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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 onnitted 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
xemptions 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.
İn 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. Toʻmandate 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
faults on a contract-on an installment contract—at any time during the contract period.
On balance, however, we feel the Minish bill goes a long way toward protecting consumers from the most flagrant and prevalent land sales abuses.
I would like to conclude by telling you about a phone call I got a few months ago from a woman in New Hampshire, and I must say, I get similar phone calls at least once a week and sometimes more often.
The woman and her husband had just sold a small family business and were looking for someplace to invest the proceeds, about $9,000. They thought of land, and accepted an invitation for an all-expensepaid weekend in Florida to see a very large subdivision called Lehigh Acres.
There they made a downpayment and signed their installment contract for a quarter-acre lot priced at $7,195.
The woman called INFORM shortly thereafter because she read a magazine report on our research and had become concerned about the soundness of her investment.
As I spoke to her, it became clear that she had not seen the lot she signed for. Only one which the salesman described as similar to it, that the lot was not improved, although she thought these improvements were promised in the future, and that she had no idea of how the price of her lot compared to the prices of comparable lots on the resale market. She had received only the Florida property report, which is permissible in certain situations under current OILSŘ regulations, which gives only very sketchy information on these issues.
Lehigh Acres was not one of the projects which we studied in detail, so I could not give her detailed answers to her questions, but from the description of the sales operation and the location of the subdivision, in one of the most oversubdivided sections of the State, and what I knew of similar projects, I feared the worst for the future of her lot as an investment.
I think this woman was concerned enough that she would go out and get the answers she needed, and if she found that her land was a poor investment, she was at least only at the beginning of her contract period, and would lose only the $700 she had made as a downpayment.
My point here, however, is that this woman and thousands like her deserve more protection than they now get. Mr. Brown this morning mentioned the edict of caveat emptor, but like most Americans, this woman is a decent, basically trusting person. She is not unintelligent, but she did not operate on the assumption that others are out to cheat her. She also does not operate on the assumption that the law permits fraud or allows it to go on, and she is not a gambler out to make something for nothing in real estate. She deserves to have, as Congressman Minish proposes, 30 days in which to talk to knowledgeable individuals, and if she discovers problems, she should receive a refund. If she is paying on an installment contract which gives her no equity in the land, she deserves to have 3 years to cancel and get a refund. She deserves to have money escrow to guarantee the completion of improvements, and she deserves to receive a Federal property report.
We strongly urge you to oppose the Nelson amendments in conference, amendments which would take away the property report for thousands of consumers, because consumers need the property report and because the administrative regulations proposed by OILSR will shortly accomplish the same basic goal, that of helping small business, by a better means.
We also hope you will give serious consideration to the Minish bill and to certain provisions of the original administration bill which we do not have the time to discuss here. The entire area of land sales regulation deserves your serious and thoughtful review.
And I would like to thank you for taking time to spend several days on the subject.
[Ms. Halloran's prepared statement, on behalf of INFORM, follows:]