FRONT LINES: Risky Business

BY ROBERT FREEDMAN

NAR draws line on bank moves

Can national banks be real estate developers? The U.S. Comptroller of the Currency said yes in December 2005, giving PNC Bank the go-ahead to build a $170 million mixed-use complex that includes condos, a hotel, and offices, some of which will be used by its employees. But the project, which PNC plans to build next to its Pittsburgh headquarters, faces stiff opposition from a growing list of organizations, including NAR.

Opponents to this and other projects in the works by some of the biggest banking conglomerates in the country—including Bank of America and Union Bank—say banks’ acting as developers violates the separation between banking and commerce that has helped keep the U.S. economy stable since the Great Depression.

That separation was reaffirmed in the major banking modernization legislation, the Gramm-Leach-Bliley Act, enacted nearly seven years ago.

“These projects bring national banks uncomfortably close to being allowed to engage in commercial real estate activity and put them in conflict with Gramm-Leach-Bliley,” says NAR President Thomas M. Stevens.

For REALTORS®, who’ve been battling for years to keep big banks out of real estate brokerage and property management, the OCC action looks like an end run around the will of Congress, which for the last several years has prohibited national banks from entering real estate.

“It’s an example of banks trying to get through regulation what they haven’t been able to get through legislation,” says John Veneris, CRB, CRS®, chair of NAR’s Conventional Finance and Lending Committee and broker of Realty Executives Pro/Team in Downers Grove, Ill. “Through these small steps by the OCC, banks are trying to creep into our business.”

The considerably different light in which the OCC sees the projects is based on its interpretation of longstanding rights of banks to own property for their own use.

“The National Bank Act recognizes the authority of a national bank to invest in property used for the bank’s own operations, offices, and lodging for employees and customers,” said John Dugan, the U.S. comptroller, in a Jan. 11 statement, “and to lease to others the portion of the property that it does not need.” Dugan made his remark after NAR and other groups raised questions about the OCC project approvals.

Michael Whalen, an attorney in Washington, D.C., calls the OCC actions well established in precedent because the projects are clearly for the banks’ use for their staff and clients. “In each of these cases, the banks are using the properties for their own purposes and leasing the rest,” he says.

Firewalls needed

Groups concerned with the bank projects don’t dispute the right of banks to own their office buildings or even to lease space to tenants to make the buildings pencil out financially. But, they say, it seems a stretch to apply that logic to a project that includes a hotel and condo units, as does the PNC project, or a windmill farm, for which Union Bank has received the OCC’s OK. Bank of America has also received OCC approval for a hotel project.

“There are firewalls between banking and commerce for a reason,” says Jennifer Platt, director of federal government relations for the International Council of Shopping Centers. “When you start chipping away at those firewalls, you expose the economy to considerable risks. There’s concern among our trustees that banks with a big stake in real estate projects like these could create something like the savings and loan crisis we saw in the 1980s if the projects get in trouble.”

More fundamentally, if the projects are allowed to go unchallenged, banks will have made inroads into the idea that real estate activities are incidental to financial matters and not commercial in nature, as they’ve historically been considered.

Such a fundamental shift in how real estate activities are seen could throw open the door for bank-owned brokerages and even federal oversight of brokerage activity. “Bank entry into the real estate brokerage business [would become] inevitable,” says Jaret Seiberg, a financial analyst with the Stanford Washington Research Group.

“Are we willing to change the definition of what real estate brokerage is?” asks David Lereah, NAR chief economist. “If the definition of what we do is redefined, life as we know it changes.”
Among other things, brokers can say goodbye to state regulation of their activities and, along with that, the relatively low barriers to entry, Lereah says, because brokerages will have to meet requirements set by federal banking regulators.

Girding for action

Opponents of the bank projects have moved quickly to educate members of Congress on the issue. In late January Sen. Richard Shelby, R-Ala., chair of the Senate Banking Committee, and Sen. Max Baucus, D-Mont., ranking member of the Senate Finance Committee, expressed concern.

Shelby has tussled with the OCC in the past, including in 2004 when he questioned rulings by the regulator that would let industrial loan companies—corporations that operate a bank to make loans to their customers, among other things—open branches across state lines. “We have to be careful,” he said at the time. Shelby’s remark was quoted in the Jan. 22, 2004, issue of American Banker.

To get a handle on the extent to which other banks have received approval from the OCC on similar bank-owned projects, NAR in late January filed a Freedom of Information Act request with the regulator to disclose all its rulings of that type in the past 16 years. “We want to determine whether the OCC has quietly authorized other banks to engage in real estate activities that may violate the letter or spirit of Gramm-Leach-Bliley, as well as the National Bank Act,” says NAR’s Stevens.

In late January, the association sent a detailed letter to the Comptroller spelling out REALTORS®’ concerns and requesting a meeting.

At the same time, NAR is stepping up its efforts to get the widely supported Community Choice in Real Estate Act passed. Although the bill doesn’t directly address the OCC actions, it would permanently prohibit national banks from engaging in real estate brokerage and property management. The bill is cosponsored by 251 members, or 58 percent, of the U.S. House and 26 senators.

Despite strong support, the bill has never been brought to the floor of either chamber for a vote because of opposition from key members who support the banks. One of those members, Michael Oxley, R-Ohio, chair of the House Financial Services Committee, is retiring at the end of 2006.

At political activism meetings NAR held in Washington in January, Rep. Tom Davis, R-Va., encouraged REALTORS® to let the House leadership know they’re taking a keen interest in who House members name as Oxley’s replacement. “REALTORS® can be active” by providing input to congressional leaders on the choice of who heads that important committee, Davis said. (For more on the January political meetings, see “REALTORS® forceful at key time,” page 16.)
Meanwhile NAR and other groups are gearing up to oppose the OCC stance. “We’re looking at this very carefully and determining what steps we’re going to recommend Congress take,” says ICSC’s Platt.

To encourage a hearing on the issue, NAR in early February issued a Call for Action (www.naractioncenter.com) to its members urging them to write of their concerns to their members of Congress. “This matter demands congressional attention and intervention,” says Stevens.“Congress should investigate whether these recent rulings by the OCC violate the separation of banking and commerce.”

REALTORS® will also press their case when they’re in Washington May 17–19 for the Midyear Legislative Meetings.