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Chairman ASHLEY. There is a different problem when you are talking about developed real estate and the redemption that a buyer is entitled to there and the situation where it is totally undeveloped land that in many cases has never been seen.
Let me call on Mr. Brown.
Mr. BROWN. I realize that caveat emptor is dead, but do we have to go the complete other route? Who is the beneficiary, would you say, of the interstate land sales legislation?
Mr. MINISH. Who is? The developers, the ones that sell it.
Mr. BROWN. No, no, the developers are not the beneficiaries. I assume that it is aimed primarily at the purchasers.
Mr. MINISH. Our legislation? Positively. It is to protect the
Mr. BROWN. Now, who are these purchasers? Who are these consumers? How do they get into the market in the first place?
Mr. MINISH. Well, many ways: Advertisements on TV; they are invited to dinners. You know, a lot of these developers contract the work out to salesmen.
Mr. BROWN. Now, even to invite someone to one of these things, you have to have some kind of advertising, right?
Mr. MINISH. Right.
Mr. BROWN. Doesn't the FTC have jurisdiction over all advertising that would be applicable to interstate land sales?
Mr. MINISH. The FTC has done some work in this area, but not enough to satisfy me or the people who got burned.
Mr. BROWN. But then, because the FTC has not done the kind of job it should do, should we therefore change this law?
Mr. MINISH. Yes.
Mr. BROWN. The substantive law with respect to interstate land sales?
Mr. MINISH. Yes.
Mr. BROWN. Well then, supposing you change the substantive law, but they still go on and advertise fraudulently. You are going to say that they would benefit by the ex post facto right to rescind the transaction, right?
Mr. MINISH. In the legislation that is before your subcommittee now, that is, the legislation that came out of our subcommittee, we have proposals which deal with the advertising problem. The FTC hasn't been able to do the job by itself and it doesn't want to. If I called Mr. Brown and the members of this subcommittee over to my home next month and said, "Come on over, we're having some fellow come up from the Poconos or the Catskills who has some land, he's got a nice block of land and he's going to divide it up, and here's a chance for us to get into the act." And while I know your fellows are all sophisticated and sharp, the average guy may be snowed under by that. Mr. BROWN. But is the average guy going out to the Poconos and buying a lot?
Mr. MINISH. Many times he doesn't go out there at all. Other people read advertisements in the mail or advertisements in the paper. Any paper you pick up in New Jersey, and I assume New York has ads that say: "Come on up. We'll give you 3 days free lodging and a radio and this and that."
Mr. BROWN. But you have criticized the Nelson bill, and doesn't that require actual onsite inspections in order to qualify for the exemption?
Mr. MINISH. Well, first of all, it excludes everybody within the 100mile limit, and how much can you learn about the development from an onsite inspection? You look at the foliage and the nice green trees.
Mr. BROWN. Well, it exempts from the term "interstate commerce," as I recall, those who reside within 100 miles if they have visited onsite. Isn't that true?
Mr. MINISH. Right.
Mr. BROWN. So therefore, the Nelson bill isn't saying that you can do it by a letter or meeting at somebody's house. You've got to actually visit the site and live within a 100 miles in order to come within the exemption of the Nelson bill.
Mr. MINISH. How much can you learn by an onsite inspection? The average person doesn't know anything about sewers and septic tanks. For example in Sherwood Forest, they were told that, fine, this is a beautiful area and we are going to have sewers installed. And there were no sewers put in and the lot owners can't build because of the water table. The municipality in which this development is situated will not give people permission to put septic tanks there now.
You tell me, how can an onsite inspection tell an individual whether the water table is involved or not, or whether they can put septic tanks in or not.
Mr. BROWN. Apparently, there are six States that account for about 75 percent of the developments that would be really involved.
Those States are Florida, Texas, Arizona, New Mexico, Colorado, and California. You, in effect, feel that even though these few States constitute 75 percent of the problem, nevertheless you would impose the requirements on all the States. Right?
Mr. MINISH. Well, we don't know when one of the States that is left out might have new problems.
Mr. BROWN. I noticed, in your proposal, you require escrow accounts for all kinds of improvements in the property.
Mr. MINISH. Well, not all kinds; just the improvements the developer agrees to put in, like the roads, or the sewers.
