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THE INTERSTATE LAND SALES FULL DISaOSURE
Aa AMENDMENTS .
1% HAY 1979
5-2
HEARINGS
SUBCOMMITTEE ON
mVSim AJJD COMMUNITY DEVELOPMEN^f
or Tiin
CQHMTTElLaN
;]NKIi\G. FINANCE AND URBAN AFFAIRS^
HOUS E OF JIEPRF.SENTATIVES
JSUIfETY-FirTn rOKHKESS
OH
H.R. 112H5
A BUX TO AMB> vi. IJLW8
BKLATINQ TO Ii< " ' ntliUOOD
DBVIIUlPMirVT AKD PRBSBllVATIOX. AND RELATED PRO-
GBAM& AND ruK OTHJCK PUttfOHHW
H.R 12574
A »nj* TO Rm^lHti THK INTLI I
M^O BAIiHtt FVth
DI60IX)R!.tn
n.R, 3084
i: .
DBVBJ,tiPMIflWT ANJj IM!
ATmii HJil
OBAMB, ANU . .. ,.- „ :
:,, L,..„^.
^ AW^UBT t, S, AND a, \*y
i-^j
Fttatisd fur tliv tntt or Ibe
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THE INIERSTATE LAND SALES FUU DISCLOSURE
AO AMENDMENTS
HEARINGS
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY DEVELOPMENT
OP THE
COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIBS
HOUSE OF REPRESENTATIVES
NINETY-FIFTH CONGRESS
SECOND SESSION
ON
H.R. 11265
A BILL TO AMEND AND EXTEND CERTAIN FEDERAL LAWS
RBLATINO TO HOUSING, COMMUNITY AND NEIGHBORHOOD
DEVELOPMENT AND PRESERVATION, AND RELATED PRO-
GRAMS, AND FOR OTHER PURPOSES
H.R. 12574
A BILL TO REVISE THE INTERSTATE LAND SALES FULL
DISCLOSURE ACT
H.R. 3084
AN ACT TO AMEND AND EXTEND CERTAIN FEDERAL LAWS
RELATING TO HOUSING, COMMUNITY AND NEIGHBORHOOD
DEVELOPMENT AND PRESERVATION, AND RELATED PRO-
GRAMS, AND FOR OTHER PURPOSES
AUGUST 1, 2, AND 3, 1978
Printed for the use of the
Committee on Banking, Finance and Urban Affairs
U.S. OOVBRNMENT PRINTING OFFICE
tl-716 WASHINGTON : 1978
86 379ST XL -•. [
09/92 53-005-00 tit H
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COBiMITTEB ON BANKING, FINANCE AND URBAN AFFAIRS
HBNRY 8. RBUSS, Wisconsin, Chairman
J. WILLIAM STANTON, Ohio
GARRY BROWN, Michigan
CHALMERS P. WYLIE. Ohio
JOHN H. ROUSSELOT. California
STEWART B. McKINNEY, Connecticut
GEORGE HANSEN, Idaho
HENRY J. HYDE, Illinois
RICHARD KELLY, Florida
CHARLES B. GRASSLEY, Iowa
MILLICBNT FBNWICK, New Jersey
JIM LEACH, Iowa
NEWTON L STEERS, Jr., Maryland
THOMAS B. EVANS, Jr., Delaware
BRUCE F. CAPUTO, New York
HAROLD C. HOLLENBECK, New Jersey
S. WILLIAM GREEN, New York
THOMAS L. ASHLEY, Ohio
WILLIAM S. MOORHBAD, Pennsylvania
FBRNAND J. ST GERMAIN, Rhode Island
HBNRY B. GONZALEZ. Texas
JOSEPH G. MINISH, New Jersey
FRANK ANNUNZIO, Illinois
JAMBS M. HANLBY, New York
PARREN J. MITCHELL, Maryland
WALTER E. FAUNTROY,
District of Columbia
STEPHEN L. NEAL. North Carolina
JERRY M. PATTERSON, California
JAMES J. BLANCHARD, Michigan
CARROLL HUBBARD, JR., Kentucky
JOHN J. LaFALCE, New York
GLADYS NOON SPELLMAN, Maryland
LBS AdCOIN, Oregon
PAUL B. TSONGAS, Massachusetts
BUTLER DERRICK, South Carolina
BfARK W. HANNAFORD, California
DAVID W. EVANS, Indiana
NORMAN B. D' AMOURS, New Hampshire
STANLEY N. LUNDINE, New York
EDWARD W. PATTISON. New York
JOHN J. CAVANAUGH, Nebraska
MARY ROSE OAKAR, Ohio
JIM MATTOX, Texas
BRUCE F. VENTO, Minnesota
DOUG BARNARD, Georgia
WES WATKINS, Oklahoma
ROBERT GARCIA, New York
Padl Nelson, Clerk and Staff Director
Michael P. Flaherty, General Counsel
Qrasty Crews II, Counsel
Merger L. Jackson, Minority Staff Director
Graham T. Northdp, Deputy Minority Staff Director
Subcommittee on Housing and Couiixmnrr Development
THOMAS L. ASHLEY, Ohio, Chairman
GARRY BROWN. Michigan
J. WILLIAM STANTON. Ohio
JOHN H. ROUSSELOT. California
CHALMERS P. WYLIE, Ohio
STEWART B. McKINNEY, Connecticut
RICHARD KELLY, Florida
CHARLES B. GRASSLEY. Iowa
THOMAS B. EVANS, JR., Delaware
WILLIAM S. MOORHBAD, Pennsylvania
FBRNAND J. ST GERMAIN, Rhode Island
HBNRY B. GONZALEZ, Texas
PARREN J. MITCHELL, Maryland
JAMES M. HANLBY. New York
WALTER F. FAUNTROY.
District of Columbia
JERRY M. PATTERSON, California
JOHN J. LaFALCE, New York
LBS AdCOIN. Oregon
GLADYS NOON SPELLMAN, Maryland
JAMBS J. BLANCHARD, Michigan
CARROLL HUBBARD. JR., Kentucky
PAUL B. TSONGAS, Massachusetts
MARK W. HANNAFORD, California
DAVID W. EVANS, Indiana
STANLEY N. LUNDINE, New York
Gerald R. McMdrrat. Staff Director
Roger C. Faxon, Profeeeional Staff Member
Frank T. DESTErANO, Profettional Staff Member
Sheldo.v L. Schreibrrg. Counsel
DiANi DORius, A$»i*tant Couneel
Anthony Valanzano, Minority Counsel
(H)
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CONTENTS
Hearings held on — ^•«*
August 1, 1978 1
August 2, 1978 121
August 3, 1978 461
Excerpts from —
it.R. 11265 3
S. 3084 32
FuU text of H.R. 12574 12
Staff summaries of —
H.R. 12574 60
H.R. 11265 52
S. 3084 64
"Comparison of Proposed Statutory and Regulatory Changes to Inter-
state Land Sales Full Disclosure Act," table 42
Statements
Anaya, Hon. Toney, attorney general of the State of New Mexico, accom-
panied by Hon. Joe Canepa, assistant attorney general 121
Barnes, Hon. James I., Ill, deputy attorney general of the State of Nevada. 144
Belin, J. B., Jr., president, chairman of the board, American Land Develop-
ment Association; accompanied by Gary A. Terry, executive vice
president, William B. Ingersoll, general coimsel, and George G. Potts,
director of public affairs 263
Halloran, Jean, on behalf of INFORM, a public interest group; accom-
panied by L^lie Allan 76
Hempel, John E., assistant commissioner for policy and planning, depart-
ment of real estate. State of California 585
Hynes, Patricia M., assistant U.S. attorney. Southern District of New
York 1 . 107
Minish, Hon. Joseph G., a Representative in Congress from the State of
New Jersey 65
Pfersich, Gordon, director, division of land sales and condominiums, de-
partment of business regulation. State of Florida 654
Roberts, David D., vice chairman. Realtors Legislative Committee,
National Association of Realtors; accompanied by Albert E. Abrahams,
staff vice president 316
Smith, Herman J., vice president, National Association of Home Builders:
accompanied by Robert D. Bannister, senior staff vice president, and
-Gary Paul Kane, associate legislative counsel 437
Steinman, Edward D., Acting Assistant Director, Division of Marketing
Abuses. Federal Trade Commission; accompanied by John M. Tifford,
staff attorney in the land sales program 562
Worthy, Patricia, Administrator, Office of Interstate Land Sales Regis-
tration, Department of Housing and Urban Development; accompanied
by Peter Race and Alan Kappeler 461
Additional Information Submitted for Inclusion in the Record
American Land Development Association, prepared statement on behalf by
J. B. Belin, Jr., president and chairman of the board 269
Anaya, Hon. Toney:
Prepared statement 126
Resolution adopted at 1978 annual meeting, National Association of
Attorneys General, St. Paul, Minn., June 18-21, 1978 136
Aflhlev, Chairman Thomas L., letter dated August 9, 1978, from Frank J.
Kelley, attorney general. State of Michigan, with enclosed "Comments
on Proposed Interstate Land Sales Reform" 198
(tn)
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IV
Additional Information Submitted for Inclusion in the Record — Con.
Barnes, Hon. James I, III:
Attachments to prepared statement:
Exhibit A: Landex, Inc,, et tU, v. State of Nevada, ei al., Supreme Pi^f«
Court of Nevada decision 155
Exhibit B: "The Regulation of Land Sales in Virginia/' paper by
Thomas L. Stringfield 167
Prepared statement 148
Responses to questions of Congressman Gonzalez 196
Belin, J. B., Jr., prepared statement on behalf of the American Land De-
velopment Association - 269
California State Department of Real Estate, prepared statement on behalf
by John E. Hempel, assistant commissioner for policy and planning 592
Federal Trade Commission. Bureau of Consumer Protection, prepared
statement on behalf by Eaward D. Steinman, Acting Assistant Director,
Division of Marketing Abuses 566
Florida Division of Land Sales and Condominiums, Department of Busi-
ness Regulation, prepared statement on behalf by Gordon Pferish,
director _ 658
Halloran, Jean^repared statement on behalf of I NFORM 85
Hempel, John K :
Attachments to prepared statement:
Attachment 1 : Statement by Chief Counsel W. J. Thomas before
Government Operations Committee, Arizona State Legislature,
November 9, 1977 601
Attachment 2: Extract of special subdivision laws and regulations
in CaUfomia dealing with land projects 609
Attachment 3: Samples of filing forms of the California State
Department of Real Estate 614
Attaomnent 4: Letter to Chairman Ashley, dated July 31, 1978,
with attachments. 641
Prepared statement on behalf of the California State Department of
Real Estate 592
INFORNf, prepared statement on behalf by Jean Halloran 85
McClory, Congressman Robert, letter dated July 28, 1978, with attached
letter dated Alay 22, 1978, from Jack L. Lawson, executive vice presi-
dent, Elgin (111.) Board of Realtors 683
Minish, Hon. Joseph G. :
Brief summary of H.R. 12574, a bill to revise the Interstate Land Sales
Full Disclosure Act 60
Summary of problems in the Nelson bill, S. 3084 66
National Association of Realtors, prepared statement on behalf by David
D. Roberts, vice chairman. Realtors Legislative Committee 320
Office of Interstate Land Sales Registration, prepared statement on behalf
by Patricia Worthy, Administrator 469
Pferish. Gordon, prepared statement on behalf of the Florida Division of
Land Sales and Condominiums, Department of Business Regulation 658
Roberts, David D.:
Abrahams, Albert E., staff vice president. National Association of
Realtors Government Affairs Department, statement before Senate
Committee on Banking, Finance and Urban Affairs, May 26, 1978— 336
Prepared statement on behalf of the National Association of Realtors. 320
Statement before House Committee on Banking, Finance and Urban
Affairs, April 1 1, 1978, with attached correspondence 348
Table submitted comparing the Nelson provisons of S. 3084 with the
Minish proposals of H.R. 12574 330
Smith, Herman J. :
Ainendment to section 715 of S. 3084 451
Prepared statement on behalf of the National Association of Home
Builders 441
Steinman, Edward D.:
Prepared statement on behalf of the Bureau of Consumer Protection,
Federal Trade Commission 566
Response to request of Chairman Ashley for additional information.. 676
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Worthy, Patricia:
Prepared statement on behalf of the Office of Interstate Land Sales P^se
Registration 469
Response to question of —
Chairman Ashley .— 498,499,556
Congressman Brown 505,561
"Statement of Record Filings," table submitted __ 496
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THE INTERSTATE LAND SALES FULL DISCLOSURE
ACT AMENDMENTS
TUESDAY, AUaxnST 1» 1978
House op Representatives,
Committee on Banking, Finance and Urban Affairs,
Subcommittee on Housing and Community Development,
Washington^ D.C.
The subcommittee met at 10 :30 a.m. in room 2212 of the Eaybum
House Office Building, Hon. Thomas L. Ashley (chairman of the
subcommittee) presiding.
Present: Representatives Ashley, Gonzalez, AuCoin, Brown, and
Grassley.
Also present : Representative S. William Green of New York.
Chairman Ashley. The subcommittee will come to order.
This morning, the House and Community Development Subcom-
mittee begins 3 days of hearings on the Interstate Land Sales Full
Disclosure Act and the administration of this act by the Office of Inter-
state Land Sales and Registration [OILSR] in the Department of
Housing and Urban Development.
Congress, 10 years ago, passed the Interstate Land Sales Full Dis-
closure Act in response to evidence of widespread abuses in the sale
of undeveloped land. Many people bought land, sight unseen, on easy
installment payment terms. They relied on the developers' assurances
and seductive advertising campaigns that promised secluded home
sites and good investments.
Many of these investments turned out to be worthless. The land was
underwater or without water. The developer went bankrupt before
providing promised amenities. Title to the land was encumbered after
the land was sold pursuant to installment contracts. Often, there was
no resale market for the land, whatever.
The essence of this act is that a fully informed consumer will make
a reasoned investment decision. While the intent of the act is laudable
to prevent fraud by assuring that consumers are adequately informed
and to provide remedies for fraud when it occurs — the act and its ad-
ministration by OILSR have not escaped criticism.
The land sales and building industry have criticized some require-
ments for being burdensome and being contrary to congressional in-
tent. Many consumers believe that disclosure without substantive
standards provides weak protection and that existing legal remedies
are inadequate.
This debate has raised several significant issues that these hearings
will address. We now have the opportunity, based on 10 year's ex-
perience, to review the act in its entirety and to legislate necessary
changes.
(1)
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Among the issues we wDl consider are the following : First, the Fed-
eral role in regulating intrastate sales of undeveloped land; two,
whether fraudulent and unfair practices are any less prevalent in de-
velopments which differ in size, type, or location; three, the usefulness
of requiring full disclosure without establishing substantive stand-
ards: four, the burden which existing law and regulation places on
builaers and developers; and five, the adequacy of existing consumer
remedies.
Several bills are before this subcommittee : H.R. 11265, which con-
tains the administration's proposals, H.R. 12574, introduced by our
colleague, Mr. Minish, and S. 3084, which contains amendments passed
by the Senate. In addition, the Office of Interstate Land Sales Regis-
tration has proposed regulatory changes based on existing law.
[Excerpts from H.R. 11265, the full text of H.R. 12574, and S. 3084,
together with a table "Comparison of Proposed Statutory and Regu-
latory Changes to Interstate Land Sales Full Disclosure Act," and
staff summaries of H.R. 12574, H.R. 11265, and S. 3084, follow:]
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95th congress
w^="H.R. 1126i
IN THE HOUSE OF EEPEESENTATIVES
March 3,1978
Mr. Ashley (for himself and Mr. Rkuss) (by request) introduced the follow-
ing bill; which was referred to the Committee on Banking, Finance and
Urban Aflfain*
A BILL
To amend and extend certain Federal laws relating to housing,
community and neighborhood development and preservation,
and related progimns, and for other purposes.
10 A:\JEiiDMEXXS TO INTEKSTATE LAXD .SALES FULL
11 DISCLOSUKE ACT
12 Sec. 421. (a) Section 1402(8) of the Interstate Land
13 Sales Full Disclosure Act is amended by striking "fifty''
14 and inserting in lieu thereof **'one hundred".
15 (b) Section 1403(a) (1) of such Act is amended by
16 striking "fift}^" and insertijig in lieu thereof *'one hundred".
1'7 (c) Section 1403(a) (2) of sucli Act is amended by
18 striking *'five acres or more" and inserting in lieu tliereof
19 "more than forty acres".
20 (d) Section 1403(a) (4) of such Act is amended
21 by inserting immediately l)cfnrc the semicolon 'SvIumi the
22 Secretary dctennines it to be in the public interest".
2^ (e) Section 14.03(a) of such Act is further amended
2"^ by striking paragraph (10). ])y inserting the word "or"
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;£ after tlie RCiiiicolon at tlie end of paragrapli (9) and by
2 redesignating paragrai))! (11) as para^raplr (10).
3 (f) Section 1404: of sucli Act is amended to read as
4 follows :
5 "PKDIITBITIONS KELATINO TO THE SALE OJl I^EARE OE LOTS
(5 TX SL'BDIVISIOXS
7 *'Sec. 1404. (a) It shall be unlawful for a)iy dc-
8 veloper or agent, directly or indirectly, to make use of any
9 means or instruments of transportation or conniiunication
10 in interstate commerce, or of the mails, to sell or lease any
11 lot in any subdivi.4on unless a sfatemeiit- of record with
12 respect to such lot is in effect in accordance with section
13 1407 and a printed property report, meetin*;; the require-
14 ments of section 1408, is funiished to the purchasir in
15 advance of the signing of any contract oi- agreement for
Ifi sale or lease by the purchaser; and
17 "(b) It shall be unlawful for any develo])er or agent
18 thcveof subject to this title who directly or indirectly males
19 use of any means of transportation or connnunicat'uin in
20 interstate conmierce, or of the mails, in selling or leasing,
21 or (hlering to sell or lease, any lot in a subdivision —
22 **(1) to employ any device, scheme, or arlifire
23 to defraud; or
24 "(2) to obtain money or property ))y means of
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30
2 niiy untrue statement of a nuiterial fact, or any oniis-
2 sion to state a material fact necessary in order to make
3 the statements made not misleading, with respect to
4 any information included in tlie statement of reco)*d or
5 the property report or with respect to any other infor-
5 mation pertinent to the lot or subdivision; or
7 *'(3) to engage in any transaction, practice, or
8 course of business which operates oi* would operate as a
9 fraud or deceit upon a purchastn*.
10 "(c) Any contract or agreement for the purchase or
11 lease of a lot in a subdivision covered by this title, where
12 the property report has not been given to the purchaser in
13 advance or at the time of the purchaser's signing, shall be
11 voidable at the option of the purchaser.
15 "(d) A purchaser may revoke any contract oi* agree-
16 ment for the purchase or lease of a lot in a subdivision
17 covered by this title until midnight of the fourteenth day
18 after signing the contract or agreement and the contract or
19 agreement shall so provide.*'.
20 (g) Section 1405(b) of such Act is amended l)y in-
21 serting, immediately after '^amendment thereto", "or a re-
22 (juest for an exemption," and b}' strikhig "not in excess of
23 81,000".
24 (h) (1) Section 1409(a) of such Act is amended to
25 read as follows:
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6
SI
1 '*{a) In administoriiio- tliis lilU? the Secretary shall
2 cooperrtte witli State .-uithorities cliarged with tlie respousi-
3 hihty of rooiilntiiif;- the sale of lots in subdivisions which are
4 al.^o .subject to tills title. The Secretary ina}' accept for filing
5 under >cction.s 140.') and 1408 and declare cffoctivc as a
G stnlenieut of record and property report, material found
7 acceptable by such authorities if the Secretary' finds such
8 actio)! to ])e appropriate in the jnibllc interest oj- for tlie pro-
9 tcctioji of pinvhasers. Tnless rhe Secretary has accepted
10 State nijiteiials, the property- rep<n*t described in 5'ection
ri 1408 shall be used in lieu of any Stati- disclosure document
12 delivered to purchasers.
13 (2) Section 1409 (h) of >uch Act is amended by strik-
-j^.l ing '^Xfilhin;;-'' and insertin*;' in lieu thereof "JCxccpt as pro-
25 vided in SMbsection (a) , nothing''.
j(; (i) Section 1410 of such Act is amended to read as
17 follows :
13 "civil Tj.\niUTir.s
J9 ''SKr. 1410. (a) A punba-er may bring an action at
2Q laAv or in equity against a d* velo})cr oi* agent subject to this
21 tide if tiie sale oi* lease was made in violation of (1) section
22 140-1 (.'r) or (2) section 1104(b). In a suit authorized by
23 this scctidu for violation of section MOl (a) or (b) , the
24 court may order danniges. spt'cific i>erformance, or such other
25 relief a^ ihe court deems fnir, just, and equitable. In deler-
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mining such relief the court shall take into account but not be
Ihuited to the foUowmg factois: tlie contract price of the lot;
the amount the pm'chaser actually paid ; the cost of any im-
o
provements to the lot; the fair market value of the lot at
4
the time of sale ; and the fair market value of the lot at the
5
^ time such suit was broudit.
6 ^
"(I)) A purchaser may bring an action at law or in
equity to enforce any right under section 1404 (c) or (d).
o
Q In a.ny suit to enforce a right created under section 1404
-i/x (c) or (d) tlie purchaser, upon tender of an instnunent
^.j divesting the purchaser of his or her interest in a lot, shall
y be entitled to all moneys paid pursuant to such purcliaser's
^ g con traxjt or agreement.
14 " (c) A pm'clia.ser may l)ring an action at law or in
15 equity against a developer or agent subject to this title if
16 such developer or agent fails to c^ny out any obligation set
17 forth in the statement of record and property report.
18 "(d) The amount recoverable in a suit authorized by
19 this section may include interest, reasonable attorne5'S' fees,
20 independent appraisers' fees, and court costs.
21 "(e) Eveiy person who becomes liable to make any
22 payment under this section may recover contribution, as in
2'^ cases of contract, frou) any person wlio, if sued separately,
2-1 would have been liable to make the siune payment.".
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33
- (j) Section 1412 of such Act is amended to read as
2 follows :
g "L3MITATX0X OF ACTIONS
^ *SSi:c. 1412. (a) Xo action slmll be maintained to en-
t^ foico any jigiit created under clau>«e ( J ) of section 1410 (a)
Q or under section 1410(b) unless brought within one j^ear
ij after discovery of the violation upon which such liabilitj'' is
g based. In no case .shall any such action be brought more
9 than four years after the sale or lease notwithstanding de-
10 lively of a deed to tluj ])urrhaser or the sale or assignment
11 of the purchaser's contract or agreennnit to a third party.
12 ''CO ^'o action shall be inaintniaed to enforce any
13 right cKvited uiuler clause (2) of section 1410(a) unless
14 brouglit within three years afiei- discovery of the violation
15 upon which such liability is based or after discover}^ should
16 have been made by tlic exercise of reasonable diligence.
17 ''(c) Xo action shnll be nuiintnined to enforce a right
18 creatrd under section 1410 (c) unless brought within three
;19 yeai's after t]\c discovery of the violation upon v/hich such
20 liabiliiy is based or after discovery should have been made
21 hy the exercise of reasonable diligence, notwithstanding the
22 delivery of a deed to the |)urcliaser.".
23 (k) Section 1415 of siu-h Act is amended by addijig at
24 the end thereof the following n< w subsections:
25 "(e) Whenever the Secretary believes that any de-
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34
2 veloper or agent is or has been engaged in (1) an act
2 violative of this title or a nile or regulation prescribed
3 pursuant thereto in a case which the Secretarj^ certifies is
4 of substantial unportance or (2) recurring conduct viola-
5 tive of any such provision, rule, or regulation, or that a
6 developer or agent has failed to comply with the terms of
7 any order issued by the Secretary, the Secretaiy may issue
8 and serve upon such developer or agent a complaint stating
9 the charges in that respect and containing a notice of a
10 hearhig, at a time and a place therein fixed. Such hearing
11 shall be on a date at least twenty days and not more tlian
12 forty-five days after service of said complamt. The devel-
IS oper or agent shall have the right to appear at the place
14 and time so fixed and show cause why an order should not
15 be entered l)y the Secretary requiring the developer or
16 agent to cease and desist from the violation or failure to
17 comply as so charged in said complaint. Notwithstanding
18 the preceding sentence, if the developer or agent fails to
19 file an an^wer and intention to appear within fifteen days
20 after service of the complaint aiul notice, such developer
21 or agent shall be deemed to have waived the right to a
22 hearing and the Secretaiy may issue an order to cease and
23 desist. The Secretaiy shall issue a decision within ten days
24 after any hearing, and any order issued to coase and desist
25 shall be efTective upon service on the developer or agent.
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10
35
J ''(f) (1) Wlieucver the »Se(Tctaiy shall detcnnme thai
2 the violatioii or faihuT to coiiiply specified in the complaint
3 served upon an agent or developer pursuant to suhscction
^ (e) of this flection i> likel}- seriousl}^ to prejudice the public
5 interest, the Secretary inay i.-j^ue a temporary order requir-
Q ing the developer or agent to cease and desist from any such
rj violation or failure to comply. Such order shall l)ecome
8 efTective upon service upon the developer or agent, and,
9 imloso suspended b^^ a couit in proceedings authorized by
10 paragraph (2) of this sul)section, shall remain cfTectivc and
11 cnfon;oa))le pending the comphlion of the administrative
1^ proceedings pursuant to the complaint and notiic, or if
13 an order to cease and desist is issued againsl the de\elopcr
14 or agent pursuant to subseelion. (e), until the eflective date
15 of anj'suclj order.
IG "(2) Within ten days after any agent or developer lias
17 been served witli a (emporury ordi-r to cease and desist, such
18 developer or agent may a])[)ly to the TTnitcd States district
19 court for the judicial di-trict where the develojjer or agent
20 is located, or to the T'nit^-^d Slak'S Disrrict Court for the
.21 Dishict of Columbia, to determine whether such onler was
22 arbitrary, capricious, or an abu?o of dlseretion, or wliether
23 the order was issued in accordance with the ])roecdurL'^
*^ established hy law. The sole eli'ect of iuiy i^'i^CY of ihe court
25 ^vill be ('iily to suspend the eifeciivenes^ of the tcjuporary
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1 order to cease and desist, pending completion of the admin-
2 istrative proceedings pursuant to the complaint and notice
3 served upon the developer and agent under suhsection (e)
4 of this section.".
5 (1) Such Act is farther amended bj^ renumbering sec-
6 tions 1417 through 1422 as sections 1418 through 1423,
7 and by inserting after section 141G the following new section
8 1417:
9 "civil pexat.ties
10 "Sec. 1417. (a) Any person who violates any provisions
11 of this title or any rule, legulation, or order issued by the
12 Secretary thereunder, may be subject to a civil penalty, in
13 a determination by the Secretary after opportunity for a
14 liearing, of not to exceed S5,no0 for eacli such violation.
15 Each separate offense shall constitute a violation and, in the
16 case of a continuing ofTense, each day shall cojistituto a
17 separate violation. Any determination of the Secretaiy shall
18 be subject to review only as provided in section 1411.
19 '^(b) Penalties assessi»d puisihint to this section may be
20 collected in an action brouglit l)y tiie Secretary in any district
21 court of the United Slates. In any mc\\ action the validit}^
22 and appropriateness of the final dctmnination imposin<^ the
23 penalty shall not be subject to review.
24 " (c) The amount of sucli penalty, wIumi finally deter-
25 mined, shall be payable to tin* L'niied States Treasury.'*.
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i)5TH CONGRESS
2d Session
R R. 12574
IN THE HOUSE OF REPRESENTATIVES
May 4, 1978
^f^. MiNiRii (for himself, Mr. Addabbo, Mr. Akaka, Mr. Anxunzio, Mr. Eil-
BERo, Mr. Fary, Mrs. Fen wick, Mr. Florio, Mr. Gonzalez, Mr. Hanu.y,
Mr. Harrington, Mr. Hollknbec'k, Ms. Holtzman, Mr. Hubbard, Mr.
Hyde, Mr. Mitchell of Maryland, Mr. Neal, Mr. Patten, Mr. Richmond,
Mr. RoDiNO, Mr. Roe, Mr. St Germain, Mr. Simon, Mrs. Spellman, and
Mr. Vento) inti-oduced the following bill ; which was referred to the Com-
mittee on Banking, Finance and Urban Affairs
A bill
To revise the Interstate Land Sales Full Disclosure Act.
1 Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
3 SHORT TITLE
4 Section I. This Act may he cited as the "Interstate
5 Land Sales Ifcform Act of 1978'\
6 exemptions
7 Sec. 2. (a) (1) Paragraphs (1) and (2) of section
8 1403(a) of the Interstate Land Sales Full Disclosure Act
9 (15 U.S.C. 1702(a) (1) and (2)) are amended to read
10 as follows:
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1 " ( 1 ) the sale or lease of real estate not pursuant to
2 a common promotional plan to o£fer or sell forty or
3 more lots in a subdivision ;
4 ''(2) the sale or lease of lots in a subdivision, all
5 of which are forty acres or more in size ;".
6 (2) Section 1402(3) of such Act (15 U.S.C. 1701
7 (3) ) is amended by striking out "fifty'' and inserting in lieu
8 thereof "forty".
9 (b) Section 1403(a)(4) of such Act (15 U.S.C.
10 1702(a) (4) ) is amended by inserting the following before
11 the semicolon at the end thereof: "; except that the provi-
12 sions of this title shall apply to sales and leases pursuant to
13 court orders issued in connection with bankruptcy
14 proceedings'*.
15 PEOHIBITIONS AND BIGHT OF REVOCATION
16 Sec. 3. (a) Section 1404 (a) (1) of the Interstate Land
17 Sales Full Disclosure Act (15 U.S.C. 1703(a) (1)) is
18 amended by striking out " ; and*' and inserting in lieu there-
19 of"; or".
20 (b) Section 1404(a) (2) (B) is amended to read as
21 follows:
22 " (B) to obtain money or property by means of
23 any untrue statement of a material fact or any omis-
24 sion to state a material fact necessary to make the
25 statements made not misleading, with respect to any
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information included in the statement of record or
2 the property report or with respect to any other
3 information pertinent to the lot or the subdivision,
4 or"
5 (c) Section 1404(b) of such Act (15 U.8.C. 1703
6 (b) ) is amended by striking out the last sentence thereof.
7 (c) Section 1404 of such Act (15 U.8.C. 1703) is
8 amended by adding at the end thereof the following new
9 subsection:
10 "(c) Any contract or agreement for the purchase or
11 lease of a lot in a subdivision covered by this title shall be
12 voidable at the option of the purchaser or lessee until mid-
13 night of the thirtieth day following the signing of such con-
14 tract or agreement and such contract or agreement shall so
15 provide. Any contract or agreement for the purchase or
16 lease of a lot in a subdivision covered by this title shall be
17 voidable at the option of the purchaser or lessee for three
18 years after the signing of the contract or agreement if—
19 " ( 1 ) the signing of the contract or agreement takes
2C place on the day on which the purchaser or lessee is first
21 presented with the contract or agreement for the pur-
22 chase or lease of the lot ;
23 " (2) any part of the financing of such purchase or
24 lease of such lot is provided by the developer, by an
25 agent of such developer, or by any other partnership.
