Federal regulators are poised to open the real estate management and brokerage business to banks, a move that is fiercely opposed by the real estate industry. Realtors will appeal to Congress to block or overturn the decision, but lawmakers are unlikely to do so.

At issue is a proposal from the Federal Reserve and Treasury Department to designate real estate management and brokerage services as "financial services." That designation is key because the '99 financial modernization law allows banks to offer all such designated services through financial-holding companies. The idea was to tear down Depression-era restrictions on banks, a change that will boost competition in financial services and promote one-stop shopping for customers.

The Fed and Treasury Department will give the real estate proposal final approval early next year, a few months later than expected due to a crush of more-pressing business after the Sept. 11 terrorist attacks. While the rule will open up real estate management and brokerage services, banks will still be barred from real estate investment and development.

Expect banks to break into the new lines of business by buying established companies rather than by starting their own. Big bank holding companies will act first, probably snatching up national real estate brokerages.

Letting banks offer real estate management services is less controversial than opening up the brokerage field because banks have managed real estate assets in trust estates for some time. On the brokerage side, opponents say banks have a conflict of interest because they also offer mortgage loans. To address that concern, the final regulation is likely to have stronger protections than the proposed rule had against tying loans to real estate transactions.

The National Association of Realtors (NAR) has assiduously opposed the rule ever since it was proposed last December. NAR claims the change will not only cause conflicts of interest, but also will lead to unfair competition, less consumer choice and a decline in the quality of real estate services.

"Small to medium-sized real estate brokerages will not be able to compete against big banks," says Steve Cook, NAR's vice president of public affairs. "If they go out of business, that will mean less choice for consumers."

Bankers counter that letting them into the real estate business will increase competition, and in turn, lower costs and improve service for consumers. Furthermore, they say the change is a matter of fairness, since many real estate firms, including Long & Foster, Century 21, GMAC and Coldwell Banker, offer both real estate brokerage services and other financial services, such as loans and insurance.

The 760,000-member NAR will press its case in Congress next year, hoping not only to kill the rule but also to take away regulators' discretion to designate real estate services as financial services. "We want to drive a stake in the heart of this vampire," states Cook.

Killing the regulation is an uphill battle at best. Despite the proven political clout of the Realtors, Congress will resist reopening what was an extremely long and contentious debate on new freedoms for banks.

"The Realtors claimed they were going to get legislation introduced six months ago, and nothing has happened," says Catherine Pulley, a spokeswoman for the American Bankers Association. "I'll believe it when I see it."

Researcher-Reporter: Nicole Bonnell