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Chairman ASHLEY. I look forward to the advice of the witnesses who will testify during the next 3 days and hope that they will not limit their comments solely to the proposals before us.

These proposals are only a starting point for reviewing the present state of the industry, the effectiveness of HUD's administration of the existing act, and the need for statutory changes.

We will be pleased to hear first from our colleague, Congressman Joseph G. Minish. At my suggestion, his Subcommittee on General Oversight and Renegotiation, as most of you know, has conducted extensive hearings which have provided the basis for the reforms included in H.R. 12574.

I do commend Congressman Minish and his subcommittee for their efforts and their recommendations now before us. After Mr. Minish, we will hear from Jean Halloran, accompanied by Leslie Allan, and then from Patricia M. Hynes, who will be properly introduced in a few minutes.

So our first witness, with the cleanest teeth in the room, I am sure, is our colleague from New Jersey, Congressman Minish. I want say that there isn't a more worthy and respected member of the full committee than the chairman of the Subcommittee on General Oversight and Renegotiation.

He has done outstanding work in a number of areas, not the least of which is the area that is of interest at this time; namely the status of the Interstate Land Sales Full Disclosure Act.

So if you will proceed, Mr. Minish, we will be grateful to you. STATEMENT OF HON. JOSEPH G. MINISH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NEW JERSEY Mr. MINISH. Thank you, Mr. Chairman.

Members of the subcommittee, thank you for inviting me to testify on the subject of interstate land sales.

At the request of Chairman Ashley, the Oversight Subcommittee of the Banking Committee, of which I am chairman, conducted an extensive investigation of the land development industry. This included the first comprehensive review of the Interstate Land Sales Full Disclosure Act since its inception in 1968. We held hearings in April, at which we heard testimony from more than 30 witnesses, representing Federal and State governments, industry, public interest groups, and consumers. Various other interested parties submitted written testimony to our subcommittee. I would like to share the findings of our investigation with you.

Our primary finding was that consumers are not adequately protected by present laws. Although several Federal and State agencies have taken steps toward cleaning up the land sales industry, severe problems remain. Literally millions of consumers continue to be defrauded or disappointed by land developers every year. Unfortunately, the shady developers tend to prey on those who are least able to protect themselves; consumers who are elderly, poorly educated, or unsophisticated, constitute prime markets for land schemes.

I believe that the problems in the land sales industry result in large part from three basic facts:

Fact No. 1: Land Sales regulation is an "orphan," especially within the Federal Government. Although a number of Federal agencies attempt to police land sales, none of them has been able to devote the time and resources necessary to insure regulation with teeth. The pri

regulator, the Office of Interstate Land Sales within HUD has a total of 107 employees and a yearly budget of less than $3.5 million with which it attempts to oversee a multibillion dollar industry. The Federal Trade Commission and the Securities and Exchange Commission have done some regulating but only on a very limited basis. Many States do not even have statutes dealing with land development and only a handful have laws which even approach being adequate. Local laws vary widely and the least sophisticated ordinances are often in the same rural areas which are the primary target of developers.

Fact No. 2: Disclosure by itself cannot prevent abuses in the land sales industry. The selling practices of the land sales industry work against effective disclosure. Any land salesman will tell you that a sale which is not closed on the same day the sales pitch is made is almost always lost. The high pressure push toward same-day closings run directly contrary to the theory of disclosure. In real life, land buyers, who usually purchase at sales dinners or on their first visit to developments, rarely have a chance to read, much less understand, the information in the property report.

Fact No. 3: There are a number of commonplace practices within the land sales industry which are extremely unfair to consumers. Among them are: the financing of lot purchases through installment contracts which give buyers almost no protection for their money; the promising of improvements such as water, sewage disposal and recreational facilities which the developer cannot complete; high pressure sales tactics designed toward insuring same-day closings; and false or misleading advertising.