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1 association, corporadon, or other business entity with
2 regard to which such developer or agent of such de-
3 veloper or any person who has a financial interest in
4 such developer, owns at least 30 per centum of such
5 entity's financial assets ; except that this paragraph shall
6 not apply to any arrangement for the financing of the
7 purchase of a lot, which, as determined by the Secretary,
8 provides that —
9 "(A.) transfer of title to the purchaser of the
10 lot shall occur within thirty days of the date of th^
11 signingof the contract or agreement;
12 " (B) a formal foreclosure proceeding shall
13 occur before such purchaser is deprived of such title
14 in case of default or breach by the purchaser;
15 '* (C) the purchaser of a lot shall establish
16 equity in his lot proportional to his payments which
17 are applied to reduce the principal amount of obliga-
18 tion owed with respect to the lot; and
19 " (D) the purcliaser shall not be obligated in
20 any case to pay as damages, in the event of the
21 purchaser's breach or default, any specified amount
22 as liquidated damages or any amount in excess of
23 the developer's proven damages ; or
24 "(3) such contract or agreement does not contain a
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1 legally sufficient and recordable description of the bound-
2 aries of the lot.''.
3 INFORMATION BEQUIRED IN STATEMENT OF RECORD
4 8ec. 4. Section 1406 of the Interstate Land Sales Full
5 Disclosure Act (15 U.S.C. 1705) is amended by striking
6 out "and'' at the end of paragraph (11), by striking out
7 the period at the end of paragraph (12) and inserting
8 in lieu thereof **; and", and by adding the following new
9 paragraph at the end thereof:
10 ''(13) copies of all printed material used by a
11 developer or his agents to promote the purchase or lease
12 of a lot in a subdivision covered l)y this title; tnmscripts
13 of all television and radio advertisements used by a
14 developer or his agents to promote the purchase or lease
15 of such a lot; and accurate summaries of all verbal repre-
16 sentations made by a developer or his agents to promote
17 the purchase or lease of such a lot ; except that additional
18 submissions of printed material, transcripts, or summaries
19 pursuant to this paragraph shall not be construed to be
20 changes affecting material facts under section 1407 (c)
21 unless such additional printed material, transcripts, or
22 summaries do reflect substantial changes in the repre-
23 s(»ntation made by the developer, as detennined by the
24 Secretary in regulations.".
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1 EFFECT ON STATE LAWS
2 Sec. 5. Section 1409 of the Interstate Land Sales Full
3 Disclosure Act (15 U.S.C. 1708) is amended by adding at
4 the end thereof the following new subsection:
5 "(c) Nothing in this title shall annul, alter, afifect, or
6 exempt any dealer in land from complying with the laws
7 of any State relating to the sale of interstate lands, except to
8 the extent that those laws are inconsistent with the provi-
9 sions of this title or rules, regulations or orders issued
10 thereunder, and then only to the extent of the inconsistr
11 ency.".
12 DAMAGE AWABDS
13 Sec. 6. Section 1410 of the Interstate Land Sales Full
14 Disclosure Act (15 U.S.C. 1709) is amended to read as
15 follows :
16 "Sec. 1410. (a) Where any part of the statement of
17 record, when such pai*t became eflFective, contained an untrue
18 statement of a material fact or omitted to state a material fact
19 required to be stated therein, any person acquiring a lot in
20 the subdivision covered by such statement of record from the
21 developer or his agent during such period the statement re-
22 mained uncorrected (unless it is proved that at the time of
23 such acquisition he knew of such untmth or omission) may,
24 either at law or in equity, in any court of competent jurisdic-
25 tion, sue the developer.
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1 "(b) Any developer or agent, who sells or leases a lot
2 in a subdivision —
3 " ( 1 ) in violation of section 1404, or
4 "(2) by means of a property report which con-
5 tained an untrue statement of a material fact or omitted
6 to state a material fact required to be stated therein, may
7 be sued by the purchaser of such lot.
8 ** (c) A purchaser or lessee may bring an action at law or
9 in equity to enforce any right under sections 1404 (b) , 1404
10 (<)) f 01* 1425 (b) . In any suit to enforce a right under section
11 1404(b), 1404(c), or 1425(b), the purchaser or lessee,
12 upon tender of an instrument divesting the purchaser of his
13 or her interest in a lot, shall be entitled to all moneys paid
14 pursuant to such purchaser's contract or agreement.
15 "(d) (1) The suit authorized under subsection (a) or
16 (b) may be to recover such damages as shall represent the
17 difference between the amount paid for the lot, the reasonable
18 cost of any improvements thereto, any reasonable court costs,
19 and any reasonable cost incurred by the purchaser or lessee
20 in connection with such suit for attorneys' fees, appraisal
21 costs, and travel expenses to and from the lot, and the lesser
22 of (A) the value thereof as of the time such suit was brought,
23 or (B) the price at which such lot shall have been disposed
24 of in a bona fide market transaction before the suit, or (C)
25 the price at which such lot shall have been disposed of after
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1 suit in a bona fide market transaction but before judgment.
2 ''(2) The suit authorized under subsection (a) or (b)
3 may, in lieu of a suit to recover damages, be for the purpose
4 of securing specific performance of the contract or agreement
5 and any other promises made by the developer or his agent
6 in connection with such sale or lease.
7 "(e) Every person who becomes liable to make any
8 payment under thiij section may recover contribution as in
9 cases of contract from any person who, if sued separately,
10 would have been liable to make the same payment.
U " (f ) In no case shall the amount recoverable under this
12 section exceed the sum of the purchase price of the lot, the
13 reasonable cost of improvements, reasonable court costs, and
14 any reasonable cost incurred by the purchaser or lessee in
15 connection with such suit for attorneys' fees, appraisal costs,
16 and travel expenses to and from the lot.".
17 STATUTE OF LIMITATIONS
18 Sbc. 7. Section 1412 of the Interstate Land Sales Full
19 Disclosure Act (15 U.S.C. 1711) is amended to read as
20 follows:
21 "STATUTE OF LIMITATIONS
22 ''Sec. 1412. No action shall be maintained to enforce
23 any liability created under section 1410 (a) or (b)(2)
24 unless brou^t within three years after the discovery of the
25 untrue statement or omission or after such discovery should
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1 have been made by the exercise of reasonable diligence. No
2 action shall be maintained to enforce any liability created
3 under section 1410(1)) (1) or (c) miless brought within
4 three years after the discovery of the violation upon which
5 it is based or after such discovery should have been made by
6 the exercise of reasonable diligence. In no event shall any
7 such action be brought by a purchaser or lessee more than
8 seven years after the sale or lease to such purchaser or
9 lessee.".
10 ADMINISTRATIVE REMEDIES
11 Sec. 8. (a) Section 1415 of the Interstate I^nd Sales
12 Full Disclosure Act (15 U.S.C. 1714) is amended by add-
13 ing at the end thereof the following new subsections:
14 "(e) If it appears to the Secretary at any time that
15 there is a reasonable basis for believing that any developer
1(5 or agent is violating or has violated any provision of this
17 title or any rules or regulations prescribed pursuant thereto,
18 or that a developer or agent lias failed to comply with the
19 teniis of any order issued by the Secretary, the Secretary
20 nuiy issue and serve upon such developer or agent a c(un-
21 plaint stating the charges and containing a notice of a hcar-
22 ing at a time and a place described therein. Such hearing
23 shall be on a date at least twenty days and not more than
24 sixty days after service of such complaint. The developer
25 or agent shall have the right to appear at the place and time
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1 of such hearing and show cause why an order should not
2 be entered by the Secretary requiring the developer or agent
3 to cease and desist from the violation or failure to comply
4 as so charged in such complaint. If the developer or agent
5 fails to file an answer and intention to appear within fifteen
6 days after service of the complaint and notice, such developer
7 or agent shall be deemed to have waived the right to a hear-
8 ing and the Secretary may issue an order to cease and desist.
9 The Secretaiy shall issue a decision within twenty days after
10 any hearing, and any order issued to cease and desist shall
11 be effective upon service on the developer or agent.
12 '* (f ) ( 1 ) Whenever the Secretary determines that the
13 violation or failure to comply specified in the complaint served
14 upon an agent or developer pursuant to subsection (e) is
15 likely to prejudice seriously the public interest, the Secre-
16 tary may issue a temporary order requiring the developer
17 or agent to cease and desist from any such violation or failure
18 to comply. Such order shall become effective upon service
19 upon the developer or agent, and, unless suspended by a
20 court in proceedings authorized by paragraph (2) of this
21 subsection, shall remain effective and enforceable pending
22 the completion of the administrative proceedings pursuant
23 to the complaint and notice, or, if an order to cease and
24 desist is issued against the developer or agent pursuant to
25 subsection (e) , until the effective date of any such order.
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2 " (2) Withiii ten days after any agent or developer has
2 been served with a temporary order to cease and desist, such
3 developer or agent may apply to the United States district
4 court for the judicial district where the developer or agent
5 is located, or to the United States District Court for the Dis-
5 trict of Columbia, to determine whether such order was
7 arbitrary, capricious, or an abuse of discretion, or whether
3 the order was issued in accordance with procedures estab-
9 lished by law. The sole effect of any order of the court will
10 be to suspend the effectiveness of the temporary order to
11 cease and desist, pending completion of the administrative
12 proceedings pursuant to the complaint and notice served
13 upon the developer and agent under subsection (e) .".
14 (b) The Interstate Land Sales Full Disclosure Act is
15 amended by adding the following new section at the end
16 thereof:
17 "cniL PBNALTIBS
18 "Sec. 1423. (a) Any person who violates any provi-
19 sion of this title or any rule, regulation, or order issued by the
20 Secretary thereunder shall be subject to a civil penalty, in
21 a detennination by the Secretary after opportunity for a
22 hearing, not to exceed $5,000 for each such violation. Each
23 separate offense shall constitute a violation and, in the case
24 of a continuing offense, each day shall constitute a separate
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1 ' violation. Any determination of the Secretary shall be sul)ject
2 to review only as provided in section 141 1.
3 " (b) Penalties assessed pureuant to this section may be
4 collected in an action brought by the Secretary in any district
5 court of the United States. In such action the validity and
6 appropriateness of the final determination imposing the
7 penalty shall not be subject to review.
8 " (c) The amount of such penalty, when finally deter-
9 mmed, shall be payable to thie United States Treasury.".
10 ADMINISTBATIOX
11 Sec. 9. Section 1416(a) of the Interstate I^and Sales
12 Full Disclosure Act (15 U.S.C. 1715(a)) is amended by
13 inserting the following new sentence after the first senteiico
14 thereof: "In carrying out this subsection, the Secretarj' shall
15 appoint an Administrator of Interstate Land Sales who
k; shall be responsible for carrying out delegations of functions,
17 duties, and powers made by the Secretary under this sub-
18 section and who shall report directly to the Secretary.".
19 CKIMINAL TENALTJES
20 Sec. 10. Section 1418 of the Interstate Land Sales Full
21 Disclosure Act (15 U.S.C. 1717) is amended to read as
22 follows:
23 "penalties
24 "Sec. 1418. Any person who willfully violates any of
25 the provisions of this title or the rules and regulations pre-
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1 scribed pursuant tliereto, or any person who willfully, in a
2 statement of record filed under, or in a property report issued
3 pursuant to, this title, makes any untnic statement of a mate-
4 rial fact or omits to state any material fact required to be
5 stated therein, shall upon conviction be fined not more than
G $10,000 or imprisoned not less than one year nor more than
7 seven years, or both.".
8 REGULATION OF ADVERTISING
9 Sec. 11. Section 1419 of the Interstate Land Sales Full
10 Disclosure Act (15 U.S.C 1718) is amended by adding the
11 following new sentence at the end thereof: "In canying out
12 this section, the Secretary may make, issue, amend, and re-
13 scind mles, regulations, and orders with respect to advertising
14 and other promotional material w^hich may be used to pro-
1-3 mote the sale or lease of lots in subdivisions covered by this
16 title.".
17 PUBLIC EDUCATION
IvS Sec. 12. Section 1421 of the Interstate Land Sales Full
19 Disclosure Act (15 U.S.C. 1720) is amended by inserting
20 the following before the period at the end thereof: ", includ-
21 ing sums which may be used hy the Secretary exclusively for
22 public education concerning the dangei*s and difficulties inher-
23 ent in the purchase or lease of lots in subdivisions covered by
24 this title".
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1 PABENS PATEIAE
2 Sp:c. 13. The Interstate Land Sales Full Disclosure Act
3 is amended by adding the following new section at the end
4 thereof:
5 "parens patbiae bigiit to sue
6 *'Sec. 1424. (a) (1) Any attorney general of a State
7 may bring a civil action in the name of such State, as parens
8 patriae on behalf of individuals residing in such State, in
9 any district court of the United States having jurisdiction
10 of the defendant, to secure monetary or injunctive relief as
11 provided in this section for injury sustained by such indi-
12 viduals by reason of any violation of this title, any violation
13 of any rule, regulation, or order issued under this title,
14 or any violation of other Federal law if such violation is also
15 a violation of this title or of any rule, regulation, or order
16 issued thereunder. The court shall exclude from the amount
17 of monetary relief awarded in such action any amount of
18 monetary relief —
19 "(A) which duplicates amounts which have been
20 awarded for the same injury ; or
21 "(B) which is properly allocable to —
22 "(i) individuals who have excluded their
23 clauns pursuant to subsection (b) (2) of this sec-
24 tion, and
25 " (ii) any business entity.
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1 "(2) The Court shall award the State as monetary
2 relief the total damage sustamed as described in paragraph
3 (1) of this subsection, and the cost of suit, including reason-
4 able attorney's fees.
5 "(b) (1) In any action brought under subsection (a)
6 ( 1 ) of this section, the State attorney general shall, at such
7 times, in such manner, and with such content as the court
8 may direct, cause notice thereof to be given by publication.
9 If the court finds that notice given solely by publication
10 would deny due process of law to any person or persons,
11 the court may direct further notice to such person or persons
12 according to circumstances of the case.
13 ''(2) Any individual on whose behalf an action is
14 brought under subsection (a) (1) may elect to exclude from
15 adjudication the portion of the State's claim for monetary
16 relief attributable to such individual by filing notice of such
17 election with the court witliin such time as specified in the
18 notice given pursuant to paragraph (1) of this subsection.
19 '' (3) The final judgment in an action under subsection
20 (a) (1) shall be res judicata as to any claim under this
21 section by any individual on behalf of whom such action was
22 brought and who fails to give such notice within the period
23 specified in the notice given pursuant to paragraph (1) of
24 this subsection.
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1 "(c) An action under subsection (a) (1) shall not be
2 dismissed or compromised without the approval of the court,
3 and notice of any proposed dismissal or compromise shall be
4 given in such manner as the court directs.
5 "(d) In any action under subsection (a), the amount
6 of the plaintiff attorney's fee, if any, shall be determined
7 by the court; and the court may, in its discretion award a
8 reasonable attorney's fee to a prevailing defendant upon a
9 finding that the State attorney general has acted in bad
10 faith, vexatiousl}', wantonly, or for oppressive reasons.
11 "(e) In any action under subsection (a) (1) of this
12 section, in which there has been a determination that a de-
13 fendant committed any violation of this title, any violation
14 of any inile, regulation, or order issued under this title or any
15 violation of other Federal law if such violation is also a viola-
16 tion of this title or of any rule, regulation or order issued
17 thereunder, damages may be proved and assessed in the
18 aggregate by statistical or sampling methods, or by such
19 other reasonable system of estimating aggregate damages as
20 the court in its discretion may permit without the necessity
21 of separately proving the individual claim of, or amount of
22 damage to, persons on whose behalf the suit was brought.
23 " (f ) Monetary relief recovered in an action under
24 subsection (a) (1) shall—
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1 " ( 1 ) be distributed in such manner as the district
2 court in its discretion may authorize ; or
3 "(2) be deemed a civil penalty by the court and
4 deposited with the State as general revenues ;
5 except that in either case any distribution procedure adopted
6 shall afford each individual a reasonable opportunity to
7 secure his appropriate portion of the net monetary relief.
8 '* (g) (1) Whenever the Attorney General of the United
9 States or the Secretary has brought an action under this
10 title, under any rule, regulation, or order issued thereunder,
11 or under any other Federal law with regard to a violation
12 which is also a violation of this title or such rule, regulation,
13 or order, and such Attorney General or the Secretary has rea-
14 son to believe that any State attorney general would be en-
15 titled to bring an action, under this section, based substan-
16 tially on the same alleged violation of Federal law, he shall
17 promptly give written notification thereof to such State at-
18 tomey general.
19 "(2) To assist a State attorney general in evaluating
20 the notification described in paragraph (1) or in bringing
21 any action under this section, the Attorney General of the
22 United States or the Secretary shall, upon request by such
23 State attorney general, make available to such State
24 attorney general, to the extent permitted by law, any in-
25 vestigative files or other materials which are or may be
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1 relevant or material to the actual or potential cause of action
2 under this section.
3 " (h) For purposes of this section, the term *State attor-
4 ney general' means the chief legal officer of a State, or
5 any other person authorized by State law to bring actions
6 under this section, including the corporation counsel of the
7 District of Columbia, except that such term does not include
8 any person employed or retained on —
9 "(1) a contingency fee based on the monetary
10 relief awarded under this section ; or
11 " (2) any other contingency fee basis unless the
12 amount of the award of a reasonable attorney's fee
13 to a prevailing plaintifif is determined by the court under
14 subsection (d) of this section.".
15 IMPROVEMENTS DEALING WITH BASIC SERVICES
16 Sec. 14. The Interstate Land Sales Full Disclosure Act
17 is amended by adding the following new section at the end
18 thereof:
19 "improvements dealing with basic services
20 "Sec. 1425. (a) Any developer or agent who agrees or
21 promises to provide basic services in connection with a lot
22 in a subdivision covered by this title shall deposit in escrow,
23 withm ninety days after the signing of the contract of sale
24 or lease, an amount to be determined by the Secretary, ex-
25 cept that such amount shall not be less than an amount equal
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2 to the total cost of the basic services which have been
2 promised and not completed with respect to the subdivision
3 at the time of the agreement or promise, divided by the
4 pumber of lots in flie subdivision which will receive such
5 services. Such total cost and number of lots shall be deter-
5 mined by a registered engineer and shall be certified to the
7 Secretary by the engineer. The costs of such determination
8 shall be paid by the developer. Such escrow shall be de-
9 posited in an account at a banking or similar financial insti-
10 tution approved by the Secretary and shall be withdrawn and
11 utilized pursuant to rules issued by the Secretary for the pur-
12 pose of assuring that such amount be used solely for provid-
13 ing the basic services which are to be provided in connection
14 with such lot. For purposes of this section, the term 'basic
15 services' means water, sewage disposal, roads, and any other
16 amenities which may be specified by the Secretary. If, in the
17 Secretary's judgment a State's requirement with respect to
18 the establishment of escrow accounts in connection with the
19 sale and lease of real property located in such State is suffi-
20 cient to meet the purposes of this section, he may waive the
21 requirements of this section with respect to property located
22 in such State.
23 " (b) If any developer promises before or at the time of
24 the signing of a contract for the sale or lease of a lot in a
25 subdivision covered by this title, to install or complete basic
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1 services which will scn'e the lot of a purchaser or lessee by
2 a specific date, and if such developer fails to install or com-
3 plete such basic services by such promised date, the contract
4 of sale shall be revocable at the option of the purchaser,
5 and upon revocation, such purchaser may recover all moneys
6 which have been paid to the developer for the purchase or
7 lease of his lot/'.
8 E1TECT1VJ5 DATE
9 Sec. 15. The amendments made by this Act shall be-
10 come effective at the be^nning of the one hundred and
11 twentieth day after the date of the enactment of this Act.
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95th congress
2d Session
S. 3084
AN ACT
To amend and extend certain Federal laws relating to housing,
conununity, and neighborhood development and preserva-
tion, and related programs, and for other purposes.
^ Be it enacted by the Senate and House of Bepresenta-
2 txves of the United States of America in Congress assembled,
3 That this Act may be cited as the "Housing and Commu-
4 nity Development Amendments of 1978''.
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13 AI^IENDMBNTS TO INTERSTATE LAND SALES FULL
14 DISCLOSURE ACT
15 Sec. 715. (a) Section 1403(a) of such Act is
16 amended —
17 (1) by inserting "condominium," after "commer-
18 cial," in clause (3);
19 (2) by inserting after "adverse claims do not refer
20 to" in clause (10) tlie following: "United States land
21 patents or Federal grants and reservations similar to
22 United States land patents, nor to" ; and
23 (3) by striking out the matter which precedes
24 "when — " in clause (11) and inserting in lieu thereof
25 the following:
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1 "(11) tJie sale of lease of real estate which is
2 zoned by the appropriate governmental authority for
3 mdustrial or commercial development or which is re-
4 stricted to such use by a declaration of covenants,
5 conditions and restrictions which has been recorded in
6 the official records of the city or county in which such
7 real estate is located,".
8 (b) Section 1403 of such Act is amended —
9 (1) by redesignating subsection (b) thereof as
10 subsection (c) ; and
11 (2) by inserting after subsection (a) thereof the
12 following:
13 "(b) Unless the method of disposition is adopted for
14 the purpose of evasion of this title, the requirements of sec-
15 tions 1405 to 1408 inclusive, shall not apply to —
16 "(1) the sale or lease of real estate by a de-
17 veloper who is engaged in a sales operation which is
18 intrastate or almost entirely intrastate in nature. A sales
19 operation shall be considered 'intrastate or almost en-
20 tirely intrastate in nature' for tlie calendar year if not
21 more llian 5 per centum of (he lots sold in such year
22 were sold to residents of another State, or if not more
23 than five lots sold in such year were sold to resideni*
24 of nnotlier State, wliiehever is greater, exclusive of s.-il**^
25 made under the provisions of clause (2) of this sul>-
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J section. For the purpose of the exemption contained in
2 the preceding sentence, a lot may be sold to a resident
3 of another State only if —
4 " (A) the lot is free and clear of all liens, en-
5 cumbrances, and adverse claims ;
Q "(B) the purchaser or his or her spouse has
7 made a personal on-the-lot inspection of the lot pur-
8 chased; and
9 "(0) the developer executes and supplies to
10 the purchaser a written instrument designating a
11 person within the State of residence of the pur-
12 chaser as his agent for service of process and
13 acknowledging that the developer submits to the
14 legal jurisdiction of the resident State of the
15 purchaser.
16 As used in this clause (1), the tcims 'liens', 'encum-
17 brances', and 'adverse claims' do not include United
18 States land patents and similar Federal grants or reserva-
19 tions, property reservations which land developers com-
20 monly convey or dedicate to local bodies or public
21 utilities for the pui-pose of bringing public services to
22 the land being developed, taxes and assessments imposed
23 by a State, by any other public body having authority
24 to assess and tax property, or by a property owners'
25 association, which, under applicable State or local law.
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1 constitute liens on the property before they are due and
2 payable, or beneficial property restrictions which would
3 be enforceable by other lot ownei*s or lessees in the
4 subdivision, if —
5 *'(i) the developer, prior to the time the con-
6 tract of sale or lease is entered into, has furnished
7 each purchaser or lessee with a statement setting
8 forth in descriptive and concise terms all such
9 reservations, taxes, assessments, which are appli-
10 cable to the lot to be pm-chased or leased; and
11 "(ii) receipt of such statement has been
12 acknowledged in writing by the purchaser or lessee;
13 " (2) the sale or lease of real estate by a developer
14 to the resident of another State when the principal
15 residence of the purchaser is within a radius of one
16 hundred miles from the propert)' purchased if —
17 "(A) the lot is free and clear of all liens,
18 encumbrances, and adverse claims;
19 "(B) each purchaser or his or her spouse ha^
20 made a personal on-tlie-lot inspection of the lot
21 purchased ; and
22 "(C) the developer executes and supplies to
23 the purchaser a written instrument desiguntiii;jr a
24 pei-sou within the State of residence of the purcha.M»r
25 as his agent for service of process; and acknowl-
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1 edges that the developer submits to the legal juris-
2 diction of the resident State of the purchasci-s ; and
3 " (D) the developer executes a written affirma-
4 tion to the eflect that he has complied with the pro-
5 visions of clauses (A) , (B) , and (0) of this clause
G (2), such aflSrmation to be given on a fonn pro-
7 vided by the Secrctar}^ where such fonn shall in-
8 elude only the name and address of the developer,
9 the name and address of the puichaser, a legal
10 description of the lot, an affinnation that clauses
11 (A), (B), and (C) have been complied with, a
12 statement that the developer submits to the juris-
13 diction of the Act in regard to the sale, and the sig-
14 nature of the developer. The affinnation is to be
15 kept on file by the Secretary.".
16 Sales made under this clause shall not be subject to the
17 limitation contained in clause (1) but the number of
18 sales made under this clause will be added to sales made
19 under clause ( 1 ) to amve at the total number of sales
20 made in one year by a developer for puiTposes of calcu-
21 lation of the 5 per centum out-of-State sales limitation
22 factor contained in clause ( 1 ) . As used in this clause
23 (2), the teims 'liens', 'encumbrances', and 'adverse
24 claims' do not include United States land patents and
25 similar Federal grants or reseiTations, property reserva-
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tions which land developers commonly convey or ded-
2 icate to local bodies or public utilities for the purpose
g of bringing public services to the land being developed,
^ taxes and assessments imposed by a State, by any other
^ puWic body having authority to assess and tax property,
g or by a property owners' association, w^hich, under ap-
rj plicable State or local law, constitute liens on the prop-
g erty before they are due and payable, or beneficial
9 property restrictions which would be enforceable by
10 other lot owners or lessees in the subdivision, if—
11 "(i) the dcveloi)er, prior to tlic time the con-
12 tract of sale or lease is entered into, has famished
13 each purchaser or lessee with a statement setting
14 forth in descriptive and concise tcnns all such res-
15 ers'ations, taxes, assessments, which are applicable
16 to the lot to be purchased or leased ; and
17 " (ii) receipt of sucli statement has been
18 acknowledged in writing by the purchaser or
19 lessee ; or
20 " (3) the sale or lease of real estate which is located
21 within a municipality or county whose goveniing body
22 specifies minimum standai-ds for the development of siil>-
23 division lots taking place within its boundaries, when—
24 "(A) the subdivision meets all local codes nii'l
25 standards and is either zoned for single family rc>i-
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1 dences or, in the absence of a zoning ordinance, is
2 limited exclusively to single family residences;
3 "(B) the real estate is situated on a i)aved, pub-
4 lie street or highway which has been built to a
5 standard acceptable to the municipality or coimty or
6 a bond or other surety acceptable to the municipalit)'
7 or county in the full amount of the cost of the im-
8 provements has been posted to assure completion to
9 such standards, and that authority has accepted or
10 has agreed to accept the responsibility of maintaining
11 the public street or highway;
32 "(C) at the time of closing, potable water,
13 sanitaiy sewage disposal and electricity have been
14 extended to the real estate or the municipality or
15 county has agreed to install such facilities within
16 180 days. For subdivisions which do not have a
17 central water or sewage disposal system, rather than
18 installation of water or sewer facilities, there must
19 be assurances that an adequate potable water sup-
20 ply is available year-round or that the land is ap-
21 proved for the installation of septic taiiks ;
22 "(D) the contract of sale requires delivery
23 of a warranty deed to the purchaser within 180
days of the signing of the sales contiact ;
*' (E) a policy of title insurance or title opinion
U
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1 is issued in connection with the transaction showing
2 that at the time of closing, title to the real estate
3 purchased or leased is vested in the seller or lessor,
4 but nothing herein shall be construed as requiring
5 the recordation of a lease ;
6 "(1) each and eveiy purchaser or his or her
7 spouse has made a personal on the lot inspection
S of the real estate which he purchased or leased,
9 prior to the signing of a contract to purchase or
10 lease;
n *'(f^) there are no direct mail or telephone
12 solicitations or offers of gifts, trips, dinners, or other
13 such promotional techniques to induce perspective
14 purchasers or lessees to visit the subdivision or to
j5 purchase or lease a lot.
IG "(^) »^eetion 1412 of such Act is amended by striking
17 the last sentence and inserting in lieu thereof 'In no event
13 shall any action be brought by a pmchaser more than three
19 ye^i*^ ftftei* tl^c signing of a contract Or lease, not with>t:uul-
20 ing delivery of a deed to a purchaser on the sale or assi^rn-
21 ment of the purchaser's contiact or agreement to a third
22 P^ity/".
23 (^') ^'^^'^•^ion 14 J G of such Act is amended by addiiiii
24 at the end thrreof the following:
25 "(^) (^) ^^* discharging his responsibilities umVr t»us
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1 title, the Secretary shall conduct all actions with respect
2 to rulemaking or adjudication in accordance with the provi-
3 sions of chapter 5 of title 5, United States Code.
4 "(2) The Secretarj', by rule, shall prescribe the pro-
5 cedure applicable to every case pursuant to this title of
C adjudication (as defined in section 551 of title 5, United
7 States Code) not required to be determined on the record
8 after notice and opportunity for hearing. Such rule shall,
9 as a minimum, provide that prompt notice shall be given
10 of any advei*se action or final disposition and that such notice
11 and the entry of any order shall be accompanied b)' a state-
12 ment of legal authority and other written reasons.".
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SUMMARY OF INTERSTATE LAND SALES REFORM ACT OF 1978
H.R. 12574 (MINISH BILL)
Section 2 - Subdivisions of less than 40 lots and subdivisions containing lots over 40 acres
each are exempt.
- Deletes existing exemption for sales pursuant to bankruptcy proceedings.
Section 3 - Adds omissions to state material facts as violaUons and eliminates requirement
of proof of reliance in order to establish material misrepresentation as a violation.
- Provides an absolute 30-day right of recission for lot purchasers.
- Provides that purchaser has right to void contract at any time during 3 years
after signing contract if:
(a) contract signed on first day contract is offered,
(b) contract does not contain a legally sufficient and
recordable description of the lot, or
(c) the developer provides financing except when title
is transferred within 30 days of signing contract,
formal foreclosure proceedings take place before
loss of title, purchaser establishes equity proportional
to payments and on default, and purchaser not required to
pay liquidated damages greater than de\'elopers proven
damages.
Section 4 - Copies of advertising and sales pitches must be filed as part oi Statement of Record.
Section 5 - Nothing in Act shall affect requirement that person comply with State laws regarding
sale of interstate land except to extent State laws are inconsistent with this Act.
Section 6 - Elands damages consumer may recover in civil suit under Act to include attorney^
fees, travel expenses and appraisal costs. Purchasers may sue for specific
performance of promises made by developers and on tender of the contract or deed
pursuant to suit to enforce rights may be entitled to a total refund of monies paid
pursuant to the contract.
