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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.
Jr. 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. 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.
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.
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 Texas.
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 15 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 moot.
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.
ISFORM 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 purchaser'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 ?
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.]
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.
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