None of these practices can be controlled by a simple disclosure statute and all of them should be discouraged. Most of the consumer abuses in the land sales industry can be eliminated without putting developers out of business. The bill which I and 26 of my colleagues have introduced, H.R. 12574, would eliminate many of the worst consumer abuses in the land sales industry without seriously affecting honest developers.

I am happy to report that five of the members of this subcommittee, Representatives St Germain, Gonzalez, Mitchell, Hanley, and Spellman, have decided to cosponsor this bill. I would like to discuss a few of its major provisions, but before I do so, I want to speak briefly on another measure being considered by this subcommittee, the "Nelson bill," which has been incorporated into the Senate version of the Housing Act of 1978.

During the investigation and the subsequent hearings which my subcommittee held, we received testimony from various industry sources which suggested that OILSR has overstepped its jurisdiction by regulating some small, primarily intrastate developers. This may, in fact, be the case and there may be some need for legislation which clarifies the jurisdiction of OILSR. However, I question whether the Nelson bill is the way to accomplish this.

I think that the Nelson bill, in its present form, is an unwise proposal. It will exempt some of the worst interstate developers in the country from the requirements of the Interstate Land Sales Full Disclosure Act. It contains complicated and probably unworkable exemp

tions which will leave developers, consumers, and HUD uncertain as to who is covered by the Federal law. Although it may be possible to draft amendments to the Interstate Land Sales Act, which exempt only some intrastate developers, this proposal does not accomplish that. It is far too broad and contains loopholes which would allow many large interstate developers to escape Federal regulation.

I know that HUD intends to testify as to the problems of the Nelson bill. In general, I concur with its analysis. There are, however, several difficulties which I think deserve special mention.

First, the two main exemptions in this bill, the five lot or 5-percent exemption and the 100-mile exemption, are very complicated yet they are self-executing. This means that many developers may think they qualify for exemptions and then be forced to cancel sales contracts when they find out later that they are covered by the Interstate Land Sales Act.

Second, the Nelson proposal makes the fraud provisions of the act applicable to all developers covered by that law, even if they qualify for the Nelson exemptions. However, as was pointed out by several witnesses in the Senate Banking Committee's hearings on land sales, criminal prosecutions or civil suits are almost impossible to bring without the benefit of the information provided in the statement of record. Without the information provided under the disclosure sections of the Interstate Land Sales Act, attorneys for buyers will be operating in the dark. The fraud provisions, by themselves, will be almost meaningless.

Third, one section of this proposal requires OILSR to comply with the Administrative Procedures Act. OILSR already does this by regulation. No one seems to know which this section is in the bill.

Fourth, the provision of the Nelson bill that concerns me most is the 100-mile radius exemption. This exempts sales to people who live within 100 miles of the developer. It is a lot-by-lot exemption which means that no matter how big or how bad the developer is, he may sell to anyone within 100 miles of his development, without being covered by the Federal law. I would like to give one example of the nightmares which would occur if this provision is adopted.

One of the primary areas for land subdivision in the East is the Pocono Mountains of Pennsylvania. Within 100 miles of most Pocono developments are the metropolitan areas of New York City, northern New Jersey, and Philadelphia. Taken together, these three areas represent a market of over 20 million people. Under the Nelson bill, none of these people would be protected by the Federal disclosure requirements if they bought lots in the Poconos.

During our hearings, our subcommittee heard testimony concerning a number of very poor subdivisions in the Poconos. One will serve as a good example.

Sherwood Forest, near Newfoundland, Pa., sold over 800 lots during 1972 and 1973. Three hundred and sixty-five of the lots were sold to people from New Jersey. At least 30 of the buyers are my constituents. jiost of the other lots were bought by residents of the Philadelphia or New York metropolitan areas. Among other things, Sherwood Forest promised improvements such as sewage disposal and water, which it never completed. It concealed from prospective buyers a dispute with local township authorities which made Sherwood Forest

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unable to deliver clear title to the lots it sold. It used high-pressure sales tactics and committed other consumer abuses.

Today, 6 years after most sales took place at Sherwood Forest, the buyers are unable to build on their lots, they can't sell their lots because of the clouded titles and the inability to build, and they have been unable to get any money back from Sherwood Forest, which is now insolvent.

HUD suspended Sherwood Forest from selling lots and recommended that several of the principals be prosecuted for violations of the Interstate Land Sales Act and the Federal mail fraud statutes. If the Nelson bill had been in effect in 1972 and 1973, the great majority of the sales made by Sherwood Forest would have been exempt from most of the major provisions of the Interstate Land Sales Act. The situation at Sherwood Forest would be even more of a travesty than it is today.

If the Nelson bill, as presently in the Senate Housing Act, is passed, there will be new Sherwood Forests all over the Poconos and other areas of the country and the Federal Government will be unable to intervene in any meaningful way. Although there may be some need for a clarification of OILSR’S jurisdiction, it would be very wrong to make that the major thrust of land sales legislation. The people who suffer most under the present law are not the developers; they are consumers.

As you may know, a number of the provisions of my bill closely parallel provisions in the administration's proposal. These include restrictions on the statutory bankruptcy exemptions, an absolute right of recision for lot purchasers, the prohibition of omissions of material facts by developers, a provision which allows purchasers to sue for specific performance of promises made by the developer, extension of the statutes of limitations on civil suits under the Land Sales Act, and provisions which allow OILSR to issue cease-and-desist orders and to impose civil penalties. My bill does go beyond the administration's proposal in several key areas. I would like to mention three of them.

Our bill attempts to eliminate the use, in its present form, of the installment-contract method of financing lot purchases. Under the traditional installment contract, the purchaser agrees to pay for his lot over a period of years, usually 7 to 10, through monthly installments. There is no transfer of title to the purchaser until he has completed payments and, in many cases, purchasers who finish paying discover that the developer is unable to deliver clear title. Most installment contracts contain a “liquidated damages" clause which provides that in the case of default by the purchaser, all money paid by the purchaser is retained by the developer. Thus, the purchaser builds no equity proportional to his payments as he would under a traditional mortgage method of financing. In some cases, purchasers have paid over 90 percent of what they owe and then have been left with nothing when they cannot continue to pay.

Another problem which results from the installment contract method of financing is that developers often sell the installment contracts to third parties. The purchaser then owes his payment to the third party, but, because of the holder in due course laws, the purchaser cannot force the third party to fulfill any of the obligations of the developer. In addition to all these problems, because the purchaser

does not get title until he has completed payments, he may not be able to use the property for 7 to 10 years after he signs the contract of sale.

In short, consumers who buy under installment contracts are allaround losers.

Our bill would prevent this abuse by insuring that developers who extend credit for the purchase of their own lots, do so by means of the more traditional mortgage or deed-deed of trust arrangements. They would have to use contracts which provide for formal foreclosure proceedings in case of default and which do not contain liquidated damages clauses. This would insure far more protection to the consumer.

A second provision of our bill requires that developers who promise to provide basic services such as water, sewage disposal, and electricity must establish escrow accounts which insure completion of these services. During our investigation, we found that developers often promise all kinds of improvements as part of their sales pitch. In many cases, those developers are financially unable to keep their promises and thus force lot buyers to spend money which they never anticipated having to spend. A number of States already have escrow requirements which have provided increased consumer protection without imposing excessive economic burdens on developers.

The third major reform which our bill provides is our "parens patriae” section. We found that many people who have civil causes of action under the present Interstate Land Sales Act are unable to bring suit because individual suits are too expensive and it is too difficult to bring class actions in Federal court.

Our parens patriae section allows the attorney general of a State to bring civil actions against deevlopers on behalf of citizens of his State who have purchased land. This provision does not create any new rights but simply makes it easier for consumers to enforce rights which they already have.

There are a number of other reforms in our bill which I shall not go into at this time. I would like to submit a summary of the major provisions of our bill.

(Mr. Minish subsequently furnished the following summary for inclusion in the record :]

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