Section 7 - Extends statute of limitations to a maximum of 7 years after sale or lease.
- Lengthens statute of limitations to 3 years after discovery for suit on basis of
untrue statement or omission and for suit on basis of failure to file a statement
of record or to give purchaser a prc^erty report.
Section 8 - Gives OILSR authority to issue cease to desist oi-ders against developers and to
impose civil penalties on developers after an administrative hearing.
Section 9 - Directs Secretary of HUD to appoint an Administrator of interstate Land Sales.
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Section 10 -* Raises the criminal penalties for violators of the Act from a maximimi of
$5, 000 and 5 years imprisonment to maximum of $10, 000 and 7 years
imprisonment.
Section 11 - Clarifies HUD authority to regulate advertising by developers.
Section 12 - Authorizes HUD to expend funds for public education concerning problems of
buying property covered by tliis Act.
Section 13 - **Parens Patriae" section allows attorney general of a State to bring civil actions
on behalf of citizens of his State %vlio have purchased land against developers
who have violated this Act.
Section 14 - Requires that developers who promise to provide basic services, such .as water,
sewage disposal and electricity establish escrow accounts to assure completion
of these services.
- Lot purchasers may revoke contracts of sale if developers fail to install basic
services by date specified.
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Summary <f Administration's Proposed Amendments to
Interstate Land Sales Full Disclosure Act
H. R. 11265
Sec. 421(a}: Raises from 50 to 100 lots the size of a subdivision within
the jurisdiction of the Act.
Sec. 421(b) and (c): The sale or lease of subdivisions of less than 100 lots,
or where all lots are more than 40 acres, are exempt from
the Act.
Sec. 421(d): The sale or lease of land under or pursuant to a court order,
where the Secretary of HUD determines it to be in the public
interest, is exempt.
Sec. 421(e): Eliminates exemption from the Act for the sale or lease of
unencumbered land after the on-site inspection by the purchaser.
Sec. 421(f): Adds prohibition against omissions to state material facts and
eliminates requirement of proof of purchasers reliance in order
to establish material misrepresentation as a violation.
Sec. 421(f): Creates unqualified right of revocation unkH the 14th day after
signing contract.
Sec. 421(g): Deletes the $1000 ceiling on the fee for filing, and adds requirement
that such a fee be paid for filing a request for exemption.
Sec, 421(h)(1): Unless the Secretary has accepted state approved materials,
the property report shall be used in lieu of any state disclosure
document.
Sec. 421(i): In a civil suit b>' the purchaser, court may order damages,
specific performance, or such other relief as the court deems
fair, just, and equitable; the couil must take into account: the
lots contract price, the price actually paid by the purchaser, the
cost of any improvements, the fair market value at the time of
sale, fair market value at time suit was initiated; a purchaser
may sue to revoke the contract where no propert>' report was given
at the time of signing, and the purchaser, upon divestment of his
or her interest in the lot, shall be entitled to all monies paid
pursuant to the contract; the purchaser may sue if developer does
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2
not fulfill any obligation set forth in the statement of record or
property report; the amount recoverable in such a suit may
include: interest, reasonable attorneys' fees, independent
appraisal fees, and court costs;
Sec. 421(g): -The statute of limitations for any right where no property
report has been supplied, or no statement of record or property
report filed is one year after discovery, but not more than four
years after the sale notwithstanding deliveiy of the deed, or
assignment of the contract;
-the statute of limitations for actions based on fraudulent schemes, u
true statements or omissions, or failure b>' developer to fulfill
promises is three years after discover^'.
Sec. 421(k): Secretary may issue cease and desist orders.
Sec. 421(1): Developer may be subject to a civil penalt}' of no more than $5,000
per violation.
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Suxnmazy of Senate Amendments to Interstate Land
Sales Full Disclosure Act (Nelson Bill)
Senate Bill does the following:
Sec. 715(a)(3): An exemption from all provisions of the Act is added for
real estate restricted to commercial or industrial use k^
recorded covenants. The conunercial exemption is now
limited to property restricted k^ zoning.
Sec. 715(b)(2)(b): Exemption from Registration and Property Report requirements for
three new categories:
(A) developments where not more than 5% or five lots (whichever
is greater) are sold to out-of-state residents if title is clear
of all liens and an onsite inspection has been made;
(B) sales made to out-of-state purchasers living within 100 miles
of the property under same conditions as above;
(C) real estate located in a mimicipality with subdivision
development standards if (1) the subdivision meets all local
codes and standards, (2) is limited to single family residences, |
(^ is on a paved public street which the municipality has agreed
to maintain, (4) water, sewage and electricity in place, (5) a
deed will be delivered within 180 days, (6) title insurance
issued, (7) on site inspection has been made, and (8) direct
mail and telephone or similar solicitations and promotions
have not been employed.
Sec. 715(c): Maintains present 3-year maximum statute of limitations.
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Chairman Ashley. I look forward to the advice of the witnesses
who will testify during the next 3 days and hope that they will not
limit their comments solel v to the proposals before us.
These proposals are only a starting point for reviewing the present
state of the industry, the effectiveness of HUD's administration of the
existing act, and the need for statutory changes.
We will be pleased to hear first from our colleague. Congressman
Joseph G. Minish. At my suggestion, his Subcommittee on General
Oversight and Renegotiation, as most of you know, has conducted
extensive hearings which have provided the basis for the reforms
included in H.R. 12574.
I do commend Congressman Minish and his subcommittee for their
efforts and their recommendations now before us. After Mr. Minish,
we will hear from Jean Halloran, accompanied by Leslie Allan, and
then from Patricia M. Hynes, who will be properly introduced in a
few minutes.
So our first witness, with the cleanest teeth in the room, I am sure,
is our colleague from New Jersey, Congressman Minish. I want to
say that there isn't a more worthy and respected member of the full
committee than the chairman of the Subcommittee on Gteneral Over-
sight and Renegotiation.
He has done outstanding work in a number of areas, not the least
of which is the area that is of interest at this time ; namely the status
of the Interstate Land Sales Full Disclosure Act.
So if you will proceed, Mr. Minish, we will be grateful to you.
STATEMENT OF HON. JOSEPH G. MINISH, A BEPSESENTATIVE IN
CONOSESS FBOM THE STATE OF NEW JEESET
Mr. MixiSH. Thank you, Mr. Chairman.
Members of the subcommittee, thank you for inviting me to testify
on the subject of interstate land sales.
At the rec|uest of Chairman Ashley, the Oversight Subcommittee
of the Banking Committee, of which I am chairman, conducted an ex-
tensive investigation of the land development industry. This included
the first comprehensive review of the Interstate Lana Sales Full Dis-
closure Act since its inception in 1968. We held hearings in April^ at
which we heard testimony from more than 30 witnesses, representmg
Federal and State governments, industry, public interest groups, and
consumers. Various other interested parties submitted written testi-
mony to our subcommittee. I would like to share the findings of our
investigation with you.
Our primary finding was that consumers are not adequately pro-
tected by present laws. Although several Federal and State agencies
have taken steps toward cleaning up the land sales industry, severe
problems remain. Literally millions of consumers continue to be de-
frauded or disappointed by land developers every year. Unfortu-
nately, the shady developers tend to prey on those who are least able
to protect themselves; consumers who are elderly, poorly educated,
or unsophisticated, constitute prime markets for land schemes.
I believe that the problems in the land sales industry result in large
part from three basic facts :
Fact No. 1 : Land Sales regulation is an "orphan," especially within
the Federal Government. Although a number of Federal agencies at-
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tempt to police land sales, none of them has been able to devote the
time and resources necessary to insure regulation with teeth. The pri-
mary regulator, the Office of Interstate Land Sales within HUD has a
total of 107 employees and a yearly budget of less than $3.5 million
with which it attempts to oversee a multibillion dollar industry. The
Federal Trade Commission and the Securities and Exchange Commis-
sion have done some regulating but only on a very limited basis. Many
States do not even have statutes dealing with land development and
only a handful have laws which even approach being adequate. Local
laws vary widely and the least sophisticated ordinances are often in
the same rural areas which are the primary target of developers.
Fact No. 2 : Disclosure by itself cannot prevent abuses in the land
sales industry. The selling practices of the land sales industry work
against effective disclosure. Any land salesman will tell you that a sale
T^ich is not closed on the same day the sales pitch is made is almost
always lost. The high pressure push toward same-dav closings run
directly contrary to the theory of disclosure. In real life, land buyers,
who usually purchase at sales dinners or on their first visit to develop-
ments, rarely have a chance to read, much less imderstand, the infor-
mation in the property report.
Fact No. 3 : There are a number of commonplace practices within
the land sales industry which are extremely imfair to consumers.
Among them are : the financing of lot purchases through installment
contracts which give buyers almost no protection for their money; the
promising of improvements such as water, sewage disposal and recre-
ational facilities which the developer cannot complete ; high pressure
sales tactics designed toward insuring same-day closings; and false
or misleading advertising.
None of these practices can be controlled by a simple disclosure
statute and all of them should be discouraged. Most of the consumer
abuses in the land sales industry can be eliminated without putting
developers out of business. The bill which I and 26 of my colleagues
have introduced, H.R. 12574, would eliminate many of the worst con-
simier abuses in the land sales industry without seriously affecting
honest developers.
I am happy to report that five of the members of this subcommittee.
Representatives St Germain, Gonzalez, Mitchell, Hanley, and Spell-
man, have decided to cosponsor this bill. I would like to discuss a few
of its major provisions, but before I do so, I want to speak briefly <m
another measure being considered by this subcommittee, the "Nelson
bill," which has been incorporated into the Senate version of the Hous-
ing Act of 1978.
During the investigation and the subsequent hearing which my sub-
committee held, we received testimony from various mdustry sources
which suggested that OILSR has overstepped its jurisdiction by regu-
lating some small, primarily intrastate developers. This may, m fact,
be the case and there may be some need for legislation which clarifies
the jurisdiction of OILSR. However, I question whether the Nelson
bill IS the way to accomplish this.
I think that the Nelson bill, in its present form, is an imwise pro-
posal. It will exempt some of the worst interstate developers in the
country from the requirements of the Interstate Land Sales Full Dis-
closure Act. It contams complicated and probably unworkable exemp-
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tions which will leave developers, consumers, and HUD uncertain as to
who is covered by the Federal law. Although it may be possible to
draft amendments to the Interstate Land Sales Act, which exempt
only some intrastate developers, this proposal does not accomplish
that. It is far too broad and contains loopholes which would allow
manv large interstate developers to escape Federal regulation.
I know that HUD intends to testify as to the problems of the Nelson
bill. In general, I concur with its analysis. There are, however, sev-
eral difficulties which I think deserve special mention.
First, the two main exemptions in this bill, the five lot or 5-percent
exemption and the 100-mile exemption, are vefry complicated yet they
are self -executing. This means that many developers may think they
qualify for exemptions and then be forced to cancel sales contracts
when they find out later that they are covered by the Interstate Land
Sales Act.
Second, the Nelson proposal makes the fraud provisions of the act
applicable to all developers covered by that law, even if they qualify
for the Nelson exemptions. However, as was pointed out by several
witnesses in the Senate Banking Committee's hearings on land sales,
criminal prosecutions or civil suits are almost impossible to bring
without the benefit of the information provided in the statement of rec-
ord. Without the information provided under the disclosure sections
of the Interstate Land Sales Act, attorneys for buvers will be operat-
ing in the dark. The fraud provisions, by themselves, will be silmost
meaningless.
Third, one section of this proposal requires OILSR to comply with
the Administrative Procedures Act. OILSR already does this by reg-
ulation. No one seems to know which this section is in the bill.
Fourth, the provision of the Nelson bill that concerns me most is the
100-mile radius exemption. This exempts sales to people who live
within 100 miles of the developer. It is a lot-by-lot exemption which
means that no matter how big or how bad the developer is, he may sell
to anyone within 100 miles of his development, without being covered
by the Federal law. I would like to ^ve one example of the nightmares
which would occur if this provision is adopted.
One of the primary areas for land subdivision in the East is the
Pocono Mountains of Pennsylvania. Within 100 miles of most Pocono
developments are the metropolitan areas of New York City, northern
New Jersey, and Philadelphia. Taken together, these three areas repre-
sent a market of ovefr 20 million people. Under the Nelson bill, none
of these people would be protected by the Federal disclosure require-
ments if they bought lots in the Poconos.
During our hearings, our subcommittee heard testimony concerning
a number of very poor subdivisions in the Poconos. One will serve as
a good example.
Sherwood Forest, near Newfoundland, Pa., sold over 800 lots during
1972 and 1973. Three hundred and sixty-five of the lots were sold to
people from New Jersey. At least 30 of the buyers are my constituents.
Most of the other lots were bought by residents of the Philadelphia
or New York metropolitan areas. Among other things, Sherwood
Forest promised improvemefnts such as sewage disposal and water,
which it never completed. It concealed from prospective buyers a dis-
pute with local township authorities which made Sherwood Forest
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unable to deliver clear title to the lots it sold. It used high-pressure
sales tactics and committed other consumer abuses.
Today, 6 years after most sales took place at Sherwood Forest, the
buyers are unable to build on their lots, thejr can't sell their lots because
of the clouded titles and the inability to build, and they have been un-
able to get any money back from Sherwood Forest, which is now
ins olven t.
HUD suspended Sherwood Forest from selling lots and recom-
mended that several of the principals be prosecuted for violaticms of
the Interstate Land Sales Act and the Federal mail fraud statutes. If
the Nelson bill had been in effect in 1972 and 1973, the great majority
of the sales made by Sherwood Forest would have been exempt from
most of the major provisions of the Interstate Land Sales Act. The
situation at Sherwood Forest would be even more of a travesty than
it is todav.
If the Nelson bill, as presently in the Senate Housing Act, is passed,
there will be new Sherwood Forests all over the Poconos and other
areas of the country and the Federal Grovemment will be unable to
intervene in any meaningful way. Although there may be some need
for a clarification of OIISR'S iurisdiction, it would be very wrong to
make that the major thrust of land sales legislation. The people who
suffer most under the present law are not the developers; they are
consumers.
As you may know, a number of the provisions of my bill closely
parallel provisions in the administration's proposal, Tf'hese include
restrictions on the statutory bankruptcy exemptions, an absolute ri^ht
of recision for lot purchasers, the prohibition of omissions of material
facts by developers, a provision which allows purchasers to sue for
specific performance of promises made by the developer, extension of
tne statutes of limitations on civil suits under the Land Sales Act, and
provisions which allow OILSR to issue cease-and-desist orders and
to impose civil penalties. My bill does go beyond the administration's
proposal in several key areas. I would like to mention three of them.
Our bill attempts to eliminate the use, in its present form, of the in-
stallment-contract method of financing lot purchases. Under the tradi-
tional installment contract, the purchaser agrees to pay for his lot over
a period of years, usually 7 to 10, through monthly installments. There
is no transfer of title to the purchaser until he has completed payments
and, in many cases, purchasers who finish paying discover that the
developer is unable to deliver clear title. Most installment contracts
contain a "liquidated damages" clause which provides that in the case
of default by the purchaser, all money paid by the purchaser is re-
tained by the developer. Thus, the purchaser builds no equity propor-
tional to his payments as he would under a traditional mortgage
method of financing. In some cases, purchasers have paid over 90 per-
cent of what they owe and then have been left with nothing when they
cannot continue to pay.
Another problem which results from the installment contract
method of financing is that developers often sell the installment con-
tracts to third parties. The purchaser then owes his payment to the
third party, but, because of the holder in due course laws, the pur-
chaser cannot force the third party to fulfill any of the obligations of
the developer. In addition to sill these problems, because the purchaser
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does not get title until he has completed pajrments, he may not be
able to use the property for 7 to 10 yefars after he signs the contract
of sale.
In short, consiuners who buy imder installment contracts are all-
around losers.
Our bill would prevent this abuse by insuring that developers who
extend credit for tne purchase of their own lots, do so by means of the
more traditional mortgage or deed — deed of trust arrangements. They
would have to use contracts which provide for formal foreclosure
proodedings in case of default and which do not contain liquidated
damages clauses. This would insure far more protection to the
consumer.
A sec(md provision of our bill requires that developers who promise
to provide basic services such as water, sewage disposal, and electricity
must establish escrow accounts which insure completion of these
services. During our investigation, we found that developers often
promise all lsm& of improvements as part of their sales pitch. In mmj
cases, those developers are financially unable to keep their i>romises
and thus force lot buyers to spend money which they never anticipated
having to spend. A number of States already have escrow requirements
which have provided increased consumer protection without imposing
excessive economic burdens on developers.
The third major reform which our bill provides is our "parens
patriae'' section. We found that many people who have civil causes of
action under the present Interstate Land Sales Act are imable to bring
suit because individual suits are too expensive and it is too difficult to
bring class actions in Federal court.
Our parens patriae section allows the attorney general of a State to
bring civil actions a^inst deevlopers on behalf of citizens of his State
who have purchased land. This provision does not create any new
rights but simply makes it easier for consumers to enforce rights which
they already have.
There are a number of other reforms in our bill which I shall not
go into at this time. I would like to submit a summary of the major
provisions of our bill.
[Mr. Minish subsequently furnished the following summary for
inclusion in the record:]
ii-7U O - 78 - 5
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BRI^ SUMABY CF INTERSIATE: LAND SAUES REFORM ACT CF 1978
Section 2 deals with the ocpverage of and exemptions to the Interstate Land
Sales Full DisclosLire Act (ILSFDA) . Itie floor of the HiSFDA is lowered
frcm 50 to 40 lots, thus exenptlng siixdvisions of less than 40 lots. The
n^FDA is also amended to cover lots up to 40 acres. The present Act is
limited to lots of 5 acres or less. Ihe exanption in the present Act for
sales pursuant to bemkn:^>tcy proceedings is eliminated.
Section 3 pros^ides an absolute 30-day right of rescission for lot purchasers.
It also discourages sales on the same day that the buyer receives the con-
tract of S£de frcm the developer and, with certain exceptions, prevents de-
velopers from extending credit on their own lot scQes. Preventing the ex-
tension of credit by developers will do avey with a nunber of the major
abuses in the land sales industry, including installment contracts, the in-
ability of seme developers to deliver good title and the sale of bad ocm u ta .'-
cial paper by developers. Ihis section also requires a legally sufficient
and recordable description of lots sold by developers. Under the present Act
a "material misrepresentation" is a violation if the buyer relies on it.
Ihis section includes anissions to state material facts as violations and
eliminates the requiren^ait of proof of reliance.
Section 4 requires that copies or transcripts of all advertising and siin-
msuries of verbal presentations made by a developer or his agent be made a
part of the Statement of Record filed with the Office of Interstate Land Sales
Registration.
Section 5 provides that nothing in the Act shall affect state laws except
to the extent that the state laws are inconsistent with the Act.
Section 6 expands the damages %4iich consaners may recover in civil suits under
the ILSFDA to include attorneys* fees, travel expenses and ai]praisal costs.
It allows consuners to sue for i^)ecif ic perfonnances of pronnlses made by de-
velopers and gives purcdiasers the right to sue to enforce their ric^its of
revocation.
Section 7 extends the statute of limitations of the II£FDA to a maximum of
seven years and also lengthens the specific statutes of limitations on vari-
ous sections of the Act.
Section 8 provides new administrative remedies for OUSR. It gi'v^es OILSR the
authority to issue cease and desist orders against developers and also allows
OII^R to impose civil penalties i:pon developers after an 2Kininistrative hear-
ing.
Section 9 changes sli^tly the adndnistrative structure of the Departanatt of
Housing and Urban Development by providing for ein eidndnistrator of interstate
land sales within HUD.
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Section 10 raises the crimljial penedties for violators of the Act.
Section 11 makes it clear that OILSR has the authority to regulate ad-
vertising~by developers.
Section 12 authorizes HUD to esqpend money for public education oonoem-
ing the problems of buying land.
Section 13 the "Parens Patriae" section allows the attorney general of
a state to faring civil actions against developers on behalf of citizens
of his state who have purchased land. This provision vdll maike it
easier for oonsunoers \iho have been defrauded by land developers to get
tiieir money back.
Section 14 requires that developers \^io promise to provide basic se3>-
vioes sul^ as v»ter, sewage di^x)sal and electricity establish escrow
aooounts uhidi insure the oanpletion of these services. It also pro-
vides that lot purchasers may revoke their contracts of sale if developers
fail to keep specific premises with regard to the installation of basic
services.
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Mr. MiNiSH. I could also cite additional examples of abuse by devel-
opers, but I'm sure you will hear plenty in the testimony to be pre-
sented by INFORM, Patrcia Hynes, and Attorney General Anaya.
In closing, I would like to give you a word of warning. You are
going to hear a lot of industry testimony which paints a picture of
small, overburdened businessmen, tormented by a giant government
bureaucracy at HUD. Don't believe it. The real victims here are un-
sophisticated, lower and middle class people who are led into buving
land they often don't want through financial arrangements they don't
understimd. The main issue before this subcommittee is not protecting
business from big government — OILSR has 107 employees. The main
issue here is protecting little people from bi^ business. If you follow
the testimony closely for the next 3 days, I thmk this will become very
clear. I think you will conclude that the main thrust of land sales
le^lation has to be increased consumer protection.
Mr. Chairman, I want to thank you very much, and ccmsidering that
I have a numb jaw, I don't think I was too bad.
Chairman Ashley. If you will let us know when the anesthetic starts
to wear off, we will be happy to let you go at that juncture. [Laughter.]
That is a veir good and forceful statement. I suppose that this ques-
tion could be airected at other witnesses, those from HUD and else-
where. But in your statement you say that literally millions of con-
sumers continue to be defrauded or disappointed by land developers
every year, and I am wondering about the effectiveness of the origmal
act and the extent to which it has provided adequate protection. And
obviously, this comment reflects on those interests that I have
expressed.
What kind of testimony did you get as to the incidence of continued
fraud, of deception within or without the law, the disappointment, the
whole range of activities that you are concerned with addressing?
Mr. MiNiSH. Mr. Chairman, let me just take one, Sherwood Forest,
which I am familiar with, is in the Poconos, not very far from where
I was bom and only about 75 miles from where I live now. Just the
other day a lady stopped by my office and said : "Mr. Minish, what do
I do with my land ?" She said : "I just got a bill to pay school taxes, and
I can't build." The reason lot owners can't build up there is because
the developer was supposed to put sewers in there, and never did and
somehow the money aisappeared. The lot owners cannot put septic
tanks in because of the high water table. So all of these people up
there — and there are literally hundreds — are hung up with all of this
land that they can't do a darned thing with. They don't know what to
do.
I had another case. A gentleman from New Jersey bought 40 acres
in Colorado. And when he bought the land, he didn't have a chance to
go out there and see it. The developer told him that there was no ques-
tion that he could earn money on the land, and probably what he earned
by leasing it out to cattle owners would more than pay whatever the
cost was per month.
Well, he found out that not a single cattleman was interested in it,
because when he finally went out there, he found that the lot was on the
side of a' mountain, all stone, and not even billy goats could climb up
there. And so he has been paying for 7 or 8 years, and he has 2 years
to go on the contract. And he says : "What do I do?" It is rather diffi-
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cult to tell a man what to do in that case. Do you tell him to stop paying
and forget everything ?
I said : "I really don't know what to tell you. Chances are if you
have only 2 years to pav, maybe you ought to pav it. Who knows, you
mOT find uranium or gold up there. I doirt know,''
But anyhow, OILSR has not done the job. I don't think that they
have enough employees. And I am not in favor of building the bu-
reaucracy, but I am for requiring government to protect consumers.
If you want to know how well consumers are protected, ask Patricia
Hynes, the assistant U.S. attorney from New York, because I think
she will tell you a story that will be more convincing than anything
that I can tell you, about some developer who got about $170 million for
land that he paid about $20 million for, and that is a pretty good
profit.
And I am inclined to remember something Bob Strauss said. When
asked about our oil problem he said, "I am from Texas and I don't know
any poor oilmen." I am getting to the point where, I am from New
Jersey and I haven't heard of a poor land developer in the United
States.
Chairman Ashley. In your hearings, apparently you established to
the satisfaction of just about every bcSy that there are only a handful
of States that have ade(][uate laws protecting their consumers.
Mr. MiNisH. That is right, Mr. Chairman.
Chairman Ashlet. And that for that reason this has escalated into
a national problem, requiring a national solution.
Of course, that was decided 10 years ago when we legislated in the
first instance. Is it your impression that States are looking to the Fed-
eral Government to provide this protection? Is that the reason that
only a handful of States are in this business of trying to protect their
own people from the kinds of fraud and deception that is found both
in intrastate and interstate land sales ?
Mr. MiNiSH. Mr. Chairman, that is an accurate statement. Some of
the States are looking for Federal assistance. I think that the attorney
general from Colorado, Mr. MacFarlane, and also the one from New
Mexico, will testify to that, that they are looking to the Federal Gov-
ernment for help with this problem.
Chairman Ashley. One of the things that has interested me is that
OIIiSR doesn't seem to be interested in establishing any kind of cooper-
ative arraujgements with those States that do pursue aggressively the
kind of legislation that affords protection to citizens purchasing prop-
erty either within that State or outside that State. Generally within
the State, that would be the province of State governments.
And I am curious as to what your notions are about the situation
where a State, whether it be New York or Florida or any other State,
directs itself aggressively to this problem. In that situation wouldn't
it-be appropriate for there to be some kind of cooperative arran^ment
between OILSR and that State which would obviate the necessity for
the honest developer — and we are concerned with him, as well as the
dishonest developer — to fill out the reams of disclosure material, and
go through the registration and so forth, twice rather than once. What
is your thought on that ?
Mr. MixisH. Well, I think that is a good suggestion, Mr. Chairman.
I think that OILSR should work with the States to eliminate a lot of
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duplication. It is my information that the only State whose property
report is accepted by OILSR is California.
Chairman Ashley. Well, it certainly suggests itself to me that this
might be an area that together we might look at closely. It would seem
to me to be one way of encouraging the States to direct their attention
to this matter in the first instance ; and it* would help to eliminate costly
duplication, which obviously is paid for in large measure by the tax-
payers, be they Federal or State.
Mr. MiNiSH. Well, Mr. Chairman, I agree with you that there should
be cooperation. But I get a little concerned, whether many States have
the interest or ability to do the job. I am reminded, and I am sure
you are well aware of, the meat inspection issue, where some of the
people who were against Federal legislation said that the States could
do it. Then the people who were managing the bill showed pictures in
the Speakers lobby of what thef States were doing. And I think that if
anyone here saw some of those pictures, he would probably be a vege-
tarian from that day on. [Laughter.]
So I question whether the States have the will or the means to regu-
late land sales by themselves.
Chairman Ashley. Well, it strikes me that we might consider
establishing some kind of Federal standards to be met by the States,
at least where there is the duplication and the States don't do every-
thing that OILSR does, because the problem from the Federal stand-
point is broader than that of the States, I suspect. I seems to me that
through the establishment of standards, where appropriate and where
those standards are met, duplication could be eliminated. It would be a
good idea.
Mr. Grassley, any questions?
Mr. Grassley. TTiank you.
Before I ask our colleague a question, I would like to say that I
worked very closely with Mr. Minish on this legislaticm and I think
he needs to be complimented for his hard work. I am the ranking
Republican member and, even though we don't agree on everything, I
find that he has a fine reputation around here, and it has been sup-
ported by my work with him. He probably doesn't need any flowers
thrown in his path, but in all the investigations I have shared the
podium with him, I found him to be very thorough and very extensive,
and a person that can ask fair and penetrating questions to get to the
bottom of things.
So I feel your calling him as a witness is a good place to start the
meeting, Mr. Chairman.
Mr. Minish, I was interested in your discussion concerning Sher-
wood Forest Starting on page 3 of your statement about the Nelson
bill, where you state that it will exempt some of the worst interstate de-
velopers, your testimony deals almost exclusively with that 100-mile
exemption. I was wondering if there was any other problems with that
bill, and specifically, do you have any specific examples related to the
Nelson exemption of where there are other problems.
Mr. Minish. Well, Mr. Grassley, first of all, thank you for your
kind remarks. The think that upsets me most about the bill is that 100-
mile exefmption. Mr. Green, who is from New York City, has a lot
of constituents who could be burned and who would not be protected
under the Nelson bill. And while there are many other problems— I
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don't have the bill before me and I don't know all of the specifics of it —
I would say that that alone is enough information to make you be
against it.
There is the self-executing problem, also.
Mr. Grassley. 'What you could do is, if jrou think of any of the
others, you could submit them to us in writing. I would appreciate
that.
Mr. MiNiSH. I will have my staff provide a siunmary of all the
problems in the Nelson bill.
[The following summary of problems in the Nelson bill was provided
for the record by Congressman Minish :]
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JO«9H a. k.iNIM«. NJ.. CMAIMMAN
BAX.J W. CVAfTt. iNa
JIM K . . rex. TCX.
HCNflV a. OOMlAt.SZ. TKX.
r„AHK ANHUHXK,. .u.. y g HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON GENERAL OVERSIGHT
AND RENEGOTIATION
Boa borrus. stavt MnscToii 0^ -fHC
COMMITTEE ON BANKING. HNANCE AND URBAN AFFAIRS
Nw
WASHINGTON. D.a 20515
August 15, 1978
SUBJECT: PRESET? SIAIUS CF IHE NELSGN PROPOSAL
As you kncwr S. 3084, the Housing and Ocmnunity DevelQpnsnt Anend-
ments of 1978, was passed by the Senate on July 20, 1978 and is now in
oonferenoe. Secticn 715 of this bill oontains the so-called Nelson pro-
po82d %ihich pcovides a niiii3er of new exenptions for developers f ran the
present law. Since the House versixsn of the Housing bill, H.R. 12433,oQn-
tains no land szdes a roenAnents (Chaixinan Ashley chose to defer consideza-
ticn of land s£des unt:il you r^xarted to him on our Subccmnittee's investi-
gation) , one of the nain issues at the conference will be whether tao aooept
any or all of the Nelscn acnendoents. It would be best for us if the con-
ference accepts none of the Nelson land saQes proposals. Our cbjectlons
to the Nelson aroencknents are as follows:
1. Policy Cbjecticns. The investigation which our SidbconiQittae
has pursued has shoMn that large nunbers of consuners continue tao be de-
frauded or disappointed by land developers every year. It is widely a g rood
that the federal law is inadequate to protect lot buyers. OWo bills (cur
proposed, H.R. 12574 and the Carter Adninistration*s proposal) would make
the Interstate Land Sedes Full Disclosure Act significantly tougher, but
neither of those refonn proposcds is included in either of the Housing bills.
Therefore, under the rules of the oonferenoe, the only questdon for
the conferees is %iiether to provide more exenptions to an already inadaquate
law. There is no possibility of getting any oonsuner-ariented aroenAnents
into the final Housing bill. In li^t of the results of our investigation
and the testiimony which has been given at the various hearings held en land
sales, it would be ir responsible for the Congress to make exemptions for de-
velopers the only concern of its legislation. Any land sades a roenckne n ts
should be primarily concerned vdth protecting the public, not with taking
care of developers.
