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er's first contact with the subdivision project. For example, promotional materials for Colorado City, a Great Western United project, promised, quote, "plenty of water," closed quote; and prominently featured a photograph of lushly flowing Greenhorn Creek. Yet, the subdivision has legal rights to only enough water for, at best, one-tenth of its projected population.

Similarly, Palm Coast, ITT's 100,000-acre project in northeast Florida, was promoted as, quote, "not an ordinary development," close quote.

Full-page ads stated, quote, "only the immense resources of a giant corporation like ITT could build a community of this scope," close quote.

Yet, at Palm Coast, development is being financed not by the multibillion dollar ITT corporation, but by its subdivision subsidiary, so small that its assets are not listed separately in ITT's annual report. Again-is that the bell?

Chairman ASHLEY. Yes.

Again, Ms. Holloran, we are about to take leave of your charming company, but we will return.

[Whereupon, at 11:30 a.m., the subcommittee recessed for lunch.]

AFTERNOON SESSION

Chairman ASHLEY. The subcommittee will come to order.

The Chair apologizes for starting a little late. It was a matter of urgency that suddenly arose.

If you will continue, then, Ms. Halloran, with your oral statement, we would receive your testimony with considerable interest. Ms. HALLORAN. Thank you.

I was talking about Horizon Corp. and some of its advertising. The Horizon Corp. is selling a project called Rio Communities in New Mexico which it advertises as a "carefully planned cluster of communities growing so rapidly that they seem like a mirage."

A mirage it may, in fact, be: There are only 800 homes in the 7 communities, despite the fact 170,000 lots have been sold. If construction at Rio Communities continues at its present rate, Rio Communities will not be fully occupied in less than 3,600 years.

The second major problem we uncovered is that of the installment

contract.

All of the companies we studied were selling lots via installment contracts generally extending over 10 years, and installment contract sales are characteristic of the industry.

Many purchasers think they are buying a lot when they sign a contract but, in fact, the contract is not a deed, nor is it similar to a conventional mortgage whereby the purchaser may live in a house while he is paying for it. An installment contract purchase agreement doesn't transfer ownership of the land, and it doesn't transfer the right to use the land; it simply gives the purchaser the right to make monthly payments for 5 or 10 years, at the end of which the company promises to turn over the land and whatever improvements it has agreed to furnish.

Under this sort of contract the purchaser has virtually no rights or protections. Should a purchaser ever fail to make the monthly pay

ment for the lot he in most cases will forfeit everything, both lot and all prior payments. And I would like to say that was true for seven of the nine companies we studied.

Should the company go bankrupt in the course of the 10 years and be unable to provide promised improvements, there is usually little the purchaser can do.

We also found abuses in terms of the product that the lands sales companies are selling. All of the companies we looked at sell lots either implicitly or explicitly as homesites or as investments; yet all too often they do not provide the basic services that make the lots usable and salable.

INFORM found only 5 of the 19 projects we looked at had most necessary basic services, such as water supplies, sewage system, electricity and telephones and adequate drainage.

The problems we uncovered do not end with the lack of basic services. The condition of the land itself can often be a problem. INFORM found that subdivisions are frequently located on land prone to natural hazards such as flooding, landslides, earthquakes, and hurricanes.

Marco Beach and Cape Coral, to take two Florida subdivisions, are in the coastal hurricane flood zone, a fact which is not necessarily apparent to the naked eye, even during an onsite inspection.

Lake Havasu City, located in the dry and barren Arizona desert, has experienced flash floods in which three people have died and, I might add, $4 million worth of damage was done.

Is such land a good investment? Companies claim it is, or at least that they are providing land cheaply to people who otherwise could not afford it. However, INFORM has found that lot prices are actually the opposite-inflated and fraught with hidden and/or unanticipated costs, disguised by the elaborate wording and long duration of the payment arrangements.

Lots sold on the installment plan at the projects we looked at range from $1,000 to $60,000 in their base price. On top of this the purchaser must pay a finance charge of 4 to 9 percent, which adds $200 to $2,800 to the price.

