developer that is legitimately an intrastate operator, then you would not expect the law to apply to him just because he is big? Mr. BARNES. No, I wouldn't. But I will say that even when we were talking about intrastate-no, I would agree with that. Right. Most of the problems are only the interstate. That is correct. Mr. KELLY. On this business about putting money up front, wouldn't you agree with me that that is a super suggestion, because then there is no worry. I mean I understood that to be your testimony. Mr. BARNES. I think that that is one of the best solutions. Mr. KELLY. Except for the fact that you are just almost making it necessary for everybody in business to be big or to be solvent. And usually, to be solvent is to be big. And that means that every little businessman is out. And this is a fairly typical development these days. We damn business for being big and then kill everybody that isn't. And then we wind up hating big business and all the little business is dead. We have to quit if we don't believe in the free enterprise system. Mr. BARNES. That is a problem and I know that it probably is difficult for some of the smaller developments to put all of the money in up front. There, of course, are alternatives. I could say the way we have it now, we do have this letter of credit and third-party bond and this escrow account. However, the escrow account, that takes in a portion of the monthly payments. Mr. KELLY. Well, let me ask you this: Couldn't it be done withinwe've gotten by for 200 years without absolutely protecting everybody. Couldn't we maybe get by with just one more 200 years. If we would, for instance, start slamming the jailhouse door on some of these crooks, and that means not passing more laws but just prosecuting the ones we have. And then another situation that we would require these people to specify what they were going to do and then require them to put on the literature that the money to do this is not available and you are depending exclusively on the word of the developer that it will ever be done. It is kind of like the warning on a cigarette package. And because what this would do, it would open up competition and that would benefit the consumer because when you start reducing, as you have testified here this morning, the number of developers that are in the land developing business, that just, in itself, causes the price of land to go up. And also, putting this money up front is very expensive because you could be talking about money being held up for a couple of years or more. And with money going at 9, 10, 15 percent, that is heavy and the guy we are protecting is getting so much protection, he can't afford it. Would there be some limitation on your suggestion in the area that I have suggested by my remarks? Mr. BARNES. Well, first of all, Mr. Kelly, I do agree with you totally on your point of enforcement, because I think that that has been one of the biggest problems that even the current act, there have been a lot of complaints about it not being properly enforced by OILSR, and I have seen that myself. I have seen cases where we have had trouble, or one case where we have had trouble with the Federal authorities in trying to really get them to do anything. They eventually did, but it took a long time. So that is one of the big problems. But I do feel that if the developer is going to make all of these promises. I think he should be required to put up something to show that he really means it. I mean I don't think he has to make these promises. If he can't put up the money, fine, but he can say, here is the land, and tell them basically what the situation is and not make the promises. Mr. KELLY. If we turn you loose on the world, all of these two-faced companies are going out of business. Do you agree? I mean because what do they promise? Happiness ever after, besides white teeth. But it would seem to me as though the purchaser, by law, is warned that, look, there isn't a dime in this world other than what is posted in this box. This is all of the money that this person has put up. There are no bonds, there is nothing. This is the only money that is actually in escrow to pay for what he is promising you. And you are relying on his word. Now if you do that, you can get skinned. And if you put a warning like that on there and then people just simply want to trust this person, why should we just simply limit competition, impose costs on everybody else in order to protect someone that has a fraud wish. Mr. BARNES. Well, one of the problems, and I do see the problems for the small developer in putting the money into an escrow account, but one of the problems that we have with the property report, and everything that the property report says, is that, for one thing, people oftentimes don't read it. For another thing, even if they do read it, they are assured by the salesman that it doesn't count. Mr. KELLY. But if you require that it be printed in half-inch red and then it says, don't believe the salesman or anything to keep from doing things that are really hurting the American consumer because the increase in the cost of land is one of the heavy problems about the increase in the cost of homes in America. Is that so? Mr. BARNES. That is so. Mr. KELLY. So all of this-I mean everyone is wondering why that is. Well, this is why it is. Because we just keep protecting people until they are not going to be able to afford it. All right. I thank you for your interest on that. On this business about the political lawsuit, isn't it a real possibility that an enterprising attorney general, just before election, could file a suit and get the blast in the paper and then by the time the fact that the suit is no good emanates from all of the smoke and blaze, the election would be over and that would be a beneficial use for political purposes of a bad law. Mr. BARNES. Mr. Kelly, that is always a possibility. However, I think that the bill provides that in the case that the attorney general brings a suit which is not well founded or has acted in bad faith, wantonly, and so forth, that the court may, and I am quoting from the bill, the Minish bill, H.R. 12574-it says, "the court may, in its discretion, award reasonable attorney's fees to prevailing defendant upon the finding that the State attorney general has acted in bad faith, vexatiously or for oppressive reasons." So, I think that is one safeguard that is in the legislation right now, and I doubt very seriously that most attorneys general would do it in the first place. But that is a safeguard. Mr. KELLY. Well, let me ask you this: You and I agree that there are precious few crooks that have the jailhouse doors slammed behind them in this area because they have so much money and so many lawyers. That I think if you will check the record, there are even fewer attorneys general that they slam the jailhouse door on. And I think there are probably a few here, there, and yon that probably should have just that very thing happen to them. And courts just aren't really noted for their activity about putting the attorneys general in jail. I have another question. Mr. GONZALEZ. Mr. Kelly, I hate to limit, but I must. We have got to vacate this room in less than an hour, and we have three remaining witnesses that have been here all morning long. And so I would suggest that you submit your questions for the record and permit Mr. Barnes to answer for the record. And we will proceed. Mr. AuCoin has also come back to the subcommittee and he may wish to ask a question or two. Mr. KELLY. Mr. Chairman, we will just from this point on invoke the 5-minute rule? Mr. GONZALEZ. Well, it has been more than 5 minutes. I have been careful to make sure that I received no more time than what you have received thus far. But I don't want you to feel it is an arbitrary cutoff. But we do have this limitation staring us in the face and we want to be fair to the three witnesses that have traveled many miles and have been waiting here patiently, and we are caught with the use of this temporary facility in a limited way. Mr. AUCOIN. Mr. Chairman, I will give up my time so we can get to the next panel. Mr. GONZALEZ. Would it be possible to submit the questions that you have for the record? Mr. KELLY. I have just two more questions, Mr. Chairman. I think that it probably will take 1 minute. But I will submit them if that is your preference. Mr. GONZALEZ. Why don't we go ahead and take them. Mr. KELLY. All right, on this personal inspection, wouldn't it be reasonable to have that to include "or by a personal representative"? Especially where the lot to be purchased is valued at, say, less than $5,000? Because the cost of transportation to seek a lot could be prohibitive-a prohibitive additional expense imposed by the law, whether the person wants that protection or not. Mr. BARNES. You are talking, now, about a presale? Mr. KELLY. Yes. Mr. BARNES. I think I would not have any problem with that, if it is a personal representative chosen by the purchaser. I wouldn't see any problem with that. Mr. KELLY. And couldn't we use possibly some criteria such as the value of the land, rather than the size of the lot? For instance, when you got into this business about the 40 acres, that if you say that the land is going to have to be valued at more than $1,000 an acre, then you are not going to have many people that are buying $40,000 worth of lots, even if it is 40 acres, in interstate sales. Mr. BARNES. So you could have an exemption for, say, 40 acres where the land is valued at $1,000 an acre. Mr. KELLY. That would just about wind up that traffic in Nevada, wouldn't it? Mr. BARNES. Yes, that would do it. Mr. KELLY. Thank you, Mr. Chairman. I have three questions that I would like to submit for the record. [The following are written questions from Congressman Gonzalez to Mr. Barnes, along with the answers of Mr. Barnes:] QUESTIONS FROM CONGRESSMAN GONZALEZ TO JAMES BARNES Question 1. Do you think Federal law should cover transactions where the vast majority of purchasers reside in the same state as the offered property and where advertising and promotion is essentially limited to that same state? What should be done where states provide inadequate protection? And what principles should be established that will help HUD identify adequate state standards? Answer. Federal law should cover transactions in all states where the state protections are not equal to the Federal protections. It is irrelevant whether the vast majority of purchasers reside in the same state as the offered property or whether the advertising and promotion is essentially limited to the same state as the offered property. The state law and program should contain: (a) a definition of "subdivision" that is at least equal to the standards set forth in the Federal definition of "subdivision"; (b) the state law should require the developer to deliver a disclosure statement to the purchaser and the information set forth in the disclosure statement should be at least that required in the Federal act; (c) the standards for exemptions from the state act should be no broader than the exemption standards found in the Federal act; (d) the state rescission period should be at least as lengthy as the rescission period in the Federal act; (e) the state law must require that individuals who sell subdivision property must be licensed in that state as licensed real estate agents; (f) the state law must have established standards for advertising at least equal to the Federal requirements and the state law should preferably require pre-approval; (g) the penalties for violations of the act, such as failure to register, misrepresentation, etc. should be at least as stringent as the penalties contained within the federal act. If the state law in question has substantive standards that go beyond mere full disclosure (which, of course, is all that is found in the Federal law) then there should be a presumption that the state law is adequate. In determining the adequacy of the state law the quality of the state employees administering the law should not be a standard, providing that the state has a civil service act and recruitment and examinations, etc. for the positions. Question 2. The Senate bill would exempt all interstate sales within 100 miles of the purchaser's residence. What impact would that have on protecting consumers? Answer. In the case of those states which have a land sales act, the exemption of all interstate sales within 100 miles of the purchaser's residence would probably have little impact on the protection afforded consumers. However, such an exemption would have a great impact on consumers who were purchasing land located in an exempt subdivision in a state which did not have an adequate land sales law. Therefore, such an exemption, if enacted, should not apply to those states which do not have an adequate land sales law. Question 3. How common is the use of installment contracts for the purchase of land in your state? What would be the impact on the land sales industry if Federal law provided that a developer could only provide financing for the purchase of the lot if the contract included the protection specified in the Minish proposal whereby title is transferred to the purchaser within 30 days; formal foreclosure proceedings take place before loss of title; purchaser estab lishes equity in proportion to payments; and liquidated damages may not exceed the developer's proven damages? Answer. The use of installment contracts for the purchase of land in Nevada is very common. The impact on the land sales industry, if Federal law did provide that a developer could only provide financing for the purchase of the lot if the contract included the protections specified in the Minish proposal whereby title is transferred to the purchaser within 30 days; formal foreclosure proceedings take place before loss of title; purchaser establishes equity in proportion to payments; and liquidated damages may not exceed the developer's proven damages, would be that the consumer would be greatly protected, however such provisions would increase the cost of doing business and would drive up the cost of individual lots. Mr. GONZALEZ. We want to thank you again, very much, Mr. Barnes, for your very valuable contribution. Mr. BARNES. Thank you, Mr. Chairman. [Text resumes on p. 263.] [The following correspondence was received from the office of the Honorable Frank J. Kelley, attorney general, State of Michigan, enclosing a submission "Comments on Proposed Interstate Land Sales Reform." with attached exhibits:] |