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It shoold be pointed out that sincae lot purchasers have little or
no organized voice in Washingtcxi, the only way to get any increased pro-
tection for them nay be to tie it to changes in the law that the land sales
industry vients. If the Congress accepts the Nelson amendkiiaits by theneelves,
even the possibility of a tradeoff will be non-existent.
2. Procedural Objections. If the conferenoe conmittee accepts the
Nelson proposals, it will be short circuiting the legislative process.
As you ymaa, although two House subocnmittees (ours and the Housing
Subocmnittee) have held hearings on land Bales, there have been no markups
of any of the various proposals for change. No mennber of the House has
voted on any land sales a mendtoents.
The Senate's procedure in adopting the Nelson proposal was disjointed,
to say the least. Ohe ixqpetus for the Nelson bill came out of hearings,
chaired by Senator Nelson, vAiich the Senate Staiall Business Ocmnnittee held in
January of this year. Besides the Office of Interstate Land Sales Registra-
tion of H.U.D. , which administers the federal law, the only other witnesses
were developers or other r^aresentatives of the land sales industry. No
representatives of the lot-buying public testified. Shortly thereafter.
Senator Nelson introduced a bill, S. 2716, which provided a muter of new
exenopticns from the Interstate Land Sales Act. The bill made no attenpt to
deal %KLth oonsuraer problems.
The Nelson bill was introduoed as an aroendnent to the Housing bill
which was marioed up by the Senate Banking Ooninittee in May, 1978. The Senate
Ccmiit^ee deleted the consunner-oriented reforms which were in the original
Carter Adtadnistration proposal and substituted the Nelson bill. The Oonndt-
tee had held no hearings on the Nelson bill prior to aco^>ting it. Hi the
face of strenuous objections by Senator Willicns, the Ocnmittee scheduled
hearings on land sides to be held before consideration of the Housing bill
by the full Senate. At those hearings, a nixnber of witnesses, including
yourself, H.U.D. , public interest groups and plaintiffs' attorneys testified
about the large loopholes vAiich would be created by the Nelson proposeds.
De^ite extensive criticism, only minor changes were made to the Nelson anend-
ments before their passage by the full Senate. Hopefully, the oonferenoe
ccmmittee will decide to reject these ill-oc^isidered and one-sided amendknents.
3. Sifcstantive Objections. Although there may be seme need for
clarification of the jurisdictiion of 0II5R, the Nelson bill goes far beyond
its stated purpose and adds new exaiptions \^ich would apply to sane of the
biggest and worst develofinents in the country. The following is our analy-
sis of several of the Nelson propos2ds.
(a) The 5%-5-lot Exemption. The Nelson bill would amend sec-
tion 1403 of the Interstate Land Sales Act to exenpt frcm its disclosure re-
quirements any developer who sells no mere than five lots or five percent of
his total lots sold during a oalenc3ar year (whichever is greater) to out-of-
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State pucdiasers if the develOEser meets the following xequironentss
i) The land is free and clear of liens and enoidbranoes.
ii) The purchaser makes an on-site inspection of the lot.
iii) The seller agrees to submit himself to the jurisdiction of
the hcxoe state of the purchaser.
This exienption is undesirable for several reasons.
- It is quite complicated, yet it is also self-determining. This
means that the developer himself decides \(«hether he has coRplied with all
the requirennents for the exemption and then merely notifies OILSR that he
is claiming exBn|>tions. If the developer misinterprets sane pert of the
requirements, for exanple, vhat constitutes a "lien** or "encunnbranoe" or
if he makes a mistake in oonputing his out-of-state sedes, OILSR may subse-
quently question his exempt status. If this happeans, all the developer's
S2Qje8 under the challenged exanption may be sijbject to rescision.
- There is no cap on the 5% requirement. Some subdivisions have
veil over 10,000 lots, and thus would be able to sell a substantial minber
of lots to out-of-state residents vdthout being subject to federal disclosoce
zequirements .
- Reliance on on-site inspections. As an alternative to tiie infoc^
mation which is presented in the federal property r eport (the disclosure
statement required under the present Interstate Land Sales Act) , this ex-
en|>tiGn relies heavily on an on-site inspection by the purchaser. However,
most of the truly crucial information about a develoEment cannot be dis-
cerned by merely looking at it. An on-site in^section tells the buyer nodi-
ing about the financial stability of the developer, about whether there is
sufficient water, about %^iether the land is suitable for proper sewage dis-
posed, 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 de-
prived of property reports and who make their on-site inspections in the
ocnpany of high-powered salesmen will be at a decided disadvantage.
(b) Ttie 100-Mile Radius Exemption. The Nelson bill would amend
section 1403 of the Act to provide a lot-oy-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 encunbranoes.
ii) Ohe purchaser makes an on-site inspection.
iii) The seller agrees to sufcmit himself to the jurisdiction of the
home state of the purch2iser.
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iv) Otie developer certifies to OILSR that he has oomplied Kith
the first three requirements.
This is probably the most harmful of the Nelson proposals for miner^
ous reasons.
- Since this is a lot-by^lot exarption, no matter how big oar how
bad a development is, it can benefit from this exeqption. H.U.D. offi-
cials hacve stated that many of the worst developnents in the country would
qucdify for at least partial exaiption under this section.
- Crossing state bount3aries. Ihe Nelson bill pu r par t s to assist
snail intrastate developers, yet many of the prime beneficiaries of the 100
mile exEnnption are neither small nor intrastate. A good exEsiple of tiie prob-
lems with this exaiption is the case of the Pocono Mountains of Pennsylvania,
a primary area for land subdivision in the East. Within 100 miles of the
Pooonos are the metropolitan areas of New York City, Northern New Jersey and
Philadelphia. A circle with a 100-mile radius drawn around a developnent in
the Pooonos thus enconpasses an area of over 31,000 square miles with a po|>-
ulation well in exoess of 20 million people. Under the Nelson bill, any
Pocono developer could sell to any of those people without beijig required to
disclose a thing by the federal law. To cite another exannple, Washington,
D. C. is within 100 miles of many of the developnents in rural Mcuryland and
Virginia. This problem repeats itself throu^ut the country.
- This exemption is self -executing. Therefore, serious problems of
interpretation arise. For example, vho knows exactly how many miles he lives
fxaa any given point? Once agedn, misinterpretation or mistake by the de-
veloper may make him liable to recisions land other penalties.
- This exenption, like the 5% - 5-lot exarption, says that developers
%ito are exenpt 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 iitpossible 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
purdiasers who believe they have been defrauded will be working in the daxk»
The fravd provisions will become an enpty rented/, providing a false sense
of security and little else.
- Like the 5% - 5-lot exarption, the 100 mile exemption relies heavily
on on-site inspections which do not provide a great deal of useful informa-
tion to the prospective purchaser.
(c) Statute of Limitations. The Nelson proposal would amend
section 1412 of the Act to insure that no actJ.on can be brought within more
than three years after the signing of a contract for the sale or lease of
the lot.
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this prevision woald make it even more difficult far disairointed
purcdiasers to assert the rights they have under the present Iem. In our
investigaticn of the land sales industry, one of the most CGrnnon oonplaints
we heard was that people often don't discover that they have been swindled
until 2LEter the statute of limitations heis run out. This is because peqple
ooninonly buy lots on long-tezm installioent oontrcKrts which require trans-
fer of title only after the purchaser has ocqpleted payment, often seven to
ten years after the signing of the oontract. In addition, many purdiaaers
act in reliance upon the premises of developers to install utilities and
other amenities ipany yeeurs in the future. Because of this, neny purchasers
just don't know whether they have a cai2se of action until long after the
three year limit has passed. In recognition of this, several courts hacve
tried to extend the statute of limitations by tying it to the disocvery of
the defect or to the period of the installment oontract. Ohe Nelson bill
would preclude such equitable solutions. Once ag^uLn consumers lose.
(d) Ihe A±ninistrative Procedures Act. The Nelson bill would
amend section 1416 of the Ast to require OJISR to oconply with the Acfadnia-
trative Procedures Act. OUSR already does this by regulation. No one has
been able to explain why this section is in the Nelson proposal.
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Mr. GrBASSLEY. Speteifically, where the point where we were talking
about the exemption, I was thinking, as Chairman Ashlej 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 reluc-
tance 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. Grassuey. 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 in-
volved, 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 Ashi^ey. Mr. Gonzalez?
Mr. Gonzalez. Thank you, Mr. Chairman. I don't have any ques-
tions. 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. Greex. 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 gen-
eral, 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 ar-
rangements you had in mind. Who would be the escrow holders, and
what sort oif 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 percent-
age of the mone^ he takes in to pay for improvements. As the pay-
ment 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.
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Mr. Green. Did you look into whether a performance Ixmd was a
possible alternative?
Mr. MiNiSH. I am advised that our staff looked into corporate per-
formance 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 ask^ 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 Ashi^ey. Yes. It is a form of land contract, I would sup-
pose ; isn't that right ?
Mr. MiNiSH. Yes, it is.
Chairman Asht^y. 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 lie
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 $26 a mmith — and then unfor-
tunately, lost his job after paying for 6 years. He could not pay the $26
a month, and the land reverted, or the land stayed with the developer.
And this individual is out 48 times $26, 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 re-
demption. 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 clos-
ing of the banks. People weren't able to make their pajrments 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.
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Chairman Ashley. There is a different problem when you are talk-
ing 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 lemslation ?
Mr. MiNiSH. Who is? The developers, the ones that sell it.
Mr. Brown. No, no, the developers are not the beneficiaries. I as-
sume that it is aimed primariljr at the purchasers.
Mr. MiNisH. Our legislation? Positively. It is to protect thef
consumers.
Mr. Brown. Now, who are these purchasers? Wlio are these con-
sumers? How do they get into the market in the first place?
Mr. MiNiSH. Well, many ways : Advertisements on TV; they are in-
vited 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
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 the^ 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 so-
phisticated and sharp, the average guy may be snowed ^nder by that.
Mr. Brown. But is the average guy going out to ihe 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. Ajiy
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 doesnt that
require actual onsite inspections in order to qualify for the exemption?
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Mr. MiNiSH. Well, first of all, it excludes everybody within the 100-
mile 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 on-
site. Isn't that true?
Mr. MiNiSH. Right.
Mr. Brown. So therefore, the Nelson bill isn't saying that you can
do it bjr a letter or meeting at somebody's house. You've got to ac-
tually 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? llie
average person doesn't know anything about sewers and septic tanks.
For examplef in Sherwood Forest, they were told that, fine, this is a
beautiful area and we are goinff 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 ffive 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 percefnt 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 de-
velm>er 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 c<Mn-
mittee 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 snould 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.
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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 26, 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 acticm 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 suMivisions 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 1 aw 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 160 lots. But still j 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 beingbumed.
Mr. Brown. But all of the provisons of your law would still be
applicable, apparentljr.
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. Mtnish. Thirty is the absolute right of recission.
Chairman Ashley. Mr. Minish, I thank you very much indeed for
your testimony this mominff. 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 indus-
try conducted by INFORM, a nonprofit organization which conducts
research on the impact of corporations on consumers and the environ-
ment ; 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 HALLOBAN, ON BEHALF OF INFOBH, A
PUBLIC INTEBEST OBOUP, ACCOMPANIED BT 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, full-
time staff of 20, and a subscriber list oi 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 regula-
tory burden on the small, legitimate businessman and of freeing Fed-
eral regulators for more important tasks. But the broadly worded
Nelson provisions go far beyond this goal.
The past historj^ of this industry does not justif^r 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 Com-
munity Development Act.
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I would like, if I may, to tell vou 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. liALLORAN. The impact of the land sales industry is enormous,
but no one seems to know exactly how enormous. The land sales indus-
try is generalljr 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 ranch-
ettes; and the subdivisions, from 5-lot aevelopments 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 concen-
trated in Florida, New Mexico, Arizona, California, Colorado, o^nd
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 accommo-
date 45 to 60 million people. That is more than the populations of Los
Angeles, San Francisco, Chicago, Detroit, Boston, New York, Phila-
delphia, 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 indus-
try 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 thef 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 aavertising — which is generally the purchas-
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er's first contact with the subdivision project. For example, promo-
tional materials for Colorado City, a (jreat Western United project,
promised, quote, "plenty of water," closed quote; and prwninently
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 ijrojected 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 multi-
billion 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 Ashmjy. Yes.
Again, Ms. Holloran, we are about to take leave of your charming
co mpa ny, but we will return.
[Whereupon, at 11 :30 a.m., the subcommittee recessed for lunch.]
APTERNOOX 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. Hallorax. Thank you.
I was talking about Horizon Corp. and some of its advertising.
The Horizon Corp. is selling a project called Rio Commimities in
New Mexico which it advertises as a "carefully planned cluster of
communities growing so rapidly that they seem like a mirage."
A mira^ it may, in fact, be: Thefre are only 800 homes in the 7
communities, despite the fact 170,000 lots have been sold. If construc-
tion 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 con-
tracts 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 con-
tract but, in fact, the contract is not a deed, nor is it similar to a con-
ventional mortgage wherebv the purchaser mav live in a house while
he is pajring for it. An installment contract purcThase agreement doesnt
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 6 or 10 years, at the end of which the company promises
to turn over the land and whatefver 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-
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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
impBcitly 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, elec-
tricity and telephones and adequate draina^.
The problems we uncovered do not end with the lack of basic serv-
ices. 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 hurricaner flood zone, a fact which is not necessarily ap-
parent 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 actual-
ly the opposite — inflated and fraught with hidden and/or unantici-
pated 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
landi special service, district assessments, bond reduction charges, re-
duction 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 pur-
chaser 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 ns 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-
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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 admend-
ment 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 hav-
ing 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 pur-
chaser 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 in-
spection would also be exempt.
In our view these amendments would be devastating to the effective-
ness 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 particu-
larly 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
purc^hasers should consider before making a $5,000 or $10,000 invest-
ment in land.
The developers will argue that the purchaser still has the right to
sue for fraud if there is misreprevSentation, 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 J^mall developers, honest and irresponsible operators. The
larger companies will use elaborate phone and mail solicitation tech-
niques. 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.
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INFORM h-as examined the property reports and consumer protec-
tion laws of five States which do already attempt to regulate this
industry. Without exception the State property reports are less com-
plete than those prepared imder 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 ac-
cepted the Federal report m 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 sjrstem, 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 deregu-
lating 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 thef Office of Interstate Land Sales Registration
issued a set of proposed guidelines which outlined exactly what had
been proposed oy Senator Nelson, exemptions for small developersi
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 protec-
tions 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 de-
veloper more than 3 vears after signing a contract, regardless of
whether he has received a deed.
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Such a law would make it impossible for mo^ of the consumers in
a majoritjr of the subdivisions we studied to bring any^ kind of legal
action a^inst 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 nis
promises in year 10. l^o mandate that the statute of limitations runs
out in year 3 is, in effect, taking away the purchaser's right to sue be-
fore 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 pressinjg 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 spe-
cific 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 im-
plicit part of the product purchased in the subdivision. The Minish
bill in specifically providing for the escrowing of moneys for prom-
ised 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
{)urchaser does not have the use of the land while he or she is paying
or 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 addi-
tion 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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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 prevalefnt
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-expense-
paid weekend in Florida to see a very large subdivision called Lehigh
Acres.
There they made a downpayment and signed their installment con-
tract 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 OILSK regulations,
which gives only very sketchy information on these issues.
Lehigh Acres was not one of the projects which we studied in de-
tail, so I could not give her detailed answers to her (questions, but from
the description of the sales operation and the location of the subdivi-
sion, 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 momin^g
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 some-
thing for nothing in real estate. She deserves to have, as Congressman
Minish proposes, 30 days in which to talk to knowledgeable individ-
uals, 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 de-
serves to have money escrow to guarantee the completion of improve-
ments, and she deserves to receive a Federal property report.
We strongly urge you to oppose the Nelson amendments in confer-
ence, amen£nents which would take away the property report for
thousands of consumers, because consumers need the property report
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and because the administrative regulati<ms 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 administraticm 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, fol-
lows:]
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TESTIMONY OF JEAN HALLORAN
RESEARCH DIRECTOR, INFORM
. ACCOMPANIED BY LESLIE ALLAN
before the
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON HOUSING
on
Interstate Land Sales Regulation
August 1, 1978
INFORM
25 Broad St.
New York City 10004
212/425-3550
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My name is Jean Halloran. I am Research Director of INFORM
and the editor of INFORM* s three- volume study of the retail land
sales and subdivision industry entitled PROMISED LANDS. With me is
Leslie Allan, primary author of PROMISED LANDS .
By way of background, I would just like to say that INFORM
is a nonprofit public- interest research organization that studies
the impact of business on society. We have a permanent full-time
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
five years.
Our primary finding has been that the land sales and subdivision
industry is rife with consumer abuse; that 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
Congressman Minish's effort to reform the Interstate Land Sales Full
Disclosure Act is a vital step forward, a step which could save
ordinary people millions of dollars. For the same reason, we are
extremely dismayed to see Senator Nelson's bill, which would exempt
vast nuirbers of developers from what little regulation new exists,
progressing through the legislative process. Wc understand and in-
deed support the goal of reducing the regulatory burden on small
legitimate businessmen and freeing federal regulators for more inpor-
tant tasks. But the broadly worded Nelson provisions go far beyond
this goal. The past history of this industry docs not justify such
loosely drawn exeirptions, nor does it justify the hasty consideration
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given the Nelson a mendm en ts by the Senate Banking Comnittee prior to
substituting them for the Administration proposals in the Housing and
Conmunity Development Act of 1978.
I would like, if I may, to tell you some of what we found in
our research, and then discuss specifically how this relates to the
various legislative proposals on land sales you have before you today.
The iinpact of the land sales industry is enormous, but no one
seems to know exactly how enormous. Existing fragments of descriptive
data only suggest the broad features of land sales activities.
The land sales industry is generally defined as consisting of
companies engaged in selling lots in subdivisions. The companies
range from mom-and-pop affairs to multi-million-dollar corporations
traded on the stock exchange. The lots range from 1/8 acre "townhouse"
lots to 40 or 50 "ranchettes ; " and the subdivisions from 5- lot develop-
ments to 200,000 lot "planned new communities." Since 1969, companies
selling lots of less than 5 acres in size in subdivisions of over
50 lots in size must file with the Federal Office of Interstate Land
Sales Registration. Alan Kappeler, of OILSR, estimated in June of '76
that approximately 6200 individual subdivision projects are registered
with his agency. The President's Council on Environmental Quality
has found that most developments registered with IIUD arc relatively
large, averaging about 1,000 acres, and that most of the lots marketed
are relatively small, about a quarter-acre to one acre.
Another analysis of OILSR's filings indicates that there arc
subdivisions registered in all states except North Dakota and Rhode
Island, and that the most subdivision activity is concentrated in six
states: Florida, New Mexico, Arizona, California, Colorado, and Texas.
However, OILSR's filings may be very incomplete. For example, it had
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315 projects registered for Colorado, while the Colorado Real Estate
Coninission had 1,000 projects registered. Similarly, OTLSR shows half
a million acres subdivided in California, while California's Department
of Real Estate shos 2-1/2 million acres subdivided. Frankly, we have
been unable to come up with an adequate explanation for this discrepancy;
whether it reflects the existence of many federally unregistered
subdivisions or whether it reflects simply poor or inadequate record-
keeping.
Considering both state and federal information, one industry expert
Estimates that the total standing stock of lots subdivided in this
country covers 35 to 40 million acres of land. This amounts to 62,000
square miles, which is about 2 percent of the continental United States.
Assuming three residents per subdivision lot, this land could acconinodate
45 to 60 million people. That is more than the populations of Los Angeles,
San Francisco, Chicago, Detroit, Boston, New York, Philadelphia, and
Washington, 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 mid 1970 's did cause a precipitous slide in industry
volume. However, a survey conducted by the American Land Development
Association indicates that sales are on the upswing. The industry seems
to be riding on the shirt-tails of the current real estate boom. Of 163
conpanies surveyed, 78t had better sales in 1976 than 1975, and most
were planning new projects.
Most observers agree that since 1969 OILSR and the FTC have had a
chilling effect on some of the most flagrant abuses conducted by the
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very largest companies. Yet OILSR continues to receive about 3000
consuner complaints a year, as it has for each of the past six years.
The land sales industry has historically gone through boom- and -bust
cycles and will undoubtedly continue to do so, particularly if it
remains relatively free from substantive government regulation.
INFORM has studied in detail a sample of companies and sites
which represents the various aspects of the/^ industry in the states
with the most widespread land sales activity. They are old and now,
large and small, and in varied terrains. They are marketed by the
largest companies, who should be the most responsible.
CXir primary finding was that the industry is in radical need of
reform. Problems begin with the representations made in advertising,
which is generally the purchaser's first contact with the subdivision
project. As an example, promotional materials for Colorado City, a
Great Western United project, promised "plenty of water," and promi-
nently featured a photograph of a lushly flowing Greenhorn Creek; yet,
the subdivision has the legal rights to only enough water for, at best,
a tenth of its projected population.
Similarly, Palm Coast, ITT's huge, 100,000-acrc project in
northeast Floraida, was promoted as "not mi ordinary development." Full
page ads stated, "Only the immense resources of a giant organization
like ITT could build a conimjnity of this scope." Yet, at Palm Coast,
development is being financed not by the multibillion dollar ITT
Corporation, but by a subdivision subsidiary so small that its assets
are not listed separately in ITT's annual report. The water supply for
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the project has been in question since its inception, and it was only
the corabined efforts of the Federal Trade Comnission and several Florida
agencies that managed to rein in this massive problem.
Again, Horizon Corporation is selling a project called Rio
Commmities in New Mexico, which it advertises as a "carefully planned
cluster of coninunities growing so rapidly that they seem like a mirage."
A mirage it may in fact be: There are only 800 homes in these 7 connunitics,
despite the fact that 170,000 lots have been sold. If construction at
Rio Comnunities continues at its past rate, Rio Coirmunitics will not be
fully occupied in less than 3600 years.
The second major problem we uncovered is the installment contract.
All 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 installment contract is
not a deed. Nor is it similar to a conventional mortgage, whereby a
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 five or ten 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 payments for the lot, he in most cases will
forfeit everything, both lot and all prior payments. Should the company
go bankrupt in the course of the ten years and be unable to provide
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promised inprovements , there is usually little the purchaser can do.
Finally, the contract is often used by the developer as a source of
revenue, either as conmercial paper discounted to a bank, or as collateral
for loans. The holder of the paper is not necessarily liable for the
developer's obligations.
We also found abuses in terms of the product that the land sales
conpanies are selling. All of the companies we looked at sell lots
either implicitly or explicitly as homcsites or as investments; yet,
all too often they do not provide the basic services that make the lots
usable and saleable.
INFORM found that only 5 of the 19 projects we looked at had most
necessary basic services such as water supply, sewage system, electricity,
and telephones, adequate drainage available. The others lacked these
services, do not guarantee installation by the time the purchaser has
paid for his land, have not set aside any funds for installation, and
do not offer a refund if land is not usable.
This can prove very costly to purchasers of lots in these comminitics.
At Rio Conmunities, for example, if a purchaser wants to use his plot of
sparsely vegetated desert grassland, he has to pay up to $11,000 for a
well, a septic tank, a radio -telephone, and a generator; or he can pay
local utilities up to $12,000 a mile to extend electricity and telephone
service to whatever part of this vast 400 -square-mile site he is located
in; or he may be able to trade the land for a lot in the core development
area. However, there are no guarantees that any land will be available
for trade, and to get it he will have to pay considerably more money and
he will have to build immediately. His original lot, which he has paid
SS-71t O . 711 . 7
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for over 10 years with 30 percent interest, is virtually useless, except
as an option to buy a conventional home on a conventional -mortgage basis.
The problems do not end with lack of basic services. The condition
of the land itself is often 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 as an example, are in the coastal
hurricane flood zone, a fact which is not necessarily apparent to the
naked eye even during an on-site inspection. Lake llavasu City, located
in the dry and barren Arizona desert, has experienced flash floods in
which three people died. Many California subdivisions are in earthquake
zones .
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 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 ranged from $1000 to $60,000. On top of this, purchasers must
pay a finance charge of 4 to 9 percent annually, which adds $200 to $28,000
to the price. They must also pay property taxes, although they do not
own the land; special service district assessments; bond reduction
charges, recreation fees, property owners' association dues; and often,
imfirovemcnt fees or betterment fees. At the sites we studied these
additional charges added up to $26,000 to the lot price over ten years.
In the end, the purchaser usually receives a bad bargain. We
polled local realtors to see if any of the lots were an adequate
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investment. We found that at virtually all of the projects, lots can
be resold only at hardship prices, that is, at less than what the
purchaser initially paid. At several of the projects local realtors
reported that it was virtually iinpossible to unload a lot at any price.
The problems I have described do not respect state boundaries.
They-endemic to land sales transactions conducted in the absence of
substantive regulation. They are as likely to occur if the subdivider
is on the eastern shore of Maryland selling to Baltimore residents, in
the Poconos selling to Philadelphians, in the Nassanutton Mountains
selling to Washington Suburbanites, or in northern Wisconsin selling
to Milwaukee residents, as they are if he is in New Mexico or Florida
selling to New Yorkers.
If the problems of consumer abuse are so endemic to the industry,
the question arises then as to what the existing laws do. To answer
this question, INFORM analyzed the laws of five states which are the
sites of intense subdivision activity and a sixth state, New York,
where many of the lots are marketed. We also analyzed the laws of the
Federal Government. We found out that regulation of this industry is
not adequate. What little protection now exists is embodied in the
Interstate Land Sales Full Disclosure Act. This Act requires sub-
dividers to register with OILSR, and to prepare a property report
disclosing important information to consumers. It also gives purchasers
and the government the right to sue for damages on the basis of mis-
statements of fact in the statement of record or property report.
Beyond OILSR' s registration and disclosure requirements, only
20 states have their own laws requiring subdividers to issue property
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reports to lot purchasers. And only a very few states
actually have substantive regulations to require a central
water system, for example, or escrowing of funds for refund
purposes.
Both INFORM and the President's Council on Environmental
Quality, which has also studied this industry, found disclosure
to be inadequate protection for consumers. But, weak as it
is, it is a vital and necessary minimum.
I would now like to turn to the various legislative
alternatives pending before this Committee. I would like to
start with the Nelson amendments, which are 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
give consumers a Property Report, although the companies could
still be sued for fraud under the Interstate Land Sales Full
Disclosure Act (ILSFDA). Companies marketing to residents of
the same state would be exempt. Companies marketing to
people who live within a 100-mile radius of the subdivision
would also be exempt, provided the lot purchaser has inspected
the lot before buying. Finally, companies selling lots having
certain kinds of basic services, who deliver a deed, who do
not use elaborate sales techniques, and who require an on-thc-
lot inspection would also be exempt.
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In our view, these amendments would be devastating to the
effectiveness of the Office of Interstate Land Sales Reg-
istration, 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 a land sales company to operate virtually un-
regulated in a 31 ,400-square-mile area, is particularly
dangerous. Its impact in the Northeast would perhaps be
the most serious. There, an unscrupulous land sales operation
in the Poconos would have the entire metropolitan area to
market to, since a 100-mile line drawn around the Poconos
includes New York City, all of New Jersey and Philadelphia.
With this huge market to approach, it is very likely that
an exempt land sales operation could sell thousands of lots
and do millions of dollars of business a year in interstate
commerce, using high-pressure sales tactics--the very type
of abuse which the ILSFDA sought to address ten years ago.
Without a Property Report, with only a site visit and a sales-
man's pitch to go on, purchasers will 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 a purchaser 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 an misrepresentation. But
without a Property Report, a purchaser has very little in the
way of documentation on which to base a suit.
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An exemption for land sales companies operating intrastate,
thought perhaps not quite so blatantly contrary to the intent
of the original ILSFDA 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 a least partly
because state legislatures felt the federal government was
handling the problem. Thus, if the Nelson amendments become
law, the intrastate sale of subdivision lots would be totally
unregulated in over half of the states in the country. Those
states would have to establish their own state agencies to
take over the registration and disclosure tasks now handled
by OILSR. They will have to set up 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 of the states which do already attempt
to regulate this industry. Without exception, the state property
reports are less complete than those prepared under current
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federal requirements. The federal OILSR now provides an
extremely useful, helpful and important service to the states
which should not be taken away.
Even the third Nelson exemption, designed to exempt
subdividers who have installed all basic services and are
delivering a 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 underwater half the year, is omitted from the
list of services which must be completed in order to obtain
the exemption.
The Nelson amendments were proposed in the guise of helping
the small businessman. We feel that the three types of
exemptions in these amendments open the door for vast consumer
abuse by deregulating not just small businesses but large
businesses as well. Were there a cap on the size of all these
exemptions — limiting them to projects of perhaps less than
250 lots, thus truly designing this bill for the small businessman-
our concern would not run so deep. The amendments as drawn,
however, contain no such limitation.
Most important, the need for statutory exemptions for
small developers may now be moot. About a month ago, OILSR
issued a set of proposed regulations pursuant to ILSFDA which
outline exactly what has been proposed by Senator Nelson-
exemptions for small developers. However, these exemptions,
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unlike the Nelson provisions, are very carefully drawn to
separate the large developer from the small, the sound from
the unsound, and the responsible from the irresponsible.
Among the exemptions which OILSR proposes are the sale of
lots to other land sales companies, sale of lots to builders,
sale of lots in large subdivisions where there are less than
12 sales a year, sales in projects of less than 150 lots if
the marketing is entirely local (as carefully defined by the
agency), and sales in subdivisions of less than 300 lots
which have all basic services, deliver a deed to the purchaser,
and do not use installment contracts. This last exemption
is similar to the third exemption in the Nelson bill. Yet
because the OILSR version is carefully drawn, we favor it.
Because the Nelson version has clear loopholes, we strongly
oppose it.
In general, we feel that OILSR' s approach, establishing
exemptions for small developers based on the character of the
subdivision, is far preferable to the blanket approach of
the Nelson bill. We feel OlLSR's regulations take adequate
stock of the needs of the consumer while trying to lighten
the load of the small operator. It is our sincere hope that
these regulations, pending now for a year and a half, will
soon be made final. These exemptions would ease the burden
of small, legitimate developers without establishing huge
loopholes in the existing law.
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I would also like to mention one last 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 three 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
subdivider 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 ten
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 Three, whether the subdivider will fulfill
his promises in Year Ten. To mandate that the statute of
limitations runs out in Year Three 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 fell, 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 have come across in our research. The Minish
bill would give OILSR specific authority to set standards for
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advertising.
I have also described 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
real estate experts, read the property report thoroughly,
and if necessary get a refund of his or her downpaymcnt
(usually at least several hundred dollars). The Minish
bill would guarantee consumers a 30-day cooling-off period.