They must also pay property taxes, although they do not own the land, special service, district assessments, bond reduction charges, reduction charges, recreation fees, property owners' association dues, and often improvement fees or betterment fees. They must often sink wells and dig septic tanks.

At the sites we studied, these additional charges add up to $26,000 to the lot price over the course of the 10-year contract.

In the end, a purchaser usually receives a bad bargain. We polled local realtors and found that at virtually all of the projects we studied lots can be resold only at hardship prices, that is, at less than the purchaser initially paid."

At several of the projects local realtors reported that it was virtually impossible to unload a lot at any price.

If the problems of consumer abuse are so endemic to the industry, the question arises as to what the existing laws do do. INFORM analyzed the laws of six States and the Federal Government and found that regulation of this industry is not adequate. What little protection exists is embodied in the Interstate Land Sales Full Disclosure Act. This act requires the subdividers to register with OILSR and to pre

pare a property report. It also gives purchasers and the government the right to sue for damages on the basis of misstatements of fact in the statement of record of property report.

I would like to turn to the various legislative alternatives pending before this committee. I would like to start with the Nelson admendment which is now part of the Senate version of the Housing and Community Development amendments of 1978.

This would exempt certain types of land sales operations from having to register with OILSR and having to give consumers a property report although the companies could still be used for fraud.

Companies marketing to residents of the same States would be exempt. Companies marketing to people who live within a 100-mile radius of the subdivision would also be exempt, provided a lot purchaser has inspected the lot before buying. Finally, companies selling lots having certain kinds of basic services who deliver a deed and who do not use elaborate sales techniques and who require an on-the-lot inspection would also be exempt.

In our view these amendments would be devastating to the effectiveness of the Office of Interstate Land Sales Registration, and for vast numbers of consumers remove one of the few protections against deception and fraud in land sales which they now have.

The 100-mile exemption which would allow land sales companies to operate virtually unregulated in a 31,400-square-mile area is particularly dangerous.

As Congressman Minish has pointed out, its impact in the Northeast would be most serious. In that area, without a property report, with only a site visit and a salesman's pitch to go on, purchasers buying in the Poconos would have no way of knowing whether the project has a water supply, who will build and pay for the sewage system, whether the land is in a flood zone, or any of the other myriad facts that purchasers should consider before making a $5,000 or $10,000 investment in land.

The developers will argue that the purchaser still has the right to sue for fraud if there is misrepresentation, but without a property report, the purchaser has very little in the way of documentation on which to base a suit.

An exemption for land sales companies operating intrastate, though perhaps not quite so blatantly contrary to the intent of the original act as the 100-mile exemption, is still, we feel, not in the public interest.

Again, companies operating solely within one State include both large and small developers, honest and irresponsible operators. The larger companies will use elaborate phone and mail solicitation techniques. Smaller ones may have problems with raising the capital to extend services. Consumers approached by these companies need the protection of property reports. State governments are simply not equipped to take on the job of regulating these companies.

Fully 27 States have no land sales laws of their own or mechanisms for supervising preparation of property reports. In many cases this is at least partly because State legislatures felt the Federal Government was handling the problem. Those States would have to establish their own State agencies to take over registration and disclosure tasks now handled by OILSR. They will have to setup expensive bureaucracies and acquire staff and expertise. Conflicting and duplicative rules and procedures will proliferate.

INFORM has examined the property reports and consumer protection laws of five States which do already attempt to regulate this industry. Without exception the State property reports are less complete than those prepared under current Federal requirements.

The Federal OILSR now provides an extremely useful, helpful, and important service to the States, and it should not be taken away.

And I would like to add that the Federal Office of Interstate Land Sales and Registration does accept State property reports if it deems them to be as effective or equally adequate as the Federal report, but so far only California has qualified under that kind of rule.

Many more States, a couple of dozen, have done the reverse, have accepted the Federal report in lieu of their own property report, being happier to have the Federal Government take over this task for them. Even the third Nelson exemption, designed to exempt subdividers who have installed all basic services and who are delivering the deed to the buyer, thus, presumably, obviating the need for a property report, is, in our opinion, somewhat loosely worded.