Mr. BROWN. Water, sewage disposal, electricity. You have escrow accounts to insure these improvement are made.
If that State did not require it, that developer might very likely opt not to get into interstate land sales. Right?
And then, for all intents and purposes, since there would be no holding out access to that development, it would in short be precluded to that purchaser you're talking about. Right?
Mr. MINISH. Correct.
Mr. BROWN. Because there would be no obligation to do these things. Mr. MINISH. If some of these developers that came before the committee did not get involved in interstate land sales, a lot of people would be a lot happier today and have a little bit more money in the bank.
Mr. BROWN. Why did you, in your proposal, even though HUD recommended that there should be an exemption of developments of fewer than 100 lots, and the present law says 50, drop yours down to 40?
Mr. MINISH. Well, Mr. Brown, we think that everyone ought to be protected.
Mr. BROWN. Well, then, why 40? Why not 10?
Mr. MINISH. Well, maybe it should be 10. But, you know, we have fellows who develop 25, 30, 35 lots. We wanted to help the little guy as much as we can; but we wanted to protect the consumers from the big developers who have the power to apply all of this pressure to land sales, and advertising, and whatever.
Mr. BROWN. I notice that you, in your parens patriae provision in your bill would permit the attorney general of any State to bring a class action on behalf of residents of his State, against the developer in the other State even though it may involve only one or two residents of his State.
Mr. MINISH. That is my understanding of it.
Mr. BROWN. And there is no definition of "class," for the purposes of bringing such an action?
Mr. MINISH. There is no definition, other than the people who got burned.
Mr. BROWN. But, I mean, one person could insist that the attorney general of the State bring the action?
Mr. MINISH. Well, the attorney general has discretionary powers. I would assume that if there was only one person, the attorney general might be able to jawbone somebody into straightening it out, rather than going into court and spending a lot of money.
Mr. BROWN. You don't change the existing law. Apparently the regulations now are going to give the Secretary discretion to make a determination in subdivisions of fewer than 300 lots, if sales out of State do not exceed 5 percent.
You don't touch that area at all, in your bill, as I understand it? Mr. MINISH. No.
Mr. BROWN. Would you be willing to let the Secretary exempt-if the Secretary decided to a development if up to 20 percent of the sales were out of State?
Mr. MINISH. The answer is "No."
Mr. BROWN. What? I am not sure
Mr. MINISH. No, I'm not giving the Secretary the right the exempt anyone, other than whatever the law provides for.
Mr. BROWN. Well, the law presently provides that she can make this determination.
Mr. MINISH. Up to 300.
Mr. BROWN. And now they are going down to 150 lots. But still, the 5-percent limitation
Mr. MINISH. Well, we ought to bring it down to minus zero.
Mr. BROWN. In other words, you would not want-even if there were no sales
Mr. MINISH. Well, if there are no sales, there is no action. Nobody is being burned.
Mr. BROWN. But all of the provisons of your law would still be applicable, apparently.
Mr. MINISH. Where it applies, sure.
Mr. BROWN. I have no further questions, Mr. Chairman.
Chairman ASHLEY. Just one final question.
For what period of time does the right of recission apply? Are there different circumstances for different periods of time?
Mr. BROWN. Thirty days, isn't it?
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Mr. MINISH. Thirty is the absolute right of recission.
Chairman ASHLEY. Mr. Minish, I thank you very much indeed for your testimony this morning. It has been helpful indeed, and we really appreciate, more than can be said, the work that you have directed in this important area.
Mr. MINISH. Mr. Chairman, let me say that this committee and its chairman have done great work. There are a lot of people in the United States who live in better conditions, and who will live in better conditions because of Chairman Ashley and his subcommittee.
All I would like the committee to do now is make sure that the houses on land that is secure, with sewers and whatever is needed. Thank you very much.
Chairman ASHLEY. Thank you, Mr. Minish.
Our next witness is Jean Halloran, who is the editor of "Promised Lands," a comprehensive, three-volume study of the land sales industry conducted by INFORM, a nonprofit organization which conducts research on the impact of corporations on consumers and the environment; and Patricia M. Hynes, who is an assistant U.S. attorney for the Southern District of New York, who has prosecuted major land sales fraud cases.
We will now hear from Ms. Halloran.
STATEMENT OF JEAN HALLORAN, ON BEHALF OF INFORM, A PUBLIC INTEREST GROUP, ACCOMPANIED BY LESLIE ALLAN
Ms. HALLORAN. Thank you, Mr. Chairman.
I am Jean Halloran, and with me is Leslie Allan, who is the primary author of "Promised Lands." I would like to ask that the full text of my remarks be incorporated into the record.
INFORM is a nonprofit, public interest research organization that studies the impact of business on society. We have a permanent, fulltime staff of 20, and a subscriber list of over 100 major corporations, institutions, and Government agencies.
Our organization has been studying the practices and regulation of the land sales industry for 5 years. Our primary finding has been that the land sales and subdivision industry is rife with consumer abuse. It is riddled with problems of consumer deception and fraud.
Our conclusion was that a new regulatory approach is sorely needed. For this reason, we feel that Congress Minish's effort to reform the Interstate Land Sales Full Disclosure Act is a vital step forward, a step which can save ordinary people millions of dollars.
For this same reason, we are extremely dismayed to see Senator Nelson's bill which would exempt vast numbers of developers from what little regulation now exists, progressing through the legislative process.
We understand, and indeed support, the goal of reducing the regulatory burden on the small, legitimate businessman and of freeing Federal regulators for more important tasks. But the broadly worded Nelson provisions go far beyond this goal.
The past history of this industry does not justify such loosely drawn exemptions, nor does it justify the hasty consideration given the Nelson amendments by the Senate Banking Committee prior to substituting them for the administration proposals in the Housing and Community Development Act.
I would like, if I may, to tell you some of what we found in our research, and then to discuss specifically how this relates to the various legislative proposals on land sales you have before you.
Chairman ASHLEY. We will proceed until the second bell, at which time the subcommittee will recess and retire to the floor for two votes that are on suspension that should take us about 10 minutes, and then we will return at that juncture.
So if you would please proceed.
Ms. HALLORAN. The impact of the land sales industry is enormous, but no one seems to know exactly how enormous. The land sales industry is generally defined as consisting of companies engaged in selling lots in subdivisions.
The companies range from mom and pop businesses to multimillion dollar corporations traded on the Stock Exchange. The lots range from quarter-acre, quote, "townhouse," unquote, lots, to 40 or 50 ranchettes; and the subdivisions, from 5-lot developments to 200,000-lot planned, new communities.
Since 1969, most companies selling lots have had to file with OILSR. Alan Kappeler estimated in 1976 that approximately 6,200 individual projects were registered with his agency.
There are subdivisions in all States except North Dakota and Rhode Island. And as you noted before, most subdivision activity is concentrated in Florida, New Mexico, Arizona, California, Colorado, and
One industry expert estimates the total stock of lots in this country covers 35 to 40 million acres of land, about 2 percent of the continental United States.
Assuming 3 residents per subdivision lot, this land could accommodate 45 to 60 million people. That is more than the populations of Los Angeles, San Francisco, Chicago, Detroit, Boston, New York, Philadelphia, and Washington, D.C., and the entire State of New Jersey combined.
These figures on the scope of the industry are sometimes challenged on the grounds that land sales are declining and the problems are now
The recession of the seventies did cause a precipitous slide in industry volume. However, a survey by the American Land Development Association indicates that sales are on the upswing. The industry seems to be riding on the coattails of the current real estate boom.
Of the 163 companies they surveyed, 78 percent had better sales in 1976 than 1975, and most were planning new projects. Most observers agree that OILSR and the FTC had had a chilling effect on some of the most flagrant abuses conducted by the very largest companies, yet OILSR continues to receive about 3,000 consumer complaints a year, as it has for each of the past 6 years.
INFORM has studied, in detail, a sample of companies and sites. which represent the various aspects of the mass-market portion of the industry in the States with the most widespread land sales activity. The sites are old and new, large- and modern-sized, and in varied terrains.
They were marketed by the largest companies, who should have the most resources, and therefore be the most responsible.
We identified several important problem areas. Problems begin with representations made in advertising-which is generally the purchas