As I have noted, the basic services that make lots usable
are implicitly part of the product purchased in a subdivision,
and the costs of these improvements are generally reflected
in the purchase price; yet neither federal law nor any of
the six states we studied provides for a purchaser to receive
a refund if the developer fails to provide promised services.
Further, given the long installment contract period,
escrowing of the cost of promised improvements is especially
necessary; yet of the six states that we studied, only
Florida addresses this question at all. In that state,
contract payments for promised improvements must be escrowed,
but only if refunds are promised in the purchase contract.
A number of states do require, the posting of corporate
performance bonds to guarant^i^ these promised basic improvements,
but this is inadequate protection. These bonds are backed only
by the assets of the corporations and are worthless in the
event of a bankruptcy. Florida required the GAC Corporation
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to post a total of almost $62 million in corporate performance
bonds for only two of its subdivisioas . It also required $2.5
million in surety bonds, backed by a third party. When the
company declared bankruptcy, the $62 million worth of
corporate performance bonds were virtually useless.
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 in an area of heavily documented
abuse.
Addressing the problems created by the installment
contract itself is a difficult task. As T noted earlier,
under this form of sales agreement the purchaser docs not
have the use of the land while he or she is paying for it
and is as.sured no refund if he defaults on any payments.
This highly inequitable arrangement, which all too often
lot buyers fail to understand until they have sunk thousands
of dollars into the deal, can impose severe financial hardships.
The Minish bill would ameliorate the problems created by
the use of installment contracts in several ways. First, it
would give purchasers a three-year cancellation period in which
to revoke contracts and receive a. refund, unless they are
given several important protections, including immediate
transfer of title, equity while making payments, and partial
refunds in the event of a default. This in itself would be
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a definite benefit. Whether providing a three-year can-
cellation period would have the important secondary impact of
reducing the commercial paper value of the contract so that
companies would stop discounting it or using it to obtain loans
is more questionable. However, based on our knowledge of the
industry, this provision would certainly have a chilling
effect on the companies' reliance on discounted contracts
as a source of immediate cash, and thus on the use of install-
ment contracts themselves.
The Minish bill also extends the statute of limitations
under which purchasers can sue a subdivider for fraud. INFORM
believes, however, that instead of the seven years proposed,
that a more appropriate period would be 10 years. As I stated
earlier, most of the subdivisions we studied offer lots on
10-year installment contracts and the land sales company's
obligations often do not come due until the end of the contract
period. Ten years is also the statute of limitations under
standard real property law.
Were we at INFORM drafting legislation, wc would prefer
a law which set forth rigorous conditions that would have to
be met before any land could be registered for sale. 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, lot prices
which have been determined to be fair, just and equitable
(as is the law in California for out-of-state offerings), and
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at least partial refunds to any purchaser who defaults on an
installment contract. On balance, however, we feel the
Minish bill goes a long way toward protecting consumers
against 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.
The woman and her husband had just sold a small family business
and had been looking for some place to invest the proceeds,
about $9,000. They thought of land, and accepted an invitation
for an all-expenses-paid weekend in Florida to see a very
large subdivision called Lehigh Acres. There they made a
downpayment and signed an 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 became concerned about 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 prices of comparable lots on
the resale market. She had received only the Florida Property
Report, which is permissible in cprtain situations under
current OILSR regulations, which gives only very sketchy
information on these issues. Lehigh Acres was not one of the
projects which we studied, so I could not give her detailed
answers to her questions; I could only refer her to people who
could. But from the description of the sales operation, the
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location of the subdivision--in one of the most over-sub-
divided sections of the state--and what I knew ot similar
projects, I feared the worst for the future of the lot as
an investment. I think this woman was concerned enough
that she would go out and get the answers to her questions.
If she did find that the land was a poor investment, she at
least was only at the beginning of her contract payments,
and so would lose only the $700 or so she had given over
as a downpayment if she decided better of the deal.
My point, here, however, is that this woman and thousands
like her deserve more protection than they now get. Like
most Americans, she is a decent, basically trusting person.
She is not unintelligent, but she does not operate on the
assumption that others are out to cheat her, 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 about
her purchase, and if she discovers problems, receive a
refund. If she is paying on an installment contract which
gives her no equity in the land she is buying, she deserves
three years to cancel and get a refund. She deserves to have
money escrowed to guarantee the completion of the basic
services to the lot, 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
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report for thousands of consumers--because consumers need
this protection 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.
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Chairman Ashley. Well, we are very grateful to you for excellent
testimony which will be extremely helpful to us in the days aheacL
Let me ask you a little bit about INFORM, which you describe as a
nonprofit, public interest research organization that studies the im-
pact of busmess on society.
Who funds INFORM?
Ms. Halloran. It is partially foundation funded and it is partially
self-supporting from sales of publications and reports.
Chairman Ashley. And you indicate that you have a subscriber
list of over 100 major corporations, institutions, and Government
agencies.
Do these contribute to the support of INFORM ?
Ms. Halloran. Yes. We have a sliding scale of subscription rates,
ranffing from $25 for individuals up to $500 for large corporations.
Chairman Ashley. Is ITT on your list ?
Ms. Halloran. No, it isn't, although General Development is.
Chairman Ashley. I should think it would be worthwhile for them
to be on your list.
Ms. Halloran. Well, I would think so.
Chairman Ashley. Is there any way of getting at the instances of
fraud or deceptive practices and quantify it in any meaningful way?
Ms. Halloran. I can't think of one offhand.
Chairman Ashley. I mean your methodology has been to focus, and
understandably so — I think it is a perfectly sensible methodology —
to focus on 18 or 20 different-sized land development companies and
corporations and to bring under a magnifying glass the nature of their
operations.
And that, of course, gives us a body of information which we other-
wise would not have. It is enormously valuable to the Minish sub-
committee and to the Congress generally. We are often faced, of course,
and will be in these hearings, with the assertion that the instances
of fraud are blown out of proportion and there won't be any substan-
tiation of that, I suspect, in that it is extremely difficult ior you to
quantify the instances of fraud and deception.
All that can be said, I take it, is that we know that it does exist and
it exists with some degree of regularity.
Ms. Halloran. I suppose one coula set up a group of investigators
and send them out to listen to sales pitches. We did a little bit of that
at INFORM on a spot basis, and I can report to you that at the one
land sales dinner that I went to, a salesman blandly assured me that
there was skiing at a subdivision in New Mexico in the middle of the
summer.
When I indicated that I was interested in skiing, that happened to
be the one dinner I went to — if you wanted me to think for the record
of a possible method of quantifying this better, I would be glad to.
Ms. Ali^n. I think, in addition to trying to quantify actual exam-
ples of fraud, it would be possible to at least document a lot of the
cases of dissatisfied consumers because while we were doing our
research, we found in virtually every State office, as well as the OILSR
office, boxes and boxes and boxes of letters. And whether each of
these letters is a documentable fraud may be questionable, but in point
of fact, they are a definite sign of some communication problem
between the Durchaser and the salesman.
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Chairman Ashlet. Ms. Hynes, I did not mean to proceed without
hearing from you, and inasmuch as you are an assistant U.S. attorney
from New York and have devoted considerable time to the subject
area, give us the benefit of your thoughts at this time if you would.
STATEHEHT OP PATBICIA H. HTNES, ASSISTANT U.S. ATTOBHET,
SOUTHEBN DISTRICT OF NEW TOBK
Ms. Hynes. I would be happy to. Just in response to your last
Juestion about whether we could quantify the fraud, in the case that
investigated and prosecuted, which was the Rio Rancho case, this
was a very large developer located in New Mexico. That particular
subdivision, Rio Rancho, was located in New Mexico. AMKEP is the
parent company and has other subdivisions.
Our criminal prosecution focused on the Rio Rancho subdivision
in New Mexico, which was the largest 91,000 acres. The basic selling
device and technique used there was to take these 91,000 acres, sub-
divide it into lots, sell off these raw unimproved desert lots as a safe
and sound financial investment.
That was the primary thrust of the sales pitch. That was inherently
fraudulent and there were many other large developers who had vast
tracts of lands, and I am really now talking about the really large
developers, with 100,000 acres and more, who sold off subdivided lots
as safe and secure financial investments which could be resold at a
profit
When you are talking about quantifying fraud, that type of opera-
tion is inherently fraudulent because when you are selling a sub-
divided lot, one of several hundred thousand lots, as a safe and finan-
cial investment, a subdivided lot in that situation is not an investment
vehicle as these companies well knew. There was no resale market for
the lots. There wasn't over a period of 15 to 20 years. And there is
no resale market today for those lots.
So when you deal with that type of sales practice, which was
prevalent in the sixties on into the seventies, and when we brought
our criminal prosecution against Rio Rancho Estates and showed them
that we meant business, that that was a fraudulent operation and a
fraudulent way of selling land, I think, and at least I hope that the
practice, if it has not stopped, it has at least made serious inroads
into that type of sales operation.
But let me just give you some of the background of the Rio Rancho
prosecution.
The company bought 54,000 acres of land in 1961. It paid $178 an
acre for this land. They probably overpaid at that, but they paid $178
an acre.
They began to subdivide it and sell it off throughout the country.
The sales effort was very successful. They sold through the mail in
tlie early sixties and they started to advertise on radio. Then they
started these dinners, which were a huge success. They would get
people into a room, offer them a free chicken dinner. It escalated to
a steak dinner at some point, and they made money.
They increased the sales price of the property, the property that
they bought for $178 an acre. At the time we filed our indictment in
1976, it was being sold for up to $12,000 an acre — raw, unimproved
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desert land. They had not done anything to that property other than
blade in a dirt road.
They started these sales dinners in the midsixties. You would get
salesmen up at the front of the room and it was a real hustle operation,
high pressure sales. Get them to sign the contract that night— they
could not even leave with the contract and think about it overnight*
They had to sign it that night.
There were followup calls the next morning to deal with buyers'
remorse. It was just a tank operation. They were rolling down the
avenue and these people were just right in the middle being mowed
down. And the sales training manuals had it down to a science and
you had to follow the practices of the company.
And you would get — at that dinner, there would be salesmen who
would be jumping up calling holds on property. The whole idea was
to create this enthusiasm and to get people to Wieve that they were
getting in on the ground floor.
Representations were made in sales literature that this land was
increasing 25 percent a year. And basically, it was geared to the blue
collar, unsophisticated buyer, although I will tell you, there were scMne
professionals, some lawyers and accountants and do<iors who fell for
it as easily as the blue-collar worker. But primarily, it was geared to
the blue-collar worker.
New York City was a huge marketplace for this sales effort, as
other cold climates were as well, but New York was their primary
market.
When the salesmen got the couple at the table, did the high pitch —
they saw the films, were told in their advertising literature that they
could make 25 percent a year as a financial investment, the sale wais
made.
In Rio Rancho, the evidence at trial showed that the company,
while they represented themselves to these purchasers as community
developers and you will hear a lot of talk, I am sure, from the land
companies who will talk about themselves as being land developers
and community developers. I disagree when you deal with really the
large ones because they are not community developers; they are land
subdividers. They have a small community as a secondary effort which
aids their sales effort in selling off the subdivided lots out in the
boonies. But their primary business is subdividing and selling raw,
subdivided lots.
They are not community developers.
Now when a person bought the land, he was told that it was a safe
financial investment and could be resold at a profit because there would
be a demand for it.
Now in the Rio Rancho situation, they were told that Albuquerque
was bursting at the seams and could only grow through that property.
Now there is another large subdivision outside of Albuquerque to
the south, 40 miles, who gave the same pitch, only it says that Albuquer-
qxxe is bursting at the seams and can only grow south, and that is why
it is a good, safe financial investment. And we are talking about Hori-
zon Corp., with 170,000 lots sold off, mostly to people out of State.
The Rio Rancho subdivision sales amounted to $170 million. Now I
mentioned that the land that they bought in 1961 was bought for $178
an acre. Ten years later, 1971, they bought another 37,000 acres of land
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which adjoined their prc^rty. They bought that for $180 an acre.
Ten years later, $2 more an acre. I mean that wasn't even abreast with
inflation. And they were selling it to the public as a safe financial
investment that was appreciating at 25 percent per year.
Well, it wasn't appreciating even $2 an acre over 10 years for the
company to buy the next 37,000 acres of that land.
Now they were successfully prosecuted on the theory that that land
was not a ^e financial investment and they knew it, and they misrep-
resented the facts.
Now AMREP and Rio Rancho came back and said, "But we have a
community out there and we are building homes." Well, the evidence
at trial showed, we found an internal management report, a report that
was done for management, the management of Rio Rancho and
AMREP never believed that more than 5 percent of the people that
they sold land to would ever move to that property, and that was their
basic operating premise.
So they set aside, and this is really how the very large subdividers
operate, and this is what you have to be very careful about, they set
aside a piece of land which this company owned — ^they don't oflfer
it for sale nationwide. And they will put some utilities in that land
and they will say to that 5 percent or less who want to move to the
property, we will take one of the lots out in the boondocks and exchange
it in and you can move into our building area and you build a house
and you've got water, electricity and you are happy and we are happv.
That person is happy if he only bought one lot because he can only
exchange one lot and build a house. If he bought 10 other lots for his
financial investment, he is not happy. The company is happy because
he then takes — ^they then take that small area, put it on film and use
it at their sales dinner and say, "This is what we are going to do to the
entire property."
Well, they are not. They know they are not. They don't have the
capability l)ecause they've sold off the rest of the land to people in 37
States.
In the Rio Rancho case, they sold off 77,000 lots to 45,000 purchasers
in 37 States, for a total sales price of $170 million. They paid a total
of $18 million for that land and sold it for $170 million.
Now what you really have here in terms of trying to protect the con-
sumer, when we come back to what we learned, having had this statute
on the books for 10 years, I think that we have leamSi several things.
One, that the problem of fraud in the land industry is with us. It has
been, it continues to be, and something has to be done about it.
We have learned lessons, we have taken some steps forward, but there
is still much to be done.
One, you've got to enforce the law and I say in appropriate cases,
you have to bring criminal prosecutions. That is the strongest deter-
rent to a land developer or a land subdivider, to be (Hi notice that this
is taken seriously, that he faces possible criminal jail time if he is going
to violate the law and defraud the public.
Now the idea that there is a sucker bom every day, I probably would
agree. But it does not give you the right to go out and to just steal
from that person.
In addition to really effective enforcement of the laws, I think that
the laws must be strengthened. The Interstate Land Sales Act needs to
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be strengthened in very precise ways, many of which are covered in the
Minish bill.
For example, the escrow situation. In the Rio Rancho case, they ad-
vertised themselves as a master planned community and the invest-
ment value of these lots was supposed to c<Hne f nwn the fact that they
were going to place utilities in the land that you are buying. You were
paying for it, God knows, I mean you were paying $6,000 to $12,000
an acre because you thought you were going to get utilities.
Well, it turns out you don't get utilities umess you want to build
a house, and if you want to build a house, you don't build it on the land
that you bought ; you have to go into the company building area.
And to add insult to injury, you pay more to ^ into the company
building area because it is a nice lot. It sure is. It is the (mly place you
can build.
So you get to the situation where if you had the companies required
to place money in escrow for those utilities, that would go a long way
toward preventing fraud.
Now when the developers come in and say to this subcommittee, we
can't do it because it is too expensive, then I say look very closely at
what they are telling the consumer.
If they come into this subcommittee and say, we can't do it because
the bond is too expensive and a bonding company thinks it is too
risky, then I say if it is too risky for a bonding c<Mnpany , then it is too
risky for the consumer and the consumer should not be in the positicMi
of having to buy that lot without any protection, believing the pitch
that the company is making to them.
Now if the company is going to start making promises about utilities,
which is really the situation that is covered in Congressman Minish's
bill, if they are going to say they are going to put utilities in, then the^
have to put the money behind them, what they are saving, because if
you had a situation in Bio Kancho, if their advertising was true, if
there was going to be a demand for these lots, then Bio Rancho could
have slowly placed the utilities in those lots and sold oflf those lotR
and made a profit.
If Albuquerque was, in fact, bursting at the seams and there was no
place to grow, except through their property, they could have made the
money. Those claims were not true.
So I say that for a developer who is not able to put money in escrow
to back up his promises, then we had better be very careful about what
he is selling and what he is promising to the consumer public, because
if it is a legitimate operation, if there is the demand there, and if that
situation is going to be that the utilities are going to be in place, there
should be a situation that can be worked out where there will be finan-
cial protections for the consumer who is buying that property.
The second thing that I think that we really have to deal with in
terms of these selling efforts, if now everyone is buying land or sub-
divided lots at these sales dinners or through the mails or through these
mass marketing techniques, is that we absolutely need a cooling oflf
period.
Now whether it is the 14-day cooling off period proposed by HUD or
the 30-day cooling off period proposed by the Minish bill, a basic mini-
mum has got to be the 14-day.
I think that the longer period of time, the better.
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But when you give a purchaser a property report, you cannot expect
any purchaser to absorb and intelligently understand the information
that IS in that property report whenTie is given the property report and
asked to sign a contract the same evening.
So we absolutely need the cooling off period.
The other situation that really must be addressed by this subcommit-
tee in terms of making the Interstate Land Sales Act effective is the
statute of limitations.
In the Rio Rancho case, we had a criminal conviction affirmed on ap-
peal. There were class actions brought immediately after the indict-
ment was filed. However, the indictment was filed m 1975.
Under the HUD statute as it is presently on the books, there is a 8-
year statute of limitations which meant that only the people who had
bought the land in the last 3 years had a right of action to be included
in that class, even though the entire — actually, the class was composed
of all the purchasers ¥mo bought that land as a financial investment.
Most of them were cut out of the class because of the statute of limi-
tations.
I would say that in a fraud situation, there is no reason to have a
cutoff point where you are excluding from the class of defrauded pur-
chasers people who bought their land 5 years earlier or 6 years earlier or
7 years earher.
In a fraud situation, if you have a provable fraud, there is no reason
not in include in that class all of the defrauded victims, regardless of
the statute of limitations.
But to start arbitrarily saying 3 years after you buy your prop-
erty, you have no right of action is really a serious abuse. And I
would agree with the comments of Ms. Halloran from INFORM, that
it really is, not only is it not a protection, but it cuts off substantial
rights of the consumer, particularly in a fraud case.
Chairman Ashley. Do you have any judgment as to whether or not
the regulatory and the enforcement functions should be separated?
Ms. Htnes. I don't know whether they should be separated. I cer-
tainly think there has to be more done in terms of enforcement, in terms
of the Rio Rancho case that was developed through a grand jury. There
were very substantial benefits to proceeding in that way.
Chairman Ashuey. Well, who referred that case to you ?
Ms. Hynes. No one referred it to me.
Chairman Ashley. It did not come from the FTC did it ?
Ms. HynbJs. No. I started it. It was a situation where I was chief of
the consumer fraud unit in the U.S. attorney's office, and I was look-
ing for areas where there was not enough, where there was a Federal
problem, but that the Federal Government had not done anything.
You find many agencies that are charged with enforcement. Few in
the larger white-collar cases really don't get involved, and it is more
appropriately handled through a grand jury, so I began the investiga-
tion into the AM REP case based on a survey of trying to find out what
were the problems of consumers in the New York area and what was the
largest category of problems, and I found out that land was one of
them.
Chairman Ashley. What you are really saying is that neither HUD
nor the FTC nor the SEC referred that particular case to you.
Ms. Hynes. That's correct.
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Chairman Ashley. Have they ever referred any matters to you!
Ms. Hynes. Right now we are workinff with HUD jointly in an in-
vestigation that we had initiated and asked them to come in and help
us with; in terms of specific referrals, I would have to say no. But 1
think that the enforcement effort has to be shouldered, perhaps Iqr other
law enforcement offices, such as the U.S. attorneys' offices.
Now, the Southern District of New York where I come from is a
very large office, and we have good resources, but we committed sub-
stantial resources to that investigation. It was the largest fraud case
that was ever brought by the U.S. attorney's office in the Southern Dis-
trict of New York, and we bring very large cases in the district, and
the commitment of resources was tremendous, but we felt that the
problem was tremendous, and it warranted that conmiitment of re-
sources.
But I think that you really have to address the problem of effective
enforcement, because the industry is going to realize that if the laws
are on the books and they're not enforced, it doesn't make a bit of differ-
once anyway. You can put a lot more laws on the books and if they
are not enforced, it doesn't make any difference.
Chairman Ashijiy. Well, I can see that. But of course, from the
Federal standpoint we are looking at divided jurisdiction.
Ms. Hynes. I don't think so. I think tliat in Congressman Brown's
question this morning about does the FTC have jurisdiction, the FTC
statute which I am familiar with, because I dealt in the U.S. attornev's
office with the FTC and prosecuted some of their cases civilly, the FTC
has their basic statute, is to prevent fraudulent and deceptive acts and
practices in commerce.
Now, that is very broad. They can get into the land business which
they did. I guess they could even get into the SEC if you started hav-
ing television ads for brokerage houses that were fraudulent and de-
ceptive. The point is that I don't think that the FTC does have exclu-
sive jurisdiction, and I don't think we are taking anything away fran
the FTC in asking HUD to start to set standards for advertising* and
to boef up their enforcement effort in the area. I think you need
Chairman Ashley. Well, it is a divided responsibility is what you
are saying, which is just what I finished saying. Isn't that what the
FTC is supposed to do ?
Ms. Hynes. No. I think you need an agency that has expertise in
the area, and HUD has that expertise and should build upon the ex-
pertise and then go after.
Chairman Ashley. I don't understand. I thought the FTC had ex-
pertise with respect to fraudulent advertising and that kind of thing.
Ms. Hynes. No; I am talking about an industry. I think that FTC
theoretically has the jurisdiction, but I think HUD also has
jurisdiction?
Chairman Ashley. So it is divided jurisdiction. And is that good
or is that appropriate and beneficial ? That is what I am trying to get
at. There doesn't seem to be a lot of effectiveness at the present time.
Ms. Hynes. That I would agree with.
Cliairman Ashley. Is this because it is divided jurisdiction?
Does anybody want to comment on this ?
Ms. Halloran. Yes; I think there are a number of problems here.
The first one is that although the FTC decided to get involved in the
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issue, my understanding is that they have made a decision to get un-
involved and are rapidly phasing themselves out of it. They brought
a couple of cases. Those cases were presumably leading to a trade regu-
lation rule which would have and could have set very valuable con-
sumer standards for the industry.
But the procedure for doing that takes several years and a commit-
ment of resources on their part, which they feel they don't have, and
it is my understanding that they are not going to proceed with the
trade regulation rule, and they expect OILSR to be handling the prob-
lem from now on.
I think also OILSR's problem in enforcement is also one of lack of
funds and lack of resources. Before you start thinking about jurisdic-
tional problems, I think these agencies could all be doing a lot better
job if they had a little bit more money. The question is not do too
many people have the powers, but does anybody have the means to use
the power.
Cnairman Ashley. Well, I disagree with you there. One of our prob-
lems is we don't run our Government all that effectively, and rather
than fund a number of different as:encies and continue to give them
more money, my thought is that why not centralize responsibility in
a specific area, rather than have a proliferation of agencies that claim
the same kind of responsibility and come to 0MB or others to beef
up their budget so they can each do their thing, generally overlapping
each other.
That doesn't make any sense to me at all, unless there is a set of
circumstances which appears to justify it.
Ms. Halix)Ran. Well, unfortunately at this point, the Federal Trade
Conmiission has the powers to substantively regulate the industry, but
it doesn't want to commit the resources to it at this point.
OILSR, on the other hand, lacks those powers, although you could
give it so that if you gave it more resources; it needs a little more
authority.
Ms. Hynes. Mr. Chairman, I would just respond to your question
that in my view it would be more economical and more effective to have
the jurisdiction centered in HUD to give them the resources and give
them the power to set standards for advertising and to give them the
enforcement effort. And not to have it split up between HUD and
FTC.
There is a considerable amount of expertise involved here, which is
the prerequisite to effective enforcement. I just want to make one com-
ment on the Minish bill, where I disagree with one of the provisions
in that bill, and that is to submit the advertising to HUD for review.
I believe that HUD should have the power to set standards for
advertising and be able to regulate advertising through setting stand-
ands. but in my experience in prosecuting the Rio Rancho case, one of
the biggest problems we ran into in that prosecution was that in New
York State, New York State has a very strong land regulatory scheme.
And they require the developer to submit their advertising to New
York State.
The developer did that. The AMREP Co. and Rio Rancho submitted
their advertising, but nothing was done. Nothing. The advertising
went on. It was fraudulent for 15 years, and it was used for 15 years,
and there were no substantive changes made that had any effect on the
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consumer. But the company was able to say to the consumer : We have
submitted every piece of advertising to the State for your protection.
And I am very concerned. If that same situation is going to be the
factor when you are submitting it to HUD, that jou are going to ask
for a lot of people to have to review this advertising, really not know-
ing enough facts upon which to make any effective changes in it.
And there you are going to create the bureaucracy. So, I think that
you should get away from having HITD reviewing advertising, be-
cause it is going to be used against HITD and convince the consumer
that he is protected, when in fact he is not.
So, I would oppose submitting the advertising to HUD. I think it
is not efficient. It will be costly, and it will not be beneficial ultimately
to the consumer.
Chairman Ashley. You would keep that within the jurisdiction of
the FTC?
Ms. Hyxer. No: there are two separate things. Should HUD be able
to issue regulations to say you can and you can't say this in adver-
tising? Yes.
Should advertising be physically submitted to HUD for a review?
No: because then you get into the situation of bavins: the developer
or the land company say : It has all been submitted for your protec-
tion, and you are protected, because HUD has taken a look at this.
So, I say let them regulate it, but don't let them review it. It is not
cost-efficient, and it doesn't help the consumer in the long run.
Chairman Ashley. What about the propertv report? We hear from
some quarters that this doesn't really provide much help to a pur-
chase, because that purchaser is drowned in information that he or
she does not understand very well. I wonder if you have a judgment
as to whether or not the proposed regulations do enough to simplify
the information that is required to be of some positive help ?
Ms. Halloran. Yes; we think the proposed regulations are pretty
good, as a matter of fact. There is a certain point l)eyond which infor-
mation on purchase of land can't be made simpler. There are just a
lot of complex facts that you should know before you purchase land.
And I think OILSR is now doing a pretty good job of trying to
write their regulations ^o that these property reports will be as under-
standable and clear and comprehensible to the average person as pos-
sible. And I think they are also pretty complete.
Chairman Ashley. Do you think that the installment sales contract
should be banned or that it should be modified or that consumers
simply be warned of the pitfalls apparent in that type of sales
contract ?
Ms. Hallor.\n. I don't think just warning them will do the job, and
I can't really see how practically such a warning could be adminis-
tered. I think the installment contract is inherently — well, in fact, in
some of the cases, the FTC has brought, they have described the cur-
rent installment contract arrangement as an unfair trade practice:
that is, in a situation where the consumer gets no refund if thev de-
fault on payments. That T think is an important minimum. I think the
installment contract is structured so that the consumer does have no
rights and no right to a ref imd is, in fact, inherently unfair.
Chairman Ashley. Well, that is what I suggested this morning that
might be a modification along the lines that the State of Ohio has
followed. At least, that is my understanding in the land contract.
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Ms..Hallorax. It is our understanding that the State of Ohio does
do this, and it is very unusual in that regard and is to be commended
for it.
Chairman Ashley. I was surprised Ohio did it. It is one they
slipped through the legislature.
Ms. Hynes. Mr. Chairman, the situation you described this morn-
ing about the 1929 situation where all of the provisions in the contract
really were against the seller and in favor — I mean, against the per-
son who was purchasing the land and in favor of the one who was sell-
ing it, is really the situation that pertains today in the contracts^
Chairman Ashley. Indeed.
Ms. Allan. One of the other problems
Chairman Ashley. I was just goin^ to say that there is a possibility
of modifying the provisions of an installment contract so that that
form of financial tool can be used.
But obviously, on a soimder basis — I mean, we are really going
pretty far in the eyes of the honest land developer when we say we
need 15 to 30 days rescission right, and no installment contracts. I
mean that honest developer — and I suspect that they probably out-
number the dishonest ones — is probably paying a fearful price tor the
fraternity that he is running with and he happens to be operating in.
Ms. Allan. One of the things
Chairman Ashley. All I am saying is : If we could be sophisticated
enough in our legislative efforts that the sound, the sensible, the prop-
erly motivated land developer that wants to operate in an honest fasn-
ion could be accorded legislative treatment that wouldn't really pre-
suppose that he is of the breed that we have been discussing m our
hearings today.
That is preity hard to do, but it does seem to me that there is that
kind of concern that we should try to be responsive to.
Ms. Allan. We found that the developers who have a real product to
sell, in fact, do modify the use of the installment contract to conform
with the quality of that product, so that, for instance, the Deltona
Corp., which is one of the ones we studied, sells contracts of varying
durations, so if the purchaser wants to use his land within 2 jrears, the
Deltona Corp. sells it on a 2-year contract and promises all improve-
ments at the end of 2 years and turns the land over and does that for
a 4-year and a 6-year and an 8-year period, which is a way of — an
internal modification which we found pretty good.
The same thing with DART Industries: we found they actually
wanted to get the land used. They wanted people to come to it. They
want people to live on it, and they do the same thing.
On the other hand, we found that in the few States that have laws
which regulate installment sales, all of those laws exclude installment
land contracts. They apply to appliance contracts, every other kind
of installment contract, but not land, and we think that perhaps if these
laws could be modified to include the land contract, maybe that would
go a long way toward helping the problem.
Ms. Halloran. There is a way of paying for land on time, which is
perfectly legitimate and everyone knows about it. It is known as mort-
gage. If installment contracts could allow a person to have equity the
wi^ you do in a mortgage, it would be a far better instrument.
Chairman Ashley. What is required in the registration statement?
I am a little unclear on that.
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Ms. Halijoran. That is probably a better question to ask HUD, but
it is a lot of information which the examiner uses to see whether the
property report is true.
Chairman Ashley. I see. So, there is a real purpose to be served by
this re^st ration statement, in your judgment?
Ms. Hallorax. Yes. I think it is an open question, however, whether
all of the material now required in the registration statement is really
useful and necessary. They do fill drawers and drawers at HUD, and
I think in the proposed regulations HUD is making an effort to try to
cut down on some of the paperwork and perhaps that could go further.
Chairman Ashi^y. Congressman Minish's bill contains a provision
permitting rescission at any time during «3 years, if certain ccmditions
aren't met, such as if the contract was signed on the same day the con-
tract was offered and the developer provides financing, and so forth.
The industry, and again, this is presumably the honest participants in
the industry, have stated that this provision would simply dry up
financing.
I wondered if you agreed with that and whether you think the propo-
sal is valuable.
Ms. Halloran. I imagine it would dry up financing: in some cases
and not in other cases. Banks who Ho make lonns to businesses to spend
money on something where they think there is a reasonable assurance
that the ccmipany would be able to make money back — in other words,
if the risk is reasonable, a bank will make a loan.