For example, a drainage system, without which a lot could be under water half the year, is omitted from the list of services which must be completed in order to obtain the exemption in the Nelson bill.

The Nelson amendments were proposed in the guise of helping the small businessman, but we feel that the three types of exemptions in these amendments open the door for fast consumer abuse by deregulating not just small businesses but large ones, as well.

Were there a cap on the size of these exemptions limiting them to projects of less than 250 lots, thus truly designing this bill for the small businessman, our concern would not run so deep. More important, the need for statutory exemption for small developers may not be

moot.

About 1 month ago the Office of Interstate Land Sales Registration issued a set of proposed guidelines which outlined exactly what had been proposed by Senator Nelson, exemptions for small developers. However, these exemptions, unlike the Nelson provisions, are very carefully drawn to separate the large developer from the small, the sound from the unsound.

Among the exemptions which OILSR proposes are the sale of lots to other land sales companies, sale of lots to builders, and several other exemptions I won't go into. Sales in projects of less than 150 lots if marketed locally, sales in subdivisions of less than 300 lots which have all basic services delivered and do not use installment contracts. This last exemption is similar to the third exemption in the Nelson bill, yet because the OILSR is carefully drawn, we favor it while we oppose the Nelson version.

In general, we feel that OILSR's approach, establishing exemptions based on the character of the subdivision, is far preferable to the blanket approach of the Nelson bill. It is our sincere hope that these regulations pending now for over a year and a half will be soon made final. These exemptions would ease the burden in the existing protections for consumers.

I would also like to mention at least one provision of the Nelson bill which we feel does a gross disservice to consumers. It is the provision prohibiting a lot purchaser from bringing any action against a developer more than 3 years after signing a contract, regardless of whether he has received a deed.

Such a law would make it impossible for most of the consumers in a majority of the subdivisions we studied to bring any kind of legal action against a developer even if the developer committed the most blatant kind of fraud. This is because most companies do not even promise to make any kind of improvements until all payments are complete, usually 10 years after contract signing.

Some specify that services will not be made available until the lot purchaser obtains a building permit, something he might not do for several years after completing all payments. There is no way a consumer can know by year 3 whether the subdivider will fullfill his promises in year 10. To mandate that the statute of limitations runs out in year 3 is, in effect, taking away the purchaser's right to sue before the subdivider even has the opportunity to commit the fraud.

A lightening of the burden on the small developer may be in order. We feel, however, that there is an equal if not more pressing need for better consumer protection in land sales. Congressman Minish's bill would be a large step in that direction.

I have mentioned some of the problems of misleading advertising we came across in our search. The Minish bill would give OILSR specific authority to set standards for advertising.

I have also mentioned some of the sophisticated sales techniques the industry employs. These tactics create a strong need for a reasonable cooling-off period in which a consumer can think seriously about the purchase, consult experts, read the property report, and if necessary, get a refund.

The Minish bill would guarantee consumers a 30-day cooling off period.

As I have noted, the basic services that make lots usable are an implicit part of the product purchased in the subdivision. The Minish bill in specifically providing for the escrowing of moneys for promised improvements and a refund in the case these improvements are not forthcoming affords necessary consumer protection an area of heavily documented abuse.

Addressing the problems created by the installment contract itself is a difficult task. As I noted earlier, under this form of agreement the purchaser does not have the use of the land while he or she is paying for it, and is assured no refund if he defaults on any payments.

The Minish bill would ameliorate the problems created by the use of installment contracts in several ways.

First, it would give purchasers a 3-year period in which to revoke the contract, unless the consumer receives title immediately, has equity while making payments, and has the right to a partial refund in the event of a default.

This in itself would be a definite benefit.

The Minish bill also extends the statute of limitations under which purchasers can sue a subdivider for fraud, rather than making it shorter as the Nelson bill does.

Were we at INFORM drafting legislation, we would prefer a law which set forth rigorous conditions that would have to be met before any land could be registered for sale at all. Such conditions, in addition to those addressed in the Minish bill, would include a subdivider having received all necessary Government permits to complete basic improvements and at least partial refunds to any purchaser who de

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