-Bliley Act. That bill relaxed restrictions on the kinds of businesses banks could engage in. Using the legislation’s vague wording, the Treasury Department attempted to enact a rule giving the green light to banks to move into real estate brokerage and property management. Since then, Congress has passed annual bans preventing the Treasury Department from finalizing its ruling.

This year, though, marks the first concerted push for a permanent ban since 2003. That year, 245 members of the House co-sponsored the bill and it passed the house, but only 22 Senators signed on, leading to Congress falling back to its typical one-year ban. This year, however, backers of the ban think they have a shot of winning the Senate for the first time, according to Charles Achilles, vice president of legislation and research with the Institute of Real Estate Management and the Certified Commercial Investment Member Institute. Right now, neither side is sure how the vote will play out.

If the bill passes, the competitive landscape will remain the same as today. If it fails, real estate firms—especially brokerages—are worried that banks, with their easy access to cheap capital and relationships stemming from real estate finance businesses, will use their clout to force clients to do business with them rather than with real estate companies. There are also concerns about a major consolidation wave, with banks acquiring brokerages and real estate firms in a race to build in-house capabilities.

This is the real fear behind the real estate industry’s opposition to a banking crossover, according to Tara A. Scanlon, a partner in the real estate group at Washington, D.C.-based law firm Holland & Knight LLP. “The national brokerage associations are worried about banks buying up local brokerage companies,” Scanlon says.

NAR president Pat Vredevoogd Combs said in an official statement that, “Without passage of this legislation we are concerned that national bank conglomerates will continue their attempts to enter into the real estate industry, putting both competition and the nation’s economic health at risk.”

When called for comment, commercial real estate brokerage firms, including CB Richard Ellis, and trade groups the Real Estate Roundtable and Counselors of Real Estate all deferred to NAR’s position on the legislation.

If the bill fails, Scanlon says that the retail sector would feel less of an impact than residential companies. That’s because most regional malls and large-scale community centers are leased and managed by national firms with large portfolios and established credentials, Scanlon says. Banks won’t be able to break in without acquiring existing firms unless they concentrate on trying to win business from smaller, regional companies and focusing on smaller properties.

John Tuccillo, of John Tuccillo and Associates, Inc., an Arlington, Va.-based firm offering consulting services to the real estate, finance and technology sectors, argues that clients associate brokerage and management services with established real estate companies and are likely to be reluctant to use banks, unless they merge with real estate firms and adopt their brand names.

“Banks want to get into real estate because they would be able to cross-sell services, but they would have a very large challenge in taking away the public mind share,” he says.

The ABA opposes the ban and says it will “stifle healthy competition” in the real estate sector. “The major real estate brokerages in this country already provide mortgages and property insurance along with their brokerage services. Why not banks?” said a spokesman for the group, who noted that several previous efforts to pass a permanent ban have failed because of insufficient support in the Senate.

Achilles says allowing banks to participate in real estate brokerage will result in pressure on the borrowers to use the bank for all of their real estate-related needs. It will also put banks into direct competition with real estate companies and allow them to control developers’ access to financing.

“These will be fairly chartered banks that will be taking funds from the private sector and could force people to use their services—it’s not a level playing field,” Achilles says.

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