I would think that a legitimate, honest developer oneratinqr on a rea-
sonable scale ought to be able to obtain bank loans to finance basic serv-
ices and so forth to obtain the capital he needs, in effect, an installment
contract.
The subdivider is borrowing the money from the consumer to pay
for improvement and to build the subdivision. Why should the con-
sumer have to assume this risk? This doesn't seem fair to me, particu-
larly when the consumer is not necessarily aware of the fact that he is
playing this role.
Chairman Ashley. Do you know how many cases have been prose-
cuted in this general area ? The complaint has come to us that ther e has
not been much in the way of Government prosecution, and that HUD
does not prepare its cases well.
Ms. HALTiORAX. Perhaps also Ms. Hynes could comment on that, but
the Federal Trade Commission has brought, I believe, less than a dozen
casevS, the SEC a couple.
Chairman Ashley. Well, if there are 8,000 complaints a year, which
I think was your testimony, and if my complaint mail is anv indication,
there are more than just a few. There are 3,000 that indicate there is
some lesritimacy to the beef.
Ms. Halloran. I would think so. I would think, in fact, that based on
our research it is quite possible that a prosecution similar to the one
against Rio Rancho could be brought against quite a number of the
companies we studied. This hasn't happened. Partly it is a question of
resources; partly it may also be a question of the way efforts are di-
rected and resources are directed.
Chairman Ashijiy. That is very discouraging to me, frankly, because
I have to wonder how ad\'antAgeous it is to consider sweeping changes
in the law when we haven't b^hered to prosecute on the basis of the
law that is on the books.
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I mean, how do we have any knowledge or judgment as to how the
industry and the bad players m the industry would have responded if
they were put on notice, properly put on notice, not just by one case self-
generated by a charming and delightful and obviously assiduous assist-
ant U.S. attorney, but by HUD referring cases with the insistence
that prompt prosecutions be brought.
I just wonder how the industry would have responded over the past
10 years had there been a vigorous enforcement effort and a real com-
mitment to stopping these practices.
Ms. Hau/>ran. I think that is a very legitimate comment; however
1 would say that both are needed. Enforcement is a very expensive one
by one process, and while there is an important deterrent power to it,
the companies know that the Government can afford to bring in only so
many cases a year. I think there also needs to be substantive protections
that have a much broader impact.
Chairman Ashley. Well, we will never know, but what we do know
is that the changes in the law that are being suggested are ^ing to
apply to the innocent, to the responsible and to the honest participants
in the industry as well as the dishonest ones, and they are being in some
respect unfairly burdened not only bv the conduct of others in their
indiistry who aren't honest, but by the failure of the bureaucrats to
properly enforce the law. Had the law been enforced, the need for cor-
rective legislation would be less.
Ms. Hynes. Well, I am not sure about that. I think that the lesson in
the Rio Rancho case was that one — let us take some of the very specific
highlights of the proposals here — ^the cooling-off period.
If an honest developer has a good product to sell, if somebody gets
2 weeks to think about it, presumably, he will still be as enthusiastic
and want to buy that property 2 weeks later.
Chairman Ashley. I would say that's fine from your standpoint and
mine, but if we were in the private sector running one of those com-
panies and trying to do it honestly, we would find that this created
uncertainties that carried over into their ability to finance their prod-
uct. I mean, we are introducing additional uncertainties.
Certainly it may well be in the public interest, but to say rather
blithely that the honest operator simply isn't going to be impacted by
the changes that are proposed, strikes me as being — going maybe a step
bevond the realm of reality.
Ms. Hynes. I am not saying there is no impact. I am saying that on
balance the impact is not so terrible that it would warrant not passing
the le^slation. I think that while there misrht be uncertainty for 14
days, if that is the period that we focus on, and take the shorter period
of time, that there is more to be gained by that 2 weeks of uncertainty
and in trying to extend the statute of limitations for fraud cases where
it is really a fraudulent situation, and you are not talking about the
honest
Chairman Ashley. But you can't have it both ways, Ms. Hynes. If
we are not going to enforce, then we are asking the honest operator to
suffer the uncertainties and the changes in his operation which are not
changes for the better, for no reason whatever.
I mean, if we are not going to enforce, then there has been no pur-
pose in adding these burdens on the honest operator.
Ms. Hynes. Well, I agree with vigorous enforcement. But I think
there are some loopholes that need to be plugged, that would not harm
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the honest operator and would benefit the consumer. I mean, there are
loopholes. We have cei-tainly leaiTied the lessons of where they are, not
all of them, but a good number of them.
Chairman Ashley. Well, I am at a bit of a quandary on that. I sus-
pect from your standpoint there is every reason to accept that as being
persuasive. But I think it is very difficult to be able to reach a sound
judgment on a piece of legislation that has not been enforced. And now
we come in and say, well, we can improve the law.
It just doesn't make any sense to me in many respects.
Ms. Hynes. Well, I think — ^you know, you can look at the theory of
whether you look back and see whether the fraud has been committed
or whether you have preventive legislation — and I think in this area,
when you are talking about SEC and the Interstate Land Sales Act,
which was fashioned after the SEC statute, that you are very much
talking about preventive legislation, in terms of trying to deal with
the situation before the horse is out of the barn and not deal with the
situation looking back and saying, now, what can we do and should we
have effective enforcement.
Yes, we should, liut I certainly think that we should also focus <Mi
preventing these situations from happening again in a balanced way,
and in a way that is not going to be overly burdensome to a legitimate
operator. And I think that some of these proposals would not be really
opposed by the legitimate operators. I don't think it would have a great
deal of effect on some legitimate operators.
I would be encouraged — I mean, I would be interested to hear from
some of the developers who don't rely on the tactics that the less ren-
table ones relied on. I think the impact of these proposals would not be
very substantial on them.
Chairman Ashley. Well, I will tell you what I will do. I will send
you their testimony, and it will be soon, because we intend to hear from
them within the next day or so.
Ms. Allan. Could I add one thing to what Ms. Hynes said! In the
case of the subdivisions that we studied, where a company was prose-
cuted, be it by the Federal Trade Commission or the SEC or the dis-
trict attorney of Pueblo County, in most cases, except for the criminal
case, the remedy that resulted from the prosecutions, the remedies were
very much what is proposed by the Minish bill : Money was put in es-
crow, the company had to provide the funds for the ser\nces that it had
promised and not put in, advertising had to be changed to conform to
the reality.
So, in fact, the result of those cases was just to create for a specific
subdivision what the Minish bill would create for the whole industiy,
which would be good.
Chairman Ashley. Well, that is a pretty good point. You're stipulat-
ing in advance that there probably won't bo much enforcement, so you
just write the conditions into the law tlmt take that into account. But
you do the same thing when you are talking about the bureaucracy and
the fact that they could not be trusted to review advertising. Because
obviously you are saying that gives the sales pitch fellow an opportu-
nity to say: Well, we have submitted to HT^D the advertising. And
you are saying is : Yeah. And you know where that advertising is ?^ It is
what you are saying is : Yeah. And you know where that advertising
is? It is in a file drawer some place, and somebody is out for a coffee
break.
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Well, you have been very helpful in your testimony, and I mean that.
And I always play devil's advocate for at least 2 or 3 minutes.
The subcommittee will stand in recess until 10 o'clock tomorrow
morning.
[Whereupon, at 3 :15, the hearing was adjourned, to reconvene at 10
a.m. on Wednesday, August 2, 19787|
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THE INTERSTATE LAND SALES FULL DISCLOSURE ACT
AMENDMENTS
WEDNESDAY, AUGUST 2, 1078
House of Representatives,
COMMTTTEE ON BANKING, FINANCE AND TJRBAN AtPAIRS,
SuBCOMMriTEE ON HOUSING AND CoMMXTNlTr DfiVEIiOPMENT,
Washington^ D,C.
The subcommittee met at 10 :10 a.m. in room 2212 of the Raybum
House Office Building, Hon. Thomas L. Ashley (chairman of the sub-
committee) presiding.
Present: Representatives Ashley, Gonzalez, AuCoin, Brown, and
Kelly.
Chairman Ashley. The subcommittee will come to order.
The hearings on the Interstate Land Sales Full Disclosure Act
will continue this morning. During this session we will hear from
the Honorable Toney Anaya, attorney general of New Mexico; and
Mr. James Barnes, deputy attorney general of the State of Nevada,
representing Attorn^ General Robert List. And we will also hear,
following that, from Mr. Herman Smith, vice president of the National
Association of Home Builders; David D. Roberts, vice chairman of
the legislative committee, National Association of Realtors, accom-
panieaby our old friend, Al Abrahams, vice president for Govern-
ment affairs; and Mr. J. B. Belin, Jr., president of the American Land
Development Association.
I have a slight problem this morning, gentlemen, in that a number
of members will fe somewhat delayed in getting here. But they will,
as their other committee responsibilities permit them, join us.
I have a funeral at 11, so I am not going to be able to be with you
all morning. I will say to all of the witnesses that I read your state-
ments last night, each and every one in their entirety. Wnile I may
not be here to put questions to you and discuss some of the points raised,
in your testimony, vou can be sure that I will direct questions to you in
writing and will, nopefuUy, receive responses in a timely fashion so
that they may be a part of the record.
I think we will proceed, then, with the testimony of the distinguished
attorney general of New Mexico, the Honorable Toney Anaya.
STATEMENT OF HON. TONET ANATA, ATTOBNET OENEBAL 07 THE
STATE OF NEW MEXICO, ACCOMPANIED BT HON. JOE CANEFA,
ASSISTANT ATTOBNET OENEBAL
Mr. Anaya. Mr. Chairman, thank you very much.
I am Toney Anaya, the attorney general of the State of New Mexico,
appearing here in my official capacity.
(121)
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For the record, I would also like to introduce one of my staff mem-
bers, Assistant Attorney General Joe Canepa, who works in the area
of land fraud.
Mr. Chairman, I would like to submit my entire statwnent for the
record, as well as a resolution that was adopted by the National
Association of Attorneys General in June of this year, endorsing 8<Mne
of the legislation.
Chairman Ashley. That will be done.
Mr. Anaya. Thank you very much, Mr. Chairman.
Mr. Chairman, I just will highlight my statement.
Land fraud is a national problem, with its victims increasing by the
day. The victims of fraudulent land schemes are scattered throughout
the country, even though much of the land itself is in New Mexico. We
have estimated in New Mexico, Mr. Chairman, that we have over a
million and a half subdivided acres, and in the past 15 years we have
estimated that approximately $1 billion in subdivided land sales have
been made in our State.
Mr. Chairman, of the acreage in New Mexico, we estimate that
roughly about a half a million subdivided lots in New Mexico are
presently registered with the Office of Interstate Land Sales Registra-
tion and, Mr. Chairman, no one can really estimate how many unregis-
tered subdivided lots there are in our State. Just taking the re^stered
lots alone, we estimate that if they were all fully developed and a
family of four moved into a subdivided lot, that our population in
New Mexico would almost triple overnight. This is a preposterous
proposition in itself, but, nonetheless, new subdivisions are being
carved out almost daily.
I think if investors really recognized the extent of the land that is
already subdivided there, 1 do not think that very many investors
would be too anxious to buy land in New Mexico. Most or this land,
Mr. Chairman, is in remote areas; it is very dry with sparse vegetation,
not even fit for cattle-grazing in most cases.
Chairman Ashley. Let me interrupt you, Mr. Anaya, and ask you
why your State legislature tolerates a situation of that kind?
Mr. Anaya. Mr. Chairman, unfortunately — and this is an indict-
ment on my State legislature
Chairman Ashley. Well, we will not let the word get back to the
them. [Laughter.]
Mr. Anaya. I am sure that it will, and it has. But it is no secret. I
have made this statement back home. Our State legislature has^ in Uie
past, been very heavily lobbied by the real estate industry. The real
estate industry is a very large and powerful lobby in the State, and
because of that lobbying, the State legislature has not come to grips
with the problem. In fact, a law which was passed 3 years ago gives us
some protection, but it was adopted only after a great deal of com-
promising and a great deal of backroom negotiation. But even the act
that we presently have is a very weak, one, with hardly any sanctions
at all.
Frankly, one of the reasons that I am here today is to plead with
this subcommittee and plead with the Congress to give us some Federal
legislation.
Chairman Ashley. A legislative body that is not subject to pres-
sure of any kind. I can see your point. [Laughter.]
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Mr. Anaya. Mr. Chairman, I would hope that some of the pres-
sures could be diminished here and watered down a little bit.
Chairman Ashley. I will tell you this: There is only one on this
panel before you that is subject to any pressure at all. [Laughter.]
Mr. Anaya. Hopefully, Mr. Chairman, as the pressures get away
a little bit from the local front, we can perhaps dissipate some of its
effects. ...
Mr. Chairman, there is one subdivision in New Mexico which is
probably the largest subdivision in the Nation, and yet, after only
15 years of land sales, it now has less than 2,000 residents and is only
1 percent developed, with 99 percent of the land having no resale
market whatsoever, and much of it being described as a negative
investment.
This kind of development has led to literally thousands and thou-
sands of complaints to my office. Most of the complainants are elderly
individuals living in the East who purchase land as an investment
or for retirement and then, after some 8 or 10 years of making regular
monthly payments, they find out that really the land is not suitable
for development, that the land is not really the dream that they had
hoped for.
Chaimmn Ashley. Is this subdividing going on today?
Mr. Anaya. Mr. Chairman, it is going on daily. We have been
able to bring a number of actions through my office which have slowed
down the progression of illegal subdivisions, but it is still going on.
There is a great deal of subdivided land that was subdivided years
ago that is still being marketed here.
In fact, just in uie past couple of weeks, we brought an almost
300-count indictment against one subdivider from Baltimore, Md.,
who was selling land in New Mexico to individuals in the Washing-
ton, D.C., area and enticing them to buy the land by claiming that
it had oil and gas deposits on it, and by using all kinds of schemes.
Some of the land, Mr. Chairman, will not be in actual development
until about the year 3000, and yet people are being sold land with
the thought that they might be able to retire on it. Unless they plan
on being over 1,000 years old, Mr. Chairman, it is obvious that they
would have no hopes of ever being able to realize their dream.
The types of schemes and techniques that are used in land fraud
are unlimited. It occurs not only in the sale of the raw land, but in
the enticing of investors into the land companies and in the financing
and the sales operations.
Most of the misrepresentations that my office has proceeded against
have involved misrepresentations concerning, among other things,
clear titles, location of lots, availability of potable water, existence
or promised development of utilities that never occurred, oil and gas
discoveries, investment potential, hidden costs, hidden building limi-
tations, and almost any kind of a gimmick or a method of trickery
to try to sell the land.
We have even had examples where salesmen would take the pros-
pective purchasers out to a lot where there would be a hole in the
ground with a bucket of water at the bottom of the hole, and they
would drop stones down into the bucket of water, trying to show
that the water table was just a few feet below the land. Free trips,
that individuals found out were not free unless they purchased land ;
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and many, many other devices, Mr. Chairman, that were being used
to entice unknowing consumers into purchasing this land.
Our present New Mexico statutes, as I mentioned to you earlier, are
totally inadequate in dealing with these kinds of developments, and,
in fact, there is some pressure from business communities locally. My
office received considerable pressure a year and a half ago when we
filed a major action against the biggest subdivider in the State and
one of the biggest — if not the biggest — in the Nation.
I received considerable pressure from the business community that,
in effect, translated itself to a simple statement : "These subdivision
lots are being sold to people out of State, so why should you be con-
cerned? It is really consumers in other States back east, primarily,
that are being taken. It is good for the economy of New Mexico. So,
why should you, Mr. Attorney General, be concerned about trying to
put a stop to this kind of activity ?"
Chairman Ashley. I think what I will do is to recess at this time.
We have a vote on the floor. It is going to take us just a very few
minutes to accomplish this, and then we will be back and you can
pick up at this point.
This is an important area of your testimony, and I would jiist as
soon forbear it at this juncture. And we will resume just as quickly
as we get back.
[Brief recess.]
Mr. GrONZALEz [presiding]. The subcommittee will please come to
order.
At the time that the subcommittee recessed for the vote, I believe
Attorney Greneral Anaya was testifying.
I also understand that you have a time factor or deadline. And,
if you wish, you could proceed as you see accordingly and would suit
your purposes best; and that is, you can summarize your statement,
or you can proceed as you are, whatever suits your purposes, in view
of the fact that I understand you have a time problem.
Mr. Anaya. Thank you, Mr. Chairman.
Mr. Chairman, I had pretty well gone through most of the prob-
lems that land fraud creates in the State of New Mexico, and, as
I indicated, it is really not a problem for New Mexico or New Mexi-
cans as much as it is a problem, really, for the constituencies of the
members of this subcommittee, because most of the land that is being
sold is being sold in the Midwest and in the East.
Mr. Chairman, in the last few pages of my prepared testimony,
I have made a number of recommendations that I feel should be taken
by the Congress to try to give us some tools at the local level to deal
with the land fraud problems in our respective States.
I would call the committee's attention to those recommendations
and would basically point out that most of the provisions are con-
tained in either one or both of the House bills that are before this
committee.
I heartily endorse those provisions and particularly, would point
to one provision that is contained in one of the House bills and not in
the other, and that is the question of giving the State attorneys gen-
eral the ability to sue, acting as parens patriae on behalf of citizens
within respective States. This is not a novel approach, Mr. Chairman.
The Congress gave the State attorneys general this same power under
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the antitrust statutes. We are currently implementing that and using
that authority at the State level very successfully, and I feel that this
is the kind of tool that could be added very easily and very effectively
to try to bring the question of land fraud under control in our respec-
tive States.
Mr. Chairman, one final point with respect to the specific bills that
are before this committee. The Senate bill, S. 3084, section 715 of that
bill, I understand, is the section that tries to attack the problem of
land fraud. As we have reviewed that particular proposal, Mr. Chair-
man, we find that it is totally inadequate. In fact, it looks very much
like a subdivider's bill, and it would further weaken the already
limited enforcement powers that the Federal agencies have. Certainly
it would not contribute anything at all to solving the question of land
fraud.
Mr. Chairman, the areas that my office has been concentrating on
lately, and one that the committee should be aware of, is the extent to
which organized crime elements have found their way into land fraud.
It is a very lucrative proposition, and it certainly is an area with which
we will continue to have problems with organized crime elements if
we do not get the necessary tools to combat them.
I would urge this committee and this Congress to enact the House
bills that are presently before it, and to give us the parens patriae
ability and the tools that we need to try to protect consumers, not only
in our respective States, but consumers throughout the Nation.
In conclusion, Mr. Chairman, as I mentioned earlier, many in my
own State would question why I should be concerned about protecting
consumers in other States, because the land that is beng sold is being
sold to your constituency. But I feel as long as there is any illegal ac-
tivity within our State, Mr. Chairman, that we should be greatly con-
cerned about it and try to put a stop to it.
Mr. Chairman, I have tried to just briefly highlight the contents
of my prepared testimony. I would be happy to try to respond to any
questions.
[Mr. Anaya's prepared statement and a resolution adopted at the
1978 annual meeting of the National Association of Attorneys General,
St. Paul, Minn., June 1&-21, 1978, follow:]
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STATE OF NEW MEXICO
(Sffxtt of tijt ^ttinrtt^ (Sextitnl
DEPARTMENT OF JUSTICE
P.O. Drawer 1506
TESTIMONY OF
TONEY ANAYA,
ATTORNEY GEtJERAL OF NEW MEXICO,
BEFORE THE
UNITED STATES HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
CONCERNING
THE INTERSTATE LAND SALES
FULL DISCLOSURE ACT
ON
AUGUST 2, 1978
Thank you for the opportunity to testify concerning the
proposed amendments to the Interstate Land Sales Full Disclosure
Act. I comnend your efforts, reflected by H.R. 12574 and
11265, to protect purchasers of subdivided land in the
interstate market and to combat fraudulent land sales practices.
EXTENT OF PROBLEM
Land fraud is a national problem, and unfortunately, its victims
are increasing by the day. Although the land sold is usually
located in the "retirement" and "recreational" states of the s\in
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belt, such as New Mexico, the victims of fraudulent land schemes
are scattered throughout the country. In at least eight states,
land fraud is the number one consumer protection problem and it is
high on the list in many other states.
A large part of the nation's subdivided land is located in New
Mexico. We have over 1.5 million subdivided acres. Over a billion
dollars in subdivided land sales have been made in my state alone
within the last fifteen years. Almost a half million subdivided
lots in New Mexico are now registered with the Office of Interstate
Land Sales Registration. No one knows how many additional un-
registered subdivided lots there are. If a family of four were to
move on to each of the registered subdivided lots alone, New Mexico's
present population would almost triple. The impact orr New Mexico
could be disastrous. The arid, desert character of most of the land
subdivided for sale and the limited water resources available
clearly preclude the development of even a small portion of these
lots for full use and enjoyment by purchasers. Nevertheless, new
subdivisions are being carved out daily.
Much of this subdivided land is in remote areas of New Mexico
and consists of dry land with sparse vegetation that is, in some
cases, not even fit for cattle grazing. One major subdivision
in such an area includes over four hundred square miles with
172,000 subdivided lots. The subdivision itself is larger than
Manhattan and may be the largest subdivision in the nation. After
15 years of land sales to predominately eastern and midwestern
purchasers, the subdivision now has only 1,790 residents and
is only 1% developed. The purchasers of the remaining
99% own land for which there is no resale market. It has been
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described as a "negative investment," given the overall cost of
taxes and developer imposed assessments.
This type of subdivision has generated thousands of complaints of
fraudulent conduct to my consumer protection division. The
saddest commentary is that the majority of those complaints are
from elderly persons living in the east who have purchased the
land primarily as an investment or for retirement. After ten
years of monthly real estate contract payments, many have come to
the cruel realization that the land they have purchased has no
value and can never be used for their retirement.
New Mexico now has thousands of miles of bulldozed roads crisscrossing
the desert in neatly gridded formations leading nowhere, which
are abandoned and unused except as landing strips for drug smuggling
pilots. The thousands of undeveloped lots which front such roads
are typically owned by out-of-state purchasers who have never
seen the land but who were shown master building plans for wonder-
ful new cities and golf courses, and colorful charts and graphs
showing ever increasing land values, all of which have never come
to pass. In one major New Mexico subdivision, it was projected
that actual development would not reach most of the subdivided
lots until after the year 3000. Such a "long-term" investment
potential is of little consolation to a purchaser sixty-five
years old who was promised a buildable home site for retirement
within five years. Frankly, it is of little consolation to
anyone who plans to live to be less than one thousand years old.
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Land fraud has many faces. The types of schemes and techniques
used to sell land are unlimited. The fraud occurs not only in
the sale of the raw land, but also in the attracting of investors
in the land company itself and in the financing of the sales
operations. Misrepresentation of the land purchased, is, however,
the common denominator. My office has filed lawsuits involving a
wide variety of misrepresentations concerning, among other things:
clear title, location of lots, availability of potable water,
existence or promised development of utilities, oil and gas
discoveries, investment potential, hidden costs necessary for
utilization or access, hidden building limitations - the list is
endless. So also is the list of gimmicks and methods of
trickery used to sell subdivided land. These include everything
from dropping stones down a dry well shaft with a bucket of
water at the bottom, to bait and switch tactics, and free trips to
visit the land which suddenly become "free" only if you decide
to purchase the land you are to see.
liTEAK LAWS
Tougher state and federal land laws are needed if the problem of
land fraud is not to become worse. A recent national study which
examined New Mexico land subdivision laws described them as
"procedural, giving only the appearance of regulation." The
Inform study entitled "Promised Lands" characterized the sub-
division activity in New Mexico as "development out of control."
I cannot agree more.
Present state and federal laws offer only minimal protection for
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purchasers who are victimized by land fraud. They do not give
law enforcement agencies sufficient statutory tools to seek
redress for the land fraud victims. Criminal actions taken by
my office and other law enforcement agencies may have succeeded
in punishing the wrongdoers but in most cases the punishment did
not fit the crime-- the only results have been short jail terms,
suspended sentences, or corporate fines which are written off as
minimal costs of doing business. Such results have little effect
on the problems caused by the illegal subdivision and do absolutely
nothing to compensate the victims of land fraud- -the consumer/purchasei
I see little hope for tougher state laws in New Mexico. The
presently existing weak provisions were enacted only after years
of struggles, compromises, and concessions to subdividers by the
state legislature. The same forces that defeated stronger pro-
visions are still very much alive and well in our state, and,
unfortunately, the national scope of the problem does not lend
itself to solution on the state level.
PENDING FEDERAL AMENDMENTS
Thus, meaningful relief must come through federal action. I
am encouraged by the proposed amendments in both House Bills
H.R. 12574 and H.R. 11265. They both address the central
question of granting more meaningful remedies to the victims of
land fraud. The two crucial points in those bills are: (1)
effective remedies for lot purchasers, and (2) authorization
for state attorneys general to act on behalf of such purchasers
under the federal law.
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The most significant problem in the existing law is the lack of
effective remedies. The Office of Interstate Land Sales Registration
has limited enforcement powers and the present Act provides
almost no meaningful consumer remedies. Many of the lot purchasers
involved in the situations which I described earlier are without
effective redress under the present Act against the developer
from whom they bought their land. Their only remedy under the
Act is a suit, which can only be filed on a limited basis for
limited monetary damages. There are several steps which should
be taken to correct this.
First, the current Act requires that facts which are material to
the consumer's decision whether to purchase must be disclosed in
the Statement of Record and Property Report filed with the Office
of Interstate Land Sales Registration. The Act is violated if
material misrepresentations of fact are made in the Statement of
Record or the Property Report. Unfortunately, developers commonly
disclose one thing in the Property Report and Statement of Record,
and something completely different in their advertisements and
oral representations to purchasers , which are not now covered by
the Act. The developer should be required to include in his
Statement of Record copies of all printed materials used in
advertising, transcripts of all television and radio advertisements,
and accurate summaries of all verbal representations made by a
developer to promote the purchase or lease of his lot. The
developer would, therefore, be held responsible, and be subject
to the Act's penalties, for misrepresentations not only in the
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Property Report, but also in all advertisements and oral representations
to purchasers. This would effectively end the abuse of inconsistent
disclosures and statements by developers and their agents.
Second, purchasers must be able to sue developers for specific
performance on promises which he or his agents have made. Purchasers
are now limited to seeking monetary damages which are often
inadequate.
Third, developers must be required to establish an escrow fund to
insure completion of water, sewage, and electrical facilities.
The majority of the consvmier complaints received by my office
relating to land sales arise from the failure of developers to
provide promised utility services. The current federal law and
the New Mexico subdivision laws require neither escrowing nor the
posting of any type of performance bond by developers who promise
to provide utilities in their subdivisions. There is no requirement
that water, waste disposal, or other basic services be guaranteed
and no recourse is provided for consumers who are promised but do
not receive these amenities. The imposition of an escrow requirement
on developers who do promise such amenities would be a very
important step forward in regulation of subdivision activity and
prevention of land fraud in New Mexico and other states.
Fourth, purchasers should be able to revoke their contracts if
the developer fails to keep specific promises to provide such
essential services. Purchasers have no such recourse under
either New Mexico or federal land laws now, and revocation is
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often the only meaningful remedy in such circumstances.
Fifth, a purchaser who sues on his own behalf is not authorized
under the present Act to recover his reasonable costs incurred
in connection with such a suit for attorney's fees, appraisal
costs, and travel expenses to and from the lot. These costs
should be recoverable in a successful action. They can be
substantial in bringing and maintaining any action with respect
to land, especially when the purchaser does not reside near the
land. Such a provision would obviously provide an incentive to
subdividers to abide by the law and not make material misrepresen-
tations.
Finally, state attorneys general need additional tools to help
enforce federal law. All of the above measures would afford
better protection to lot purchasers. The fact remains, however,
that the individual purchaser usually experiences great difficulty
in bringing a private lawsuit against a land developer. My
office has handled several major cases against large subdividers
and they are exceedingly complicated and time-consuming. It is
very unlikely that individual lot purchasers, especially those
who live far from the land involved, could afford to maintain
such private actions. Attorney's fees and travel expenses alone
would almost certainly be prohibitive. Even if these items could
be recovered, it is unlikely that an attorney would handle such a
case on a contingent fee basis. For this reason, state attorneys
general should be authorized to act parens patriae for such
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purchasers under the Act. The granting of such parens patriae
power is not a novel approach. State attorneys general are now
authorized by section 301 of the Clayton Act to proceed under the
federal anti-trust laws on behalf of citizens of their states and
have done so successfully since 1976.
An attorney general, acting parens patriae , should be empowered
to sue for injunctive relief and monetary damages on behalf of
all affected citizens of his state. Such an action would not
only make it easier for purchasers to obtain redress, but it
would be the most efficient way of handling litigation with large
numbers of purchasers. It would also provide for more extensive
enforcement of the Act throughout the United States and thereby
encourage compliance by subdividers . And, it would greatly
assist attorneys general in those states with weak or non-existent
land subdivision laws as it would give them additional statutory
authority for protecting their citizens from land fraud.
I urge you, therefore, to grant parens patriae jurisdiction to
state attorneys general so that we can act effectively on behalf
of purchasers who become victims of land fraud and assist in the
enforcement of this important federal land law.
CONCLUSION
I support your efforts to amend the "Interstate Land Sales Full
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Disclosure Act" in the two House bills before you. The measures
which I have discussed are contained in one or both of these
bills and would go far to alleviate many of land fraud problems
that now exist. I would urge you to select the best of both
House bills, add whatever additional strengthening provisions you
must, and report out a new, combined proposal. The other bill
you are considering. Senate Bill S 3084, contains none of these
provisions. I cannot support it for that reason. It is a land
developer's bill that would serve only to further weaken the
already limited enforcement powers of the Office of Interstate
Land Sales Registration by exempting certain interstate land
sales now governed by the Act.
In closing, Mr. Chairman, I have been requested by the National
Association of Attorneys General to request that you include in
the hearing record on these bills a copy of a resolution adopted
by the Association in June 1978 on this subject. I submit this
resolution to you and respectfully ask that it be included in the
record.
I thank you for the opportunity to testify and I will be glad to
answer any questions which you have.
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RESOLUTION
AS ADOPTED BY THE
NATIONAL ASSOCIATION OF ATTORNEYS GENERAL
1978 ANNUAL MEETING
JUNE 18-21, 1978
ST. PAUL RADISSON HOTEL
ST. PAUL, MINNESOTA
INTERSTATE LAND SALES FULL DISCLOSURE ACT,
H.R. V»»»9 iaS'7i
WHEREAS, fraudulent practices in the interstate land sales
industry have become a problem of serious concern to consumers; amd
WHEREAS, existing federal law has not adequately protected
consumers who purchase land from interstate developments; and
WHEREAS, state Attorneys General have played a key role
in law enforcement in land fraud matters.
THEREFORE, BE IT RESOLVED, by the National Association of
Attorneys General that:
1. We endorse in principle the concept of strengthening
federal law which would curb fraudulent and abusive
practices in the interstate land sales industry
as in H.R. 1K)959 and in similar legislation; and
2. We endorse the inclusion of a parens patriae section
in such legislation to authorize state Attorneys General
to bring civil actions against developers on behalf of
citizens of the state who have purchased l2uid; and
3. The Washington Counsel is authorized to communicate
the views of the National Association of Attorneys
General to the appropriate committees of the Congress.
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Mr. GrONZALEz. As I understand it, Mr. Barnes has not testified, as
yet.
Mr. Barnes. That is correct, Mr. Chairman.
Mr. Gonzalez. So that if you do have this time factor, perhaps it
would be best to go on ahead and ask questions of Mr. Anaya.
I have two questions, really.
One, I also sit on the other subcommittee that had hearings on this
same — as a matter of fact, the bill we have here is the vehicle that
came out of that subcommittee, and we also had other attorneys gen-
eral from other States. And if I recollect well, there was some re-
luctance on the part of the State officials to admit that there is some
limitation and that therefore it is incumbent upon the Federal Gov-
ernment to provide laws and rules and regulations.
I couldn't ever quite get the pattern, though, as to why there was
that much inability on the part of the State-level officials. Given this
situation two suggestions that have come out including the approach
you endorsed which is contained in the Minish bill with respect to the
jurisdictional ability of the State attorneys general to sue.
As I understand it, a provision in the Minish bill we are consider-
ing does not provide for aggregate damages or any particular method
to assess the type of damages alleged, and^ therefore, it would seem
that it would be left up to assess damages individually, case by case.
Now, how helpful will that be? Is that really helpful, or is it
necessary?
Mr. Anaya. Mr. Chairman, let me just briefly comment on a couple
of the other points that the chairman has raised in terms of the reluc-
tance by States to move into this area.
As I alluded to earlier in my testimony, since New Mexico is prob-
ably the State with the single most subdivided land in the entire Na-
tion, land that is being sold out of State, there is a great lobbying
force in the real estate industry that has exercised its muscle in the
State legislature and, unfortunately, I think, because of what the sales
have meant to the economy of New Mexico, that has also drawn some
constituency or some following in our State legislature. And com-
bined, this has meant we have had very weak legislation at the State
level.
There is also a second problem, even to the extent that our present
State statutes give local counties some supervision, some authority
over subdivisions, there is a great deal of lack of expertise at the local
level in terms of dealing with subdividers. And, in fact, manv sub-
dividers even refuse to check in with the appropriate county officials.
So, we do have to look at some other authority to try to get to par-
ticularly the subdividers who are dealing in interstate sales.
Mr. Chairman, in terms of the ability of State attorneys general to
come in and sue, there is another reason why this would be important,
particularly in a State like New Mexico. We have not been able to,
even though there exists some Federal ability now for the feds to come
in and sue some of the subdividers, we have not been able to document
one single case where the local U.S. attorney's office has ever prose-
cuted anyone or sought to enforce any of t6e provisions of the act.
This again, I think, highlights the need to trv to not only find addi-
tional authority but place additional authority in the hands of the
State attorneys general.
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I feel that the authority that is being granted by the provisions in
the Minish bill parallel the provisions that we presently have under
antitrust statutes, and I feel that it would certainly be adequate to
initiate actions on behalf of individuals within our respective States.
I am not sure that I completely understand the concern from the
question of the chairman, but I feel that the provisicms are satisfac-
tory to permit me, as a State attorney general, to bring actions on
behalf of consumers in my State.
Mr. Gonzalez. How much of a track record do we have of experi-
ence under this doctrine in the case of antitrust? Is that not a recent
Federal enactment?
Mr. AxAYA. Mr. Chairman, the legislation was enacted in 1976. It
was funded last year, last October. My office, for example, got one
of the first grants to initiate an antitrust unit. We have now been in
operation for some 8 or 9 months.
One of the decisions, the so-called Illinois Brick decision, that
made it to the supreme court has now perhaps left some of the powers
under that particular provision in shambles, and there is legislation
presently pending in the Senate, hopefully, to be able to correct that.
But the general concept will be, I feel, extremely valuable in per-
mitting the State attorneys general to use Federal statutes in Federal
courts on behalf of State consumers.
And also, an equally important provision is forcine:, in effect, the
Federal agencies to cooperate with the local law enforcement agen-
cies. I feel this will be extremely valuable, not only in these areas.
but other areas, to permit a State attorney general to enforce Federal
laws in a Federal court on behalf of his constituency.
Mr. Gonzalez. Thank you very much.
I just was wondering, the ongoing arsruments I heard when I last
visited New Mexico was that Texas had brought up at least the south-
eastern one-third of New Mexico.
Mr. Anaya. Mr. Chairman, one thing I can say about your con-
stituency : Thev were a lot brighter than some of the others who have
bought — ^thev have bought up all of the land with the oil and gas.
Other constituents are hoping to do the same thing, but have not been
so successful.
Mr. Gonzalez. Thank you very much.
Mr. Kelly?
Mr. Kelly. T thank you, Mr. Chairman.
Gentlemen, let me ask you this.
Aren't vou really in your testimony saying that the need for the Fed-
oral law is to protect the mail order land purchase, the purchase by
people from out of State, and that you are not really suergesting that
the Federal Government attempt to police wliat are legitimately intra-
state sales?
Mr. Anaya. Mr. Kelly, that is basically correct, although the sales
techniques are not strictly limited to a mail order type operation, but
my concern is primarily addressed to interstate sales, legitimate inter-
state sales.
In New Mexico we refer to them as the ma-and-pa subdivisions. I
think the ma-and-pa subdivisions, the intrastate subdivisions, if they
are truly intrastate sales, then I believe those, the State of New Mexico
and local authorities should be prepared to try to police.
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Mr. Kelly. Well, let me ask you this. Don't you think that a legiti-
mate criteria for determining whether or not it is an intrastate as op-
posed to interstate sales is if they advertise only in local newspapers
and if they do not solicit by mail or telephone on an interstate basis,
so that when advertising in local papers can be used as a criteria for
establishing it as an interstate sale, that is not the kind of recommenda-
tion you have, is it ?
Mr. Anaya. Mr. Chairman, the whole impact, I suppose, would be
on the solicitation — how do the subdividers go about soliciting, and
where do they solicit. It is probably a little bit difficult to limit adver-
tising strictly to the four boundaries of the State of New Mexico be-
cause even our local newspapers, for example, are sold in Texas, Colo-
rado, Arizona, and Nevada and maybe in other States, so that if you
get an advertisement in one of our local newspapers, that newspaper is
sold in Texas. Conceivably, a court would uphold that as being involved
in interstate commerce, unless it was more clearly defined.
Mr. Kelly. But that is not really a legitimate concern, because I don't
want to slight the Albuquerque press, but they don't get a pretty wide
national circulation, do they ?
Mr. Anaya. Mr. Chairman, I am glad you made the statement and
not me. [Laughter.]
I don't think we would find the Albuquerque newspapers would have
the kind of circulation that the New York Times does.
Mr. Kelly. And for instance, if the Albuquerque papers would sud-
denly start and do something funny just to accommodate some sort of
a land promotion deal on an interstate basis, that would not be the
normal publication of the local newspaper.
Mr. Anaya. I believe that any restrictions or limitations of this type
I could certainly, personally, as attorney general, live with in terms of
trying to distinguish between intrastate and interstate. I believe it
would be important to give someone in an administrative capacity,
HUD, for example, the ability to try to distinguish what is intrastate
and interstate.
I found that with each limitation that Congress or the State legis-
lature places, there is always some subdivider that is going to try to
find some way to get out from under.
Mr. Kelly. All right, let me ask you this.
A personal inspection, requiring f)ersonal inspection goes a long
way toward alleviating: the really serious fraud situation, doesn't it?
Mr. Anaya. Yes ; it does.
Mr. Kelly. All right. Let me ask you something else.
Is there not a legitimate market for unimproved land? I mean,
aren't there some people that want unimproved land because they
can't afford improved land; they don't want the paved roads an&
sewers nmning out to the property because they can buy 5 acres of
land, ff it is unimproved, and they may not be ab^le to buy 1 lot if it is.
Mr. Anaya. I am sure that there is a legitimate market for imim-
proved lots.
Mr. Kelly. I want you to know I am really enjoying this elevation
and status that you have bestowed on me.
Mr. Anaya. I fully recofi:nize the position of the Congressman, and
I was addressing my remarks through the chairman.
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There is a legitimate market for unimproved land. I think the key
would be, the purchaser of that unimproved land know exactly what
he or she was purchasing.
The general impression that I was brought up with and have only
changed in the last 2 or 3 years was that any piece of real estate was
a good investment, any piece anywhere, and that is not true. In New
Mexico, much of the land, as I referred to earlier in my statement, is
a negative investment. Some of the land that was worth $12 an acre
10 years ago is still worth $12 an acre today, even in spite of inflation.
So I think the key is, does the purchaser in Florida or New York
City or Texas or wherever, does that i>urchaser know the full value
of that land and what its potential value is, or is that person being
sold a piece of real estate, unimproved real estate with the misrepre-
sentations that somehow he or she is going to have a substantial
investment.
Mr. Kelly. But if someone knew he was buying a lot on a dirt road,
I am betting that for political considerations you are not going to
announce that everybody that lives on a dirt road is a dummy.
Mr. AxAYA. Mr. Chairman, that would destroy me politically because
I live on a dirt road. [Laughter.]
Mr. Kelly. I just thought there might be some people in New
Mexico on dirt roads.
But you mentioned earlier about the lobbyists and the special inter-
est pressures and so forth, but would you believe that there is another
group of lobbyists and special interests that are real hot to go on
sewers and all kinds of engineering and reports and studies and all
of this other stuff that costs money and runs up the price of real
estate ?
Mr. AxAYA. Congressman, there is no question but that the con-
sumer protection movement can be carried to such an extreme that
the consumer is the one who ultimately winds up suffering, and I
think we have to strike some kind of a balance between both extremes,
and I think that that is basically what I would be asking this
committee to do.
Mr. Kelly. Well, you don't think this committee should mandate
that everybody has got to l)e living on a municipal sewer system, for
instance?
Mr. AxAYA. No, I don't, Mr. Chairman.
Mr. Kelly. I mean, being from New Mexico, I thought you might
l)e able to appreciate the limitations that kind of a system would have.
Mr. AxAYA. Again, I think the key would be in terms of the repre-
sentations that are being made in the sale of whatever land.
Mr. Kelly. As long as the people knew what they were buying, that
is really the criteria we are trying to get at so that people arent
homswaggled into believing they are going to be hooked up to a sewer
when there isn't one for 75 miles.
Mr. AxAYA. The big concern, Mr. Chairman, would be one of full
disclosure and remedies in the event that those disclosures were not
complied with.
Mr. Kelly. Thank you, Mr. Chairman.
Mr. GoxzALEz. Mr. Brown.
Mr. Browx. Thank you, Mr. Chairman.
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Do the land sale abuses that you are familiar with involve residents
of your neighboring States or primarily neighboring States or do they
involve residents of States like New York, New Jersey, and so forth,
which are some distance from New Mexico.
Mr. Anaya. Congressman, most of the land subdivisions that we
have proceeded against have been involving residents from the east
coast and the Midwest; very few involve purchases by New Meidcans.
Arizonans can purchase their own worthless land, if they so wish.
[Laughter.]
And they are very much aware of that.
Most of the sales are being made to Midwest and Eastern States.
Mr. Browx. You, of course, support this legislation. It almost sounds
as though you are more concerned about residents of other States
than you are about residents of the same State but in a more remote
place from the development, because, obviously, this act is not going
to protect a New Mexican resident from a bad sale in a remote part
of New Mexico.
Mr. Anaya. Mr. Chairman, I am concerned, as attorney general —
I am concerned with any illegal activities that occur within the four
boundaries of the State of New Mexico.
I have likened it in local testimony to when I was being pressured,
as I testified earlier, to not bring a lawsuit against a major subdivider
who had been making sales out of State, and I was being pressured not
to bring the lawsuit because it was going to hurt the local tax base
and the local economy, and just think of all these millions of dollars
that we are bringing in fraudulently from out of State.
I likened it at that time to another problem that I have been in
Washington testifying on, the subject of narcotics smuggling from
Mexico. If we want to use the two examples, your argument to the
conmiunity that was suggesting I not proceed against illegal sub-
dividers, their argument would te likened to my not proceeding against
narcotics smugglers who are bringing in narcotics from Mexico into
New Mexico and dispensing it throughout the Nation. It really wasn't
New Mexicans that it was being sold to; it was people in other States.
I think I have to be concerned about any illegal activity in the State
of New Mexico that affects anybody.
Mr. Brown. But this illegal activity that you are referring tx),
would not be illeiral unless it involved a nonresident of the State of
New Mexico. But, you said that your laws in New Mexico, insofar as
they protect residents of New Mexico, are inadequate.
Mr. Anaya. Mr. Chairman, I probablv should not have used the
word "illegal" in that particular phrase. The fraudulent, even though
at this point they may not be prohibited, or we may not have the rem-
edies to go against the individuals involved — the fraud that is being
perpetrated on consumers is there, whether it is intrastate or interstate.
Mr. Browx. But there is no protection from fraud if you are a
resident of New Mexico and you are not engaged in interstate land
sales, because you have no law on the books in New Mexico, apparently,
that would be comparable to the Interstate Land Sales Act.
Mr. Anaya. We do have legislation on the books which I feel is
totally inadequate at the present time to deal with the large-scale
fraudulent practices. Were we able to distinguish between interstate
and intrastate, and given the parens patriae powers that we are asking
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for, combined with existing statutes, and we have had to go beyond
subdivision laws — we have had to use our securities laws, our unfair
trade practices laws and other statutes — given all of these tools to-
gether with the additional Federal authority, I feel that we could bring
land fraud under control in our State.
Mr. Brown. Under section 301 of the Clayton Act, you can bring an
action on behalf of any individual. It doesn't have to be a class right.
Mr. Anata. That is correct, Mr. Chairman.
Mr. Brown. In other words, the provision in the Minish bill is com-
parable to section 301 of the Clayton Act, as far as standing to sue.
Mr. Anaya. That is correct. I understand that they parallel very
closely.
Mr. Brown. Have you looked at the Nelson bill in the Senate?
Mr. Anaya. Mr. Chairman, yes, I have.
Mr. Brown. That bill, of course, provides the 100-mile exemption
provided there has been onsite inspection.
Don't most of the abuses occur because there is not onsite inspection!
Mr. Anaya. I believe that the two principal reasons for the abuses
are, first of all, the lack of onsite inspection and, secondly, the repre-
sentations that are made even with onsite inspection in terms of future
developments or future amenities and things of this nature. So the on-
site inspection would cure a large number of the problems but it still
would not take care of the misrepresentations.
Mr. Brown. Thank you, sir.
Mr. Kelly. I have just one additional question, Mr. Chairman, if
I may.
Mr. GoNz.vLEz. Mr. Kelly.
Mr. Ketly. There is no reason whv New Mexico could not have
whatever laws are appropriate to handle purely intrastate lands sales.
Mr. Anaya. There is no legal reason why we shouldn't or couldnt
Mr. Kelly. And if you don't have them, it is just because you have,
in your wisdom, decided not to impose them.
Mr. Anaya. Mr. Chairman, I would not characterize it in the same
way. I believe the reason, as I indicated earlier, that we dont have
tougher laws now has been because of the strong lobbying efforts at
the local level.
I have not been any too bashful to come to the Congress before to ask
for authority in other areas wliere we need it, where the States have
failed to take care of the problem. And I suggest that is what I am
doing today.
Mr. Keli.y. Then, to really focus this thing, what you are saying is
that because the State of New Mexico has not done as you think they
should do in this area, then you think the Federal Government,
through the device of a strained "interstate" definition, we should
start monitoring the activity in New Mexico.
Mr. Anaya. No, Mr. Chairman, that is not it at all.
What I am suggesting is that, under the existing statutes, it gives
HUD particularly — and other Federal agencies — some authority in
the area : that, first of all, they are not doing their job. And one of the
reasons they are not doing their job is because they don't have the
necessary authoritv to do the job.
And second, to the extent that the authority can be extended to per-
mit State attorneys general to exercise that authority in court on behalf
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of its own citizens, I think the two combined would go a great ways
toward protecting consumers in other States and in New Mexico.
Mr. Kelly. Then, really, the extension that you are seeking is to
give local enforcement an opportunity to enforce basically. Federal
law in the area of land sales fraud.
Mr. Anata. There are two thing I am seeking.
One is additional authority for Federal agencies, for HUD.
And second, to extend that authority to the State attorney general.
Mr. Kelly. But not to strain the definition of "interstate" ?
Mr. Anaya. Mr. Chairman, I am not suggesting that at all, and I
would hope that in my earlier responses I pointed out that personally
I could support and would be in favor of an intrastate-interstate
distinction.
Mr. Kelly. I thank you.
Mr. GrONZALEz. If I could pursue just one aspect — because, in large
measure, the reason we are having these hearings, and had the other
hearings of the other subcommittee, was because of the experience of
its chairman, Mr. Minish, in New Jersey, where he had a considerable
number of his constituents involved right across the State line in
Pennsylvania. They did have, in some cases, a chance to go physically,
personally to visit, but were in no way protected by knowing the full
circumstwices and limitations. Although the pitch was that sewage,
drainage, and other facilities would te available, they found, after
purchase, that they were far from being available, and probably never
would be, because of some other mandatory health requirements.
I think you said in your statement, just a while ago, in answer to the
question by Mr. Brown, you did say, though, that it would be desirable
to have onsite, personal inspection or viewing of the site; but that, in
itself would not preclude some of the things that have come to the
attention of the subcommittee, such as in the case of New Jersey
purchasers.
Mr. Anaya. Mr. Chairman, in my prepared statement that I did not
read in its entirety — in my prepared statement, I made, among other
recommendations, two that I think touch on this point. One recom-
mendation was that the law should be amended to require the developer
to include in his statement of record copies of all printed materials
that would be used in advertising, transcripts of all television and
radio advertising, and accurate summaries of all verbal representations
which are made by the developer or his salesmen in promoting the
business.
Second, Mr. Chairman, we have recommended that developers be
required to establish an escrow fund to insure the completion of any
of the amenities that they themselves represent they are going to have —
not that they should have all the amenities that we would want them to
have, just that they insure that they develop those amenities that they
claim in the representations that they are going to provide whether
it be water, sewage, golf courses, shopping centers, whatever, electrical
facilities.
And this is particularly — it would be applicable to those subdividers
who, in essence, are carving out new cities. They make all of these kinds
of representations that they are going to have running water, and a
sewer system, and a golf course, and they sell all the land, and then
they are gone and nothing happens.
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So I think the oornhiTiation of more disclosure and the escrow fund,
I tliink would definitely solve that kind of a problem, Mr. Chairman.
Mr. GoNZAUBz. Very good.
I want to thank you very much, on behalf of the subcommittee, for
f he time and trouble you have taken, and your sacrifice in coming all
tlie way over here.
Your testimony is very valuable. You made a very good presenta-
tion and we are very grateful to you, Mr. Anaya.
Mr. Anaya. Mr. Chairman, thank you very much, we have tried to
help the subcommittee staff in the last several months, and we will
continue being available and will be glad to appear any time the'
subcommittee would desire.
Mr. Gonzalez. Thank you very much.
We have a vote pending, and those were the second bells that just
rang. So we will suspend briefly for about 5 minutes while we go over
and record our vote, and come back, and then we will hear Deputy
Attorney General Barnes.
FBrief recess.]
Mr. GoNZAUEz. The subcommittee will come to order. We will pro-
ceed with the hearings and recognize Deputy Attorney (Jeneral Barnes.
And again, Mr. Barnes, you have a prepared statement We are very
grateful to you for the time you have taken, and for your own attor-
ney general. You may proceed as you see best. You may wish to present
a summary of your written presentation, whicli will be in the record
intact; or you may proceed by reading your statement. It is strictly
up to you.
STATEMENT OF HON. JAMES I. BABNES m, DEPXTTT ATTOBNET
OENEBAL OF THE STATE OF NEVADA
Mr. Barnes. Thank you, Mr. Chairman and distinguished Ccm-
gressmen.
As you have indicated, I have submitted a prepared statement. I
don't think that I will go through that word-for-word, but there are
a few points I would like to make, and I will be fairly brief today.
First of all, I want to say that I am here representing Attorney
General Robert List, and I ^o thank you very much for affording me
the opportunity to appear here today and to discuss with you proposed
amendments to the Interstate Land Sales Full Disclosure Act.
T^et me make it clear at the very outset that I favor two major actions
being taken by Congress.
One is strengthening the Interstate Land Sales Full Disclosure Act,
which would include giving the State attorneys general the authority to
enforce tlie Federal law on behalf of the citizens of their States; and
also, having this Interstate Land Sales Full Disclosure Act focus on
what I think is the major problem — and that is, the large subdividers.
We find, in our experience, that the mom-and-pop subdividers, as
Mr. Anaya termed it, is not really the problem. It is the large sub-
divider who comes in and subdivides 50,000 acres, primarly seUs it to
out-of-State people, and makes all sorts of promises as to investment
potential, as to the improvements, and the public services and utilities
that will be put onto the property, and then the purchaser finds out
sometime — it is several years down the road — that actually these prom-
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ises haven't been fulfilled and there was no intention in the first place
that they would be fulfilled.
Now in some cases, it is a case of the subdivider actually, in good
faith, thinking he will be able to make the improvements, and then
it turns out that he doesn't have the money when the time comes to
put them in.
And in other cases, the developer has no intention of putting these
improvements in, in the first place.
Mr. Anaya also made mention of one of the proposed portions
of the legislation that I would strongly favor, and that is the estab-
lishment of an escrow account which would require the developer to,
"up front," so to speak, put all of the money into an account necessary
to eventually effectuate each and every promise that he does make at
the time he sells the property.
And under these circumstances, if the developer, in good faith, felt
that he was going to be able to make these, he would not be later em-
barrassed and imable to fulfill his promises; and, on the other hand, if
the individual developer actually never intended to make the improve-
ments, of course he would be discouraged from even registering his
land and being able to sell it.
So I think that is one of the most important points that I see in the
proposed legislation.
There are a few other things that I think are also important. Mr.
Anaya made mention of these, in his written statement, but he did not
discuss — ^he only discussed two of them. One was the escrow account,
and the other was the requirement of having the developer place in his
statement of record printed copies of all of the printed materials that
he will use, or copies of the printed materials that he will use in his
advertising, and also transcripts of his radio and television advertise-
ments, and also stating a summary of the sort of oral representations
which will be made by the developer and his salesmen.
So that, in the event that there is some problem as to the representa-
tions that are made either through advertising or the salesmen, these
will be stated in the statement of record, as opposed to the way it is now
where the developer is not required to put anv of these materials into
the statement of record. He can put one thing into the statement of rec-
ord which is entirely different, or even perhaps diametrically opposed
to what actually ends up in his sales brochures and on the lips of his
salesmen.
Now this is, again, another one of the nillars of this legislation that
I think the Nevada attorney general's office would be greatly in favor
of.
A third item is the provision which would allow purchasers to be
able to sue developers for specific performance on any promises which
he or his agents have made.
This contrasts with the situation which is now present. And that is,
that purchasers are only permitted to seek monetary damages. And this
is often inaedquate.
Fourth, I think that purchasers should be able to revoke their con-
tracts if the developer fails to keep promises to provide the essential
services. This is also something that is lacking now, but we would like
to see this included in the new legislation.
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A fifth point, which Mr. Anaya had made in his written statement,
and with which we also concur, is that a purchaser should be permitted
to recover his attorney's fees, appraisal cost, and travel expenses to and
from the lot which he incurs as a result of lawsuits which he may bring
a^inst the developer. At the present time, as you know, this is not per-
mitted. And often, lawsuits are made prohibitive by the fact that the
attorneys' fees and the cost of traveling from New i ork and Nevada to
prosecute the lawsuit eat up any judgment which might be eventually
realized.
The single most important part, in mv view, of the legislation is the
parens patriae section which would authorize State attorneys general
to sue on behalf of their individual citizens in Federal courts through-
out the country to enforce the Federal law.
The present situation is that if a purchaser wants to sue a developer
individually, the cost is often prohibitive. It is a complicated lawsuit.
Most attorneys don't want to get involved in it because the recovery on
an individual lot is not going to be enough to justify the kind of work
they are going to have to put in, and to adequately cmnpcnsate them
in their fees. /
So there is a problem, from that standpoint.
And then, under the Federal Rules of Civil Procedure, or the State
rules, which provide for a class action, this sort of situation really
isn't very easy either, because of the procedural obstacles to bringing
class actions, such as the notice requirements, and all of the other
things which are well known, and which the Congress discussed when
they enacted the antitrust parens patriae legislation.
I think the same items, the same factors that applied to the anti-
trust area also apply to the land sales area — although it is true that a
lot costs so much more than some of the consumer items that would be
bought in the antitrust area.
Where you have price fixing, you still have lots costing — ^the marl»t
is running about $4,000 to $5,000, perhaps, so any kind of recovery is
not going to be anything really substantial.
So you do have the same considerations. We would strongly urge
that that portion of the legislation be enacted.
Of the three bills that are being considered here, Nevada would
favor H.R. 12574 and H.R. 11265, or portions of both. Essentially,
there are good points in each of them, and we would like to see them
combined, and have those portions which do strengthen the present
legislation culled from both of them and put together into a final ver-
sion of the legislation.
We don't favor S. 3084 because, as far as I can tell, all that essenti-
ally does is weaken the existing legislation, which I feel is already
probably weaker than it should be.
There are two other points I would like to mention — and I think it is
appropriate to mention this, because I would also like to urge you to
consider two things.
One thing is in the leirislation, which is very important^ and that is:
Doing away with the 5-acre exemption. Currently, under the Inter-
state I>and Sales Full Disclosure Act, there is an exemption for all
lots 5 acres or more in size. And at least in Nevada, where land is very
inexpensivee — specially the type that is sold, the desert, mountainous
h d, it is very easy for the developer to put together large parcels that
Id be in excess of the 5 acres, and then he is exempt from the act.
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We have had one lawsuit where a developer was purchasing land,
and purchased over 50,000 acres, and he purchased it at $30 an acre. So
you can see that he can put it together into 40-acre parcels, which he
did, and still be pretty close to the market — to where the market is and
was at that time.
And in fact, 40-acre parcels in Nevada can run for the comparable
price to what a small lot might run in Florida or New Jersey.
So if the act is going to help Nevada and other Western States that
are similarly situated, we are going to have to do away with that 5-acre
limitation.
Now I know that the legislation does contain a provision which
would propose a 40-acre exemption, and that is a step in the right di-
rection, but I would urge you to do away with size exemptions alto-
gether, because I do not think that it is really relevant to the legislation
whether it is an 80-acro parcel or 50 acres, or whether it is a 40-acre
parcel. The important thing is whether or not the developer is selling
the land honestly.
So that is one point. The other point is that I would like to see Con-
gress consider the type of land sales act which is in effect in California
at the present time, which is a fair, just, and equitable act.
This, in my view, is the best of all of the types of land sales acts
which are now in existence. This is one in which the legislature dele-
gates to an administrative body the duty to determine whether or not
the offering, on the whole, is fair, just, and equitable.
In the event that it is not, then the developer is not issued a license.
And I think if we are ever going to wipe out the problems that we
have, some day this sort of legislation is going to have to be enacted.
Now Nevada has seen fit not to introduce this type of legislation. I
would hope — and I would doubt that it will, any time in the near
future — but I would hope that the Federal Government might be able
to institute this type of legislation in the near future.
I thank you very much for allowing me to appear here today and to
discuss with you some of the ideas that we in Nevada have.
If you have any questions, I will be glad to answer them.
fText resumes on p. 188.]
[Mr. Barnes' prepared statement follows along with the referred to
exhibits. Exhibit A : Supreme Court of Nevada decision entitled Lan-
dex, Inc.^ et oH. v. State of Nevada^ et al.; and exhibit B : "The Regula-
tion of Land Sales in Virginia," a paper by Thomas L. Stringfield.]
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MEMORANDUM
TO: All Members of the Subcommittee on Housing and Conmunity
Development of the United States House of Representatives
FROM: James I. Barnes, III, Deputy Attorney General, State of
Nevada
RE: Revisions to the Interstate Land Sales Full Disclosure
Act
I. The Land Sales Industry in Nevada
In the period 1970 - 1973, Nevada was the primary marketing
state in the union for the land sales industry. At that time,
Nevada was visited by approximately twenty (20) million tourists
a year. It was estimated, by the Office of Interstate Land Sales
Registration, that twenty-five percent (25%) of all the subdivision
lots sold under the Interstate Land Sales Act were sold within
Nevada. There were in excess of 4,000 land salesmen in Nevada.
Many large companies were operating in Nevada including GAC,
Horizon, Cavanaugh Communities Corp. (Rotonda) , and AMREP. All
or most of these subdividers were subsequently sued by the Federal
Trade Commission or the Office of Interstate Land Sales Registration.
Most of these companies entered into consent orders as a result
of this litigation.
One of the largest land sales frauds in the nation during the
1970 's occurred in the state of Nevada. This involved a siibdivision
(Lake Havasu Estates of Arizona) that purportedly met the require-
ments of the Office of Interstate Land Sales Registration.
Nevada's Land Sales Act, Chapter 119 of the Nevada Revised
Statutes, became effective July 1, 1971. This act was weak, with
no "teeth." Effective July 1, 1973, the Act was strengthened
considerably.
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Currently, Nevada is visited by approximately thirty (30)
million tourists annually. Given the re-emergence of the right
conditions, Nevada could again become an excellent market for
land sales. Nevada has experienced living with no state land
sales regulatory program, and it has ejcperienced living with a
%#eak l2uid sales regulatory program. Although the present Act is
fairly strong, it leaves a lot to be desired from a regulatory
standpoint, and attempts by the executive department to strengthen
the Act at the last two legislative sessions were rebuffed. At
the last legislative session, a serious attempt was made to \feaken
the Act. What will happen to the Act in future legislative sessions
is open to speculation. I urge you, on behalf of the Nevada
Attorney General's office and the Nevada Real Estate Division, to
take measures to strengthen the Interstate Land Sales Act in order
to provide additional protection to the citizens of the state of
Nevada and to its many visitors.
II> Nevada^s View of Reform of the Interstatg Land Salea fict
Two major things are important to Nevada: (1) that the
Interstate Land Sales Act be very strong, and (2) that the Act be
focused on the problem developers, who generally are the larger
developers .
Traditionally in Nevada, the land sales industry has tended
not to prey upon residents of the State, but it has instead tended
to prey upon tourists.
Nevada's state Land Sales Act (Chapter 119 of the Nevada
Revised Statutes) is adequate when dealing with sales made only
to local people, but it is inadequate when dealing with sales made
to out'Of -staters. For this reason, it is important to Nevada that
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the Interstate Land Sales Act be very strong.
III. Some Problem Areas In Nevada's Land Sales Act
(1) It provides for no subpoena power outside the
state.
(2) The Act provides for only a three (3) day "cooling
off period" - this is not long enough for many tourists.
By the time the tourist arrives home, his three day period
may have expired.
(3) The Act provides for an exemption for parcels
40 acres or larger in size. Such parcels are subject to
none of the requirements of the act, except that the
advertising proposed to be utilized in offering the parcels
for sale must receive the prior approvial of the State Real
Estate Division prior to being so utilized.
The Act provides for a complete exemption for parcels
80 acres or larger in size. Such parcels are subject to none
of the requirements of the Act# not even the advertising
pre-approval requirements.
Desert land in Nevada can be so inexpensive that a
subdivider can divide land into large parcels and still
sell it at prices comparable to or less than a small lot in
an Eastern state.
(4) The Act contains no fluid recovery provision. In
a recent Nevada Supreme Court decision entitled Landex, Inc . #
9% ttl.va. ^^^^g Q^ Nevada, et al . , (a copy of which is attached
hereto as Exhibit "A") a trial court judgment ordering the
offering of rescission to some 900 purchasers was reversed
based upon the fact that none of the purchasers had testified
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at the trial and proffered evidence that he had relied on
the misrepreBentations made by the developer and no purchaser
had presented testimony that he had been damaged by the
jnlerepreaentationB of the developer.
An Informative discussion of Nevada's Land Sales Act is found
in an article vrritten by the present District Attorney of Elko County,
Nevada, Thomas L. Stringfield, which is entitled "The Regulation
of Land Sales in Nevada" (a copy of this article is attached
hereto as Exhibit "B").
IV. Nevada's Position Regarding Some
Portions of the Proposed Legislation
There are several comments that should be made- regarding
Nevada's position on certain portions of the proposed legislation:
(1) Both the Minish bill and the Adjninietratloti's
bill propose changing the definition of aubdivlsion from its
current one, that being any division of more than fifty (50)
lots constituting a subdivision. The Minish bill would make
any division containing more than forty (40) lots a subdivision.
The Administration's bill would make a "subdivision" more
than 100 lots.
Nevada's position is that generally most problems are
occasioned by the large developers. Nevada would defer to
the judgment of the Office of Interstate Land Sales Registration
in this matter. Incident ly, in Nevada a "subdivision"
consists of thirty-five (35) or more lots.
(2) The Minish bill proposes to change the Interstate
Land Sales Act lot size exemption from its current 5 acres
to 40 acres.
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Nevada would support this amendment. In Nevada desert
areas, large parcels can sell for prices con^arable to, or
less than, the price of a small lot in an Eastern state. The
current five (5) acres exemption provides developers with en
easy method to avoid the provisions of the Interstate Land
Sales Act.
(3) Requirement that developer place into escrow funds
sufficient to complete all promised improvements -
Nevada favors such a requirement - full disclosure is not
enough. People seem to tend to believe that developers will
fulfill promises. People apparently think that the government
has approved a subdivision by issuing a property report.
Nevada's Act requires that "adequate financial arrangements"
be made for all prcnised improvements - Nevada has implemented
this phrase to mean a letter of credit, third party bond,
100% cash in escrow, or an escrow account that accumulates
funds out of the purchaser's do%m oavment and monthlv installment
oavments. with the develooer beinq orohibited frcm removing
funds from the escrow account until the imorovements are
comoleted.
(4) Nevada would oppose any amendment which would exempt
subdivision lots sold within one hundred (100) miles of the
purchaser's residence. Nevada wants the regulation of large
developers strengthened, whether or not such developers sell
lots to purchasers who reside within 100 miles of his subdivision.
(5) Nevada %muld support a lengthening of the right of
rescission period (which is currently 3 days) . The 30 day period
proposed in the Minish bill is -favored, however, even the 14
day period proposed in the Administration's bill would be a
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%#elcoaie improvement.
A lengthening of the right of rescission period would
be particularly helpful in sales made to tourists, as are most
sales in Nevada.
(6) Nevada favors that portion of the Minish bill which
would give the purchaser three (3) years within which to rescind
the sales contract under certain conditions.
(7) Nevada favors that portion of the Minish bill which
would extend the maximum statute of limitations under Section
1412 to seven (7) years.
Many of the premises made by the developers' salesmen
concern events which are to take place in the distant future
Generally speaking, larger statutes of limitations are desirable
so that the consumer will be better able to ascertain whether
promises have been, or are likely to be, fulfilled, while he
is still able to take legal action in the event that the
promises are, in fact, not fulfilled.
(8) Nevada would favor the provision found in both the
Administration's bill and in the Minish bill that would
increase civil remedies to allow a plaintiff to recover attorneys'
fees, appraisal fees and travel fees to and from the lot
incurred in connection with a suit brought against a developer.
(9) Finally, Nevada would be in favor of the passage
of the peurens patriae right to sue portion of the Minish bill.
Simply stated, it is difficult and costly for an individual
purchaser to bring his own, personal lawsuit against a developer
who has defrauded him. There are obstacles to bringing a class
action. The parens patriae device would allow the various
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State Attorneys General to utilize the powers of the state to
assert the legal rights of the citizens of their respective
states in a practical way.
V. Conclusion
The preceding pages contain examples of the type of reforms
to the Interstate Land Sales Act which would be favored by the
Nevada Attorney General's office and the Nevada Real Estate
Division. Generally speaJcing, any reform which %rould strengthen the
Act or would enable the Office of Interstate Land Sales Registration
to focus on what apparently is the most serious problem area -
that of the large subdivision and those who sell it - would be
supported by both offices.
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IK THE SOPREHE COURT OF THE STATE OT NEVMJA
IMXDEX, ZHC. f a foreign corporation*
inoorporatod under the la%#s of the
State of Arlsona, FRANK E. GLXVOKEZSR,
et al. ,
Appellants f
THE STATE OF NEVADA, ex rel. ROBERT
LZ8T, Attorney General, and NEVADA
REAL ESTATE DZVISZON, DEPARTMENT OF
COMMERCE, ex rel. R. E. HANSEN,
Estate Adalnistrator,
Respondents.
9053
FILED
:JUL261973
C. M. OAVIMTOnr
Appeal froa jodgnents Isposlng civil penalties,
granting injunctive relief, and ordering restitution.
Second Judicial District Court, Washoe County i Peter Z.
Breen, Judge.
Affinaed in part ; reversed in part .
Vargas, Bartlett, and Dixon,
and Jaaws S. Beasley, Reno,
for Appellants
Robert List, Attorney General,
and Jaaws Z. -Barnes, ZZZ,
Deputy, Carson City,
for Respondents
P Z N Z M
By the Court, MANOUXIAN, J. s
On May i, 1974, acting under Nevada's Misleading
advertising legislation, HRS 207.171, et seq. , and Nevada
Rules of Civil Procedure, Rule 65, et seq. , governing in-
junctions, and incidentally pursuant to NRS 119, our licensing
and regulation of land sales la%rs, respondents cooMnced
this action in district court against appellant Landex,
Inc., (hereinafter *Landex*), and Frank Glindaeier,* indivi-
dually, president and sales manager of Landex. The complaint
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«ll«9«d tlir«« c«as«s of aetioa. TIm first cans* of action
raquaatad aonatary civil panaltiaa against Laadax and
Glindaeiar, porsoant to MRS 207.174 for falsa and ■twlaading
advertising and raquastsd tha issoaaca of an injunc t ion
pursuant to HRS 207.176 an joining appallant Landax fron
continuing its dacaptiva praeticas. Tha s a c o n d causa of
action sought to unjoin Landax fron using advartising natarial
in its land salas businass which had not racaivad tha prior
approval of tha Mavada OapartsMnt of OoHwrea, through its
Real Estate Division (hereinafter "Division*), in accordance
with NRS 119.120(1) (c) and 119.180(7). In its third causa
of action, the State sought to enjoin Landax fron selling
real estate through "registered representatives,* a proacribed
practice (see VSS 119.180), rather than through licensed
real estate salasaea or brokers, as requited by HS8 64S.210
and 645.230.
Prior to this litigation, Landax successfully
sought, through the Division, an axeaption froa all- effects
of Chapter 119 of the Nevada Revised Statutes, our land
sales legislation, wtth the exception that all advertising
used in the sale of Mountain Meadow Ranchea (hereinafter
*MIR*) Mist be submitted to and approved by the Division
under HRS U9.120(l) (c).
The precise authority of this proceeding is con-
tained in HRS 207.171, 207.174, and 207.176^.
These statutes in relevant part provide:
VRS 207. X7L *It is onlavful for ^y perion, fira,
corporation or aasociatioa or any aq«rrt or e^loyae thereof
to us«t publish or by any other aanAar or aeana,
ladudltig but not liaited to solicitation or . . door-to-
door contacts aq/ 4 1;^ tenant which is known or through the
•xercisa of rvason^la c^re should b« 3uiown to be falae,
decaptiv* or aisl^iding in ofdar to Induce *ny person to
purchAS* . . any tit.ia or intafa«^ in ajiy real , . •
property ... or to enter into any obligation or trapsaction
relating thereto • . • . *
HRS 207.174, *Any person, fixa, corporation or associa-
tion or any other organization which violatea any proviaion
of HRS 207.171 . . . i» Uable for a civil penalty not to
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Zneitent to tlM first cauM of action, tho trial
court found that on March 26, 1974, appallants, throoigh
thair various agants, had »ad« rapresantations which *%iara
and ara falsa or dacaptiva or sdslaading, or tandad to
■islaad within tha aaaning of NRS 207.170 at sag." Tha
court furthar found that *said falsa, sdslaading, or da-
oaptiva stataaants «rara aada to twanty prospactiva pur*
chasars," and that GlindsMiar "tias diractly rasponsibla for
tha form and usa of such falsa, sdslaading, or dacaptiva
stataaants." Zncidantal to thasa findings, Landax %ras
ordarad to pay a sum of $25,000 for twanty violations of MRS
207.170, and appallant Glindaaiar was ordarad to pay $2,500
for tha aaaa t«panty violations. Additionally, appallants
wars paraanantly anjoinad froa Making any furthar rapraaan-
tations of tha natura datamdnad to ba mislaading and %fara
ordarad to of far rastitution to all thosa parsons who purehasad
a pareal of tha MIR subdivision aftar March 26, 1974.
With raspact to tha saoond and third eausas of
action, appallants wars panunantly anjoinad froa utilising
any unapprovad advartising and froa utilising ragistarad
raprasantativas for purpoaas of sailing tha subdivision's
proparty.
This appaal is takan only froa thoaa portions of
tha judgaant ralating to tha first causa of action. Appallants
contand tha trial court mrrmd (1) in its finding that
axeaad $2,500 for aach violation, which shall ba racovarad
in *. civil action brought in tha nana of th« 5^*t« of Nevada
by tha attomay 9«ncr«l ... in a couft of covnpetant
jurisdiction. As ua«d in this saction, th* tam^ **ach
violation* includaa, as a single violarion « egmtinuous or
rapatitiva violation ariaing out of tha sAioe act.
hr£ 207*176 'The attorney genarfti « , . aay bring an
action in any court cf coptpotent juriidiction in tha nasM
of tha 3tatc of Nevdda or hi* ovn conplaint or on tha com
plaint, of *ny board oitic^z ^ person- corporation "or
aasociftion to enjoin any violation or proposad violation
of tha provisions of . krs 207.171 to 207.177, inelusiva."
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GUndMlsr violated MRS 207.170, eUiming th« •vidmot it
iiisa£flei«ati (2) in eoncludisig th«t th« doctrines of ra»
judicata and eollataral aatoppel did not apply to praeludo
raspondants* raliaf i (3) ia ordaring Landax to aaka raati-
tution to all purchasars of "MMR" aftar March 26, 1974 i and
(4) ia holding that appallanta had comdttad t«#anty viola-
tiona of ms 207.170.
1. Sttbatantial Evidanca .
Appallant Glindaaiar contanda that ha» as praaidaat
of Landax, ootad not ba hald rasponaibla for unauthorisad
stataaanta aada by individual aalas rspreBantativaa and that
avan if it ^mrm shown that Glindaaiar was diractly rasponaibla
for tha allagad aisrapraaantations , tha Nashoa Oistriet
Court was barrad by tha doctriaaa of raa judicata and collataral
astoppal frea finding that tha atataaanta aada by tha Landax
parsoonal wara daoaiving and aialaading. Tha lattar quaatioas
will ba diacuasad infra .
As to appallant Glindaaiar*s first elaia« this
Court's raviaw of a trial court's datarainatioas of faetaal
quaatioas is liaitad. Zn Bavarly Entarprisas v. Oloba Land
Corp., 90 Mav. 363, 526 P. 2d 1179 (1974), wa statads
Wh*f« a qtwition Of fact has baan datftrbinad
by tha trial courts Uiiv court vill not ravan*
ualasa tha ^ud9»«Dt it clearly arroneDUB aiut
not basad on substantial «vidEnc«* NRCF 52\m] t
KockoB T. aar^lt ot Nev«dA, 90 Slav. 140, S20 ^,2d
13S4 19 74 Fletehar v. Flatchar, 89 Mav. 540,
516 9.2d 103 (1973).
Zd. at 365, 526 F.2d at 1179.
Tha raco r d ahows that appallant Glindaaiar axar*
eisad diraet suparvision .of tha salas parsonnal and thair
proBOtioaal prasaAtaticns. Ba aay not, tharafora, aseapa
culpabiUty by coatanding that Landax alona is liabla. Saa,
VKS 207.171 ragarding agant and aaployaa liability i aaa
also, Jory v. Bannight, 91 Nav. 763, 542 F.2d 1400 (1975).
Zn addition to tha othar substantial avidanca, %fa find
parauasiva tha fact of Glindaaiar* a tastiaony that ha par-
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•onally instructed his salss psrsonnsl as to %fhst would
coapriss thsir sslss prss«ntstions and also draftsd tha
podiiai spssdiss which %fox« qivsn daring ths salas prasan-
tations. Appallants eontand that tha salas parsonnal
"voluntaarad* atatasttnts which wara not eontainad in tha
praparad spaachas or aatariala. Tha racord doas net support
this centantioa.
Bavaral spacifie raprasan tations aada to tha pros-
pactiva purchaaars on May 26, 1974, which «#ara found to ba
sdarapraaantativa of tha actual subdivision ara thati lass
than ona percent of the total land in Nevada is available
for aala to the publici "HHR" consists of flat land with a
few rolling hills i there %fere springs and walls throughout
the subdivision! all water found in tha subdivision was good
water I eoets of trips froa the purchasers* hosws to purchase
aa well aa on a subsequent trip to determine if they desired
to retain the p r oper ty would entitle the purchaaar to a
federal ine oaw tax daductioni all of tha registered represen-
tatives in the Landex salea roon on March 26, 1974, were
approved for their selling activities and ^mrm highly qualified
in all phases of investaenti and, that parcels in the sub-
division oottld be resubdivided by the purchasers.
Bvidence to establish violations of NKS 207.171 ia
net that quaatua necessary to prove a victim* a claim of
fraud. To prove false advertising under our statute, the
State need only eatablish that tha defendants made state-
ments they knew or should have known «#ara untrue or mis-
leading in order to effect tha aala. Actual deception is
unnecessary to create liability under NRS 207.173. Cf.
Lubbe V. Barba, 91 Nav. 596, 540 P. 2d 115 (1975). Tha
atandard for untrue or misleading statements is the likeli-
hood that tha public will be misled. Sm, Double Eagle
*
Lubricanta, Incorporated v. r.T.C. , 360 F.2d 268 (10th Cir.
1965). Our review of the record reveals substantial evidence
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•upportiv* of th« trial court** tetomdnations under ims
207.171 and further raspacting Clindaaiar'a individual
liability. Additionally, tha trial court tiaa justified in
entering a permanent injunction enjoining Landex frea further
pursuit of such prohibited activities.
2. Res Judicata and Collateral Estoppel .
Appellants* second claia stens fron a decision of
the Fourth Judicial District Court of the State of Nevada,
in and for the County of Elko, rendered prior to the within
litigation on March 15, 1974. In that action, the district
attorney of Elko County sought to enjoin the sale of land in
"MIR" incident to Chapter 278 of the Nevada Revised Statutes,
opposing Landex *s claia of exesiption from that Chapter's
application. Incidental to the primary claims, the district
attorney alleged that Landex was in violation of VR8 207.171,
by virtue of an alleged representation by a corporate agent
to the effect that the marketed "open space* land had a
reservation of water rights in Lazidex. The Elko trial court
in a relevant part of its decision concluded t
5. The court hac observed from the promo-
tional spaachvs filvd vitii the ^al Estate Cooni*-
sioD by the t>efancUnt, that Uie * Sales Fitch* ij
that land is becoming mcarce; th«t lajid is a pnulant
ijivestftentr and in aany c&sea in the pact has
resulted in huge profits tor Uia land owner. As
for exantple, land on the Lds V*ga* $tfip- The buyers
are invited t« purchase as a speculative investment.
^wre is nothing unlawful about this aoproeeh et
long as there is Vfull ditcloaure > {En^phasia addad,)
Appellant argues that as a result of the Elko
County District Court's determinations, the Washoe County
District Court was precluded by . the doctrines of rei Indicate '
and collateral estoppel fron finding that the represents tiems
made by the sales representatives of Z«andex %#ere false ot
misleading.
In Paradise Palms v. Paradise Homes, 89 Nev. 27,
505 P.2d 596 (1973), this Court, quoting from the landmark
case of Bemhard v. Bank of America, Nat. Trust ft Sav.
Ass*n, 122 P. 2d 892 (Cal. 1942), stated.
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*Th« doctrine of res judicata precludes parties
or their privies from relicig^ting i CAtu« of Action
that has bc«n finally d«ten&in«d by a court of eonp*-
tent jurisdiction-. Any Iesu* necessarily decided in
socta litigation is conclusively dotenuned «& to
the par^iee or their privies ii it i£ involved in a
subsequent lawsuit on a different cause of action'
'In deterainlnq the validity of a pies of res
judicata three qucBtlona are pertinent; Was the istue
decided in t^e prior adjudication identical vith the
One presented in the action in question? Kas there a
final judgment on the P«rits7 Mas the party against
vhfvn the plea ii asserted a party or in privity
vlth a party to the prior adjudication?'
Id. at 30-31, 505 P. 2d at 598-99.
Respondents concede the finality of the prior
adjudieaticni hoi^ever, they contend that they were not in
privity with the Elko County district attorney and that the
issues litigated in this Mashoe County proceeding were
different froa those litigated and decided in the Elko
County action. Froa the record before us, «#e are con-
strained to agree with respondents that the issues tried in
the Elko proceeding are SMirkedly dissimilar froa those now
before us. The Elko case involved a different form of
advertising than the form of podium speeches and other
personal contact. We find it unnecessary to discuss the
privity question.
Purthersore » the Elko County decision as to the
t en de n cy of the questioned statesient to mislead the public
was qualified by the language "as long as there is a full
disclosure.* The issue litigated there focused on tdtether
there was, ia fact, enough of a disclosure so as to fully
infom prospective purchasers. Moreover, the representa-
tions were of a different type and nature, «#ere made subsequent
to the Elko decision, and were made in Bene, not Elko.
The doctrine of res judicata proscribes the hearing of
issues determined by a court of competent jurisdiction in a
prior proceeding between the sane parties regarding th» same
cause of action. Narkoff v. New York Life Zns. Co., 92 Siev.
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268, S49 P. 2d 330 (1976). TIm doetrlM of collatwral
•stoppttl op«rat«s to procludo tho partios or thoir prlvios
froa rvlitigating Is soos pr« viously litigatod and actoally
dotoxaiaod in tha prior proooodiag. Stato y. XalXie» 92
Mot. 665, 557 P. 2d 70S (1976); Clarlc v. Clark, 80 Nov. 52,
389 P. 2d 69 (1964). Tte trial oourt eoMdttod no orxor ia
ruling tha dafaasaa of ro» judicata and collataral astoppal
iaapplicabla.
3. Raatitotion .
Baatitntion was not oaa of tha raawdias spacifi-
cally allagad or prayad for by raspondaata ia thair eoiplaiat.
It ia appallant's centantion that aaauaiag arqoando tha
ooaplaint was sufficiaat to allow rastitutioa, oa tha facts
of this caaa an award of rastitotioa was iapropar. Ms
Za support of thair elaiasd antitlaasnt to rasti-
tutioa, raapoodaata raly haavily on Paopla v. Suparior Oourt
of Los Angalaa County ("JayhiU*), 507 P. 2d 1400 (Cal.
1973). At tha tiM Jayhill was dacidad, tha California
Suaiaass aad Profassioas Coda providad that f alaa or aislaadiag
advartiaiag *asy ba anjoinad* in an action by tha attonay
gaaaral but %fas silant as to tha powar of tha trial court to
ordar raatitution in such a procaading. Tha California
statutas involvad ara similar to MRS -207.171, at sag . Za
eonsidaring tha propriety of the attomay ganaral saalciag
rastitation on bahalf of dafraudad purchaaars, tha California
Supraas Court atatad.
At tha tias tha caa«>laint was filed Businaas
aad Prof«»ioni Cod* Svctlon 175 3S provided that
falaa or nlsleadlnq advertiain^ 'nay be enjoined
in aa •ctlon by the Attorney Generni, but w*» ttlent
as to thu pfjwvf of the triil court to Oj^d^r fCAtitn-
tioci ill auiCh * proceeding on tn* oth<r hand tha
statu t* did AOt r* strict tha court *> general equity
jurisdiction *in so aany words, or by necv9»afy and
ljwecap4ble inference." In the absence af such
a re^trivtloci s court of equity luy exereiae the
full rarige of its inJi«rent power* in order to
acco«f?liah complcta justice between the parties,
restoring if necessary the status quo ante as
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iMATly as aay b* «eitittv«d. In partieular;
in ftn Action by tii* Attorney General unii«r
tt*ction 17S3S a trial coort Iia* the inAcrttnt
pouttr te order «■ ■ fora of eneillAry r^limt,
tixmt the de£en^*nt« pmJce or offer to koic*
restitutioA to the custontra fouftd to hjve
been <3ef reuded * (Citetions OAitted; eaphaiie
i33cd. >
Id. at 1402. 8m also, Anaet., SS AU 3d 198 and Aanot. , S9
ALft 3d 1222.
Appallanta eoncad«« and v« raeognisa, that a ooort
has tha inharaat powar, ancillary to its ganaral aquity
jarisdletion« to ordar rastitution ia an appropriata case,
saa » Sacuritias 6 Bxchanga Cosi*n v. Goleonda Mining Co.,
327 F.Sopp. 2S7 (8.D. H.Y. 1971); hovavar, thay coatand that
tha Stata anat prova that parsons %fara actually dafraudad
and suffarad injury as a rasult of tha iu.ftr«prv*ejitetic»a
■ada. Baspondaats eontand that thay aaad only prova that a
violation of MRS 207.171 has occurrad, without sore, aad
eita VKS 207.173 which providaa ia part, "it is sufficiaat
. . . that aay stataMat rafarrad to ia MRS 207.171 has a
tandaney to daeaiva or sdalaad tha public bacausa of its
falaa or daeaptiva or sds loading charactar a van though ao
■aabar of tha public is actually dacaivad or misled by such
stataaant. * Ifa ara constrainad to agraa with appellant
Landax's arguaent. In People v. Superior Court of Ventura •
County, 5S2 P. 2d 760 (Cal. 1976), the California SuprasM
Court, dealing with an action brought by a district attorney
under legislation similar to NRS 207.171 at sag., stated:
Both OOA^lainte seek rcatitutlon to the
invastors . . . .The People > . . are etill i
requlTftd to proyg that restitution j.a ^pprg -
priate cvn t^Qugr>_civL 1 penj^ties rnay also ba
♦ appropriate in tJie absence pf such proof , '~
{Citation* onitted; et^phabii ailoctj/)
Id. at 763. See alao, Kuglar v. Rosaia, 279 A.2d 640 (R. J. 1971).
Tha coAparetiveiy limited proof raquirad to aatabliah
falaa or deceptive advertisiag contrasts sharply with that
aaceaaary to prove actionable fraud. To astabliah fraud
there must be provaat
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CI) A fali« r«pr«Kntatlon iMde by th* dfif«n-
dantf (2! knowledge Of b*licf oji the part of the
defendant that the rcpr«*entdtion is iaXsv — or^
Out h* h^s not M. tufficlent basis of information
to make itf L31 «n intention to induce the plaintiff
tQ «ct or to refrain from acting in reliance upon
the ■iareprAaentatit^ni ftj jumtifiable reliance
upon tiie representation on tJie p*rt of the plain*
tiff in taking action or refraining from it, and
[5] damage to tha plaintiff, raaulting from such
reliance ....
Lobba , aopra . at 599, 540 F.2d at 117; accord , Ach v. FinkaXstain,
70 Cal.Rptr. 472 (1968). Viaving the question aoat favorably
to raspondants, the first thraa alaaants have baan provan;
howavar, «#a find no avidanca on alaaants four and five.
Under our decision today, as to falsa advartiaing, no purchasar
naad ba produced, or even exist. Bowavar, relative to the
propoaitioo of actionable fraud, the record does not reveal
who, if any, of the aosw nine hundred purchasers wrm racipiants
of the deceptive advartiaing. Not a single purchasar of a
*MMII* parcel was produced at trial, and there is not a
shrad of avidanca showing reliance upon the false, deceptive,
or Misleading pre *«n cation ■ . Siadlarly, no avidanca was
proffered showing that all buyers %fara ainilarly situated,
and, therefore, what asounts are owed to each. Bacause of
like evidentiary voids ^f do not know whether reliance by
tha purchasars is provable, as sobm purchaaers say have
Icnown, as a raault of their knowledge and experience, that
tha represantations ware falae or sdalaading. Evan sore
fundaaantally, no purchaaar or repraiantative of a claas
was joined aa a party to the procaading^and for thia reason
alone restitution waa not an available raaedy. Mora praeiaaly,
tha court was without tha powar to enter a judgment ordering
an offer of raatitution or, eorraspondingly, reconveyances.
Ooggara, Onitad States v. Parkinson, 240 F.2d 918 (9th Cir.
1956) I m— alao, Kuglar , supra (by reason of a price uncon-
seionability c oswon to all traaaactions , all of tha salaa
contracts %fara held invalid and unenforceable); Jayhill ,
su£ra (holding that as a fon of ancillary raUaf to tha
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attoriMy qmamxul attit* « court aay avard rastitution to
all Durchasors shown to hava bean dafraudad) .
Although Mavada ia a 'aotlea plaading* atata, our
practica ia not ao libaral aa to panait racovary in thaaa
cireunatancaa. Tha court balow arrad in ordering rastitution.
4. Twenty Violations of WRS 207.170 .
Appallanta next challenge the atiard of civil uanaltiaa,
contending that the wording of HRS 207.170 "clearly establishes
that it ia the act of publication and not tha extent of that
advartiaing which dateradnes whether one violation, or a nuster
of violations, of falae advartiaing has been cooadtted.* They
argue that here only one violation of NRS 207.171 occurred,
referring to ms 207.174 which atatea in parts "As used ia
this section, the term 'each violation* includes, as a single
violation, a continuous or repetitive violation arising out
of the aasM act." Tha "aaaa act" language requires that there
be aapazmta acts involved before a person can be charged with
■ore than one violation of MKS 207.171.
Za the instant eaaa, tha court found that the stata-
■ants coaplained of were sada, initially, by a parson giving
a podiua speech to a group of approxisMtaly ttienty peraona
in a Bono "hoapitality room. " It waa further established
that iaaMdiataly thereafter various sales represent stivti of
Landex approached each potential investor individually and
■ade eartaia sdarapresentations used aa a partial basis of
the ooaplaiat. It is essentially appellants' contmitinn
that aiaoa the alleged itiSTaprascatation* «#ere aada to the
group, there is only one violation. We do not agree.
Zn Jayhill . aupra , tha court interpreted siailar
atatutory language and detersiined the nus^er of violations
by the nuaber of victisis. There, the defendant made twenty-
five aeparate aisrapreaentations to each custoswr in ^ir
door-to-door sales of encyclopedias. Tha Jayhill court
iapoaad the aaximua penalty of $2,500 for each violation and
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THE REGULATION OF IJiND SALES IN NEV7U)A
With the enactment of Chapter 119 of the NRS in 1971,
Nevada joined most of her. sister states and the federal govern-
ment in efforts to protect consumers from disreputable subdivision
developers. Nevada has long been a target for dishonest land sale
tactics because of our state's ability to attract vacationers
from every part of the country. Visitors to Nevada arrive with
cash and are usually in a "gambling mood". In addition, such
visitors rarely have time to even look at any property they pur-
chase m.uch less to fully investigate the persons with vhom they
are dealing or to understand the contractual terms which they are
agreeing to. Indeed, it was as much to protect the state's
reputation for fair play as to protect victimized consumers that
motivated the enactment of Ch. 119 into law.
Although Ch. 119 has been on the books for the last
five years / there has been a dearth of resulting case law
interpreting its provisions. The Nevada Real Estate Division
(NRED) , which is charged with enforcing Ch. 119, has recently
won an important case against Landex, Inc., in the Second Judi-
cial District. However, that case will soon be appealed to the
Nevada Supreme Court. Because the present writer foresees a
sharp increase in litigation pursuant to the enforcement of
Nevada's attempt to regulate land sales practices, the follov/ing
article is offered as a basic introduction to the scope of Ch. 11?-
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"fair, just and equiUable" level.- Here there are no specific
grounds for the denial of a subdivision license, rather the
legislative body delegates to an administrative body the duty
to determine v/hether or not a potential offering of subdivided
land is "fair, just and equitable". California arrived at this
level, as concerns subdivisions located outside of that State,
4/ •
also in 1963. The usual method of accomplishing this third
level of regulation is simply to define the sales of land,
located out-of-state, as being a "security" and subject to
security regulations.—^
During the 1960 's many states, and the federal govern-
ment,- expressed an interest in enacting legislation to protect
consumers from the alleged deceitful sales practices taking place
in the land sales business. In 1966 the Uniform Land Sales
Practices Act (henceforth Uniform Act) v;as suggested by the
6/
National Conference of Commissioners on Uniform State Laws."^
The Uniform Act has since been enacted by eight states and can
be categorized within the second, or "permit" level of regulation.
In 1960 the United States Cor.grcsc enacted the
Interstate Land Sales Act (ILSA)-^ which is the least cun3:)itious
of any recent attempt to regulate land sales activities. The
4/ Ca. D. & P. fis 10249.1, 10238.4.
5/ In addition to California, see Tcnn. Code Annotated ii 1602(5
1613; and Ohio Revised Cede SS 1707. 01(n), 1707.33
6/ Uniform Laws Annotated, vol. 7, p. 604. See also footnote
No. 12 infra.
2/ See the comment following S 7, on p. 616 of the Uniform Act,
The eