state purchasers if the developer meets the following requirements: i) The land is free and clear of liens and encumbrances.

ii) The purchaser makes an on-site inspection of the lot.

iii) The seller agrees to submit himself to the jurisdiction of
the home state of the purchaser.

This exemption is undesirable for several reasons.

It is quite complicated, yet it is also self-determining. This means that the developer himself decides whether he has complied with all the requirements for the exemption and then merely notifies OILSR that he is claiming exemptions. If the developer misinterprets some part of the

requirements, for example, what constitutes a "lien" or "encumbrance" or if he makes a mistake in computing his out-of-state sales, OILSR may subsequently question his exempt status. If this happens, all the developer's sales under the challenged exemption may be subject to rescision.

There is no cap on the 5% requirement. Some subdivisions have well over 10,000 lots, and thus would be able to sell a substantial number of lots to out-of-state residents without being subject to federal disclosure requirements.

Reliance on on-site inspections. As an alternative to the information which is presented in the federal property report (the disclosure statement required under the present Interstate Land Sales Act), this exemption relies heavily on an on-site inspection by the purchaser. However, most of the truly crucial information about a development cannot be discerned by merely looking at it. An on-site inspection tells the buyer nothing about the financial stability of the developer, about whether there is sufficient water, about whether the land is suitable for proper sewage disposal, about whether the land is subject to flooding, about the provisions the developer has made for installing promised amenities, about the cost of necessary utilities, about local land use laws, etc. Purchasers who are deprived of property reports and who make their on-site inspections in the company of high-powered salesmen will be at a decided disadvantage.

(b) The 100-Mile Radius Exemption. The Nelson bill would amend section 1403 of the Act to provide a lot-by-lot exemption of any sales made to buyers who reside within 100 miles of the developer, if the following requirements are met.

i) The land is free and clear of all liens and encumbrances.

ii) The purchaser makes an on-site inspection.

iii)

The seller agrees to submit himself to the jurisdiction of the
home state of the purchaser.

iv) The developer certifies to OILSR that he has complied with
the first three requirements.

This is probably the most harmful of the Nelson proposals for numer

ous reasons.

Since this is a lot-by-lot exemption, no matter how big or how bad a development is, it can benefit from this exemption. H.U.D. officials have stated that many of the worst developments in the country would qualify for at least partial exemption under this section.

Crossing state boundaries. The Nelson bill purports to assist small intrastate developers, yet many of the prime beneficiaries of the 100 mile exemption are neither small nor intrastate. A good example of the problens with this exemption is the case of the Pocono Mountains of Pennsylvania, a primary area for land subdivision in the East. Within 100 miles of the Poconos are the metropolitan areas of New York City, Northern New Jersey and Philadelphia. A circle with a 100-mile radius drawn around a development in the Poconos thus encompasses an area of over 31,000 square miles with a population well in excess of 20 million people. Under the Nelson bill, any Pocono developer could sell to any of those people without being required to disclose a thing by the federal law. To cite another example, Washington, D. C. is within 100 miles of many of the developments in rural Maryland and Virginia. This problem repeats itself throughout the country.

This exemption is self-executing. Therefore, serious problems of interpretation arise. For example, who knows exactly how many miles he lives from any given point? Once again, misinterpretation or mistake by the developer may make him liable to recisions and other penalties.

This exemption, like the 5% - 5-lot exemption, says that developers who are exempt from disclosure requirements are still covered by the fraud prohibitions in the Interstate Land Sales Act. However, several prosecutors and plaintiffs' attorneys have testified that prosecution or civil suit for fraud would be practically impossible without the information contained in the statement of record and property report. If the information required by the disclosure sections of the Act is not available, attorneys representing purchasers who believe they have been defrauded will be working in the dark. The fraud provisions will become an empty remedy, providing a false sense of security and little else.

Like the 5% - 5-lot exemption, the 100 mile exemption relies heavily an on-site inspections which do not provide a great deal of useful information to the prospective purchaser.

(c) Statute of Limitations. The Nelson proposal would amend section 1412 of the Act to insure that no action can be brought within more than three years after the signing of a contract for the sale or lease of the lot.

This provision would make it even more difficult for disappointed purchasers to assert the rights they have under the present law. In our investigation of the land sales industry, one of the most common complaints we heard was that people often don't discover that they have been swindled until after the statute of limitations has run out. This is because people commonly buy lots on long-term installment contracts which require transfer of title only after the purchaser has completed payment, often seven to ten years after the signing of the contract. In addition, many purchasers act in reliance upon the promises of developers to install utilities and other amenities many years in the future. Because of this, many purchasers just don't know whether they have a cause of action until long after the three year limit has passed. In recognition of this, several courts have tried to extend the statute of limitations by tying it to the discovery of the defect or to the period of the installment contract. The Nelson bill would preclude such equitable solutions. Once again consumers lose.

(a) The Administrative Procedures Act. The Nelson bill would amend section 1416 of the Act to require OILSR to comply with the Administrative Procedures Act. OILSR already does this by regulation. No one has been able to explain why this section is in the Nelson proposal.

Mr. GRASSLEY. Specifically, where the point where we were talking about the exemption, I was thinking, as Chairman Ashley was asking you his last question on the possibility of the States administering parts of this law, it seemed to be in our testimony, though, we run into reluctance on the part of OILSR to do that now. And I don't know whether were indicating that they really didn't want to do it or whether the law did not permit it. I assume that the law permitted some of that, but they really don't want to go in that direction.

Mr. MINISH. The law does permit it.

Mr. GRASSLEY. There is some reluctance from the Department. But also, there was some reluctance expressed by consumer groups to having State enforcement, as well as some developers wanting to deal with the Federal Government rather than dealing with individual States.

So I don't know how widespread the support would be for having the States do it. Frankly, I would prefer to have the States more involved, and I think it could be done. Because I know in my own State of Iowa we have an aggressive attorney general and assistant attorney general who have been working in this area. And I think it can be done, and I think we ought to be working toward that direction. Because I think if the job is going to be done right, it would just take too many people at the Federal level and then still not do it as well as if we had the States more intimately involved.

Mr. MINISH. Well, my only comment, Mr. Grassley, would be that, unless we set the guidelines from up here, it is not going to be done, because some of those States don't have the legislation to do what I know you believe in and I believe in also.

Mr. GRASSLEY. Mr. Chairman, I don't have anything else.
Chairman ASHLEY. Mr. Gonzalez?

Mr. GONZALEZ, Thank you, Mr. Chairman. I don't have any questions. I would just compliment Chairman Minish for his leadership in this area. And I am privileged to serve on the Subcommittee on General Oversight and Renegotiation with the gentleman.

Chairman ASHLEY. Mr. Green?

Mr. GREEN. I have a couple of questions on one point. I know that HUD had cooperative relationships with not only California but two or three other States, one of which was New York, which has a quite aggressive program in its department of law, under its attorney general. for dealing with the problem of fraudulent land sales.

Do you have any reason to know why these arrangements with the other States are no longer operative?

Mr. MINISH. No, I do not, unless it is because of the aggressiveness of the department, or lack of it, I should say.

Mr. GREEN. The other question I have was what sort of escrow arrangements you had in mind. Who would be the escrow holders, and what sort of expense would that involve? Also, would bonding be another way of reaching the problem of nonperformance of promises on the part of developers?

Mr. MINISH. They have an escrow requirement similar to the one we are proposing. It requires the developer to set aside a fixed percentage of the money he takes in to pay for improvements. As the payment of the lot is completed, more money will be in the account to assure the people who purchased the lot that they would not be left hanging, as they were in other areas.

Mr. GREEN. Did you look into whether a performance bond was a possible alternative?

Mr. MINISH. I am advised that our staff looked into corporate performance bond financing, but that it doesn't work, because so many developers go bankrupt.

Mr. GREEN. I was thinking in terms of a bonding company.

Mr. MINISH. I have been told that if you asked them to provide a surety bond, most of the developers say they can't afford it.

Chairman ASHLEY. Absolutely. I was interested-excuse me. Do you want to question, Mr. Brown?

Mr. BROWN. I might have a couple of questions Mr. Chairman.

Chairman ASHLEY. I just have one with respect to the provision in your legislation to eliminate the installment contract as a means of financing lot purchases. That is a pretty extreme remedy. I mean, this kind of contract is really a land contract, isn't it?

Mr. MINISH. The one they are using now?

Chairman ASHLEY. Yes. It is a form of land contract, I would suppose; isn't that right?

Mr. MINISH. Yes, it is.

Chairman ASHLEY. A lot of States, Ohio included, have taken a very good look at land contracts and have passed legislation that is very protective of a buyer under a land contract. Now, it certainly used to be the situation that land contracts were scandalous. They gave every conceivable advantage and opportunity for mischief to the seller. But it is my impression that a number of States over the years have recognized that problem and have passed corrective legislation, as has Ohio.

Mr. MINISH. Well, Mr. Chairman, I am not so sure that some of the States where we have the major problems have done anything about that, because I know of a personal incident where an individual entered into a 7-year contract-I think it was $25 a month-and then unfortunately, lost his job after paying for 6 years. He could not pay the $25 a month, and the land reverted, or the land stayed with the developer. And this individual is out 48 times $25, or whatever he paid in. Chairman ASHLEY. You mean the entire amount?

Mr. MINISH. Yes, the entire amount.

Chairman ASHLEY. Well, isn't there the principle of equity of redemption. But under Ohio law, it is presumed that the property can be sold again and the purchaser can receive what he paid in.

Mr. MINISH. Well, in this case it was sold again by the developer. Chairman ASHLEY. But the point is the pernicious provision in the land contract or the installment contract is a stipulation of damages of one kind or another, because it means that if a person is unable to make the payments he loses everything that he put down. That is what caused the massive difficulties we've had at the time of the 1929 closing of the banks. People weren't able to make their payments and they lost their property-and I mean all of their property.

Mr. MINISH. The other problem, Mr. Chairman, is that many of these purchases are made on the spur of the moment. You attend a meeting in some fancy motel or hotel and they feed you and you buy, and then later on you get to see the land, and then you decide that it was a bad purchase. Then it is almost impossible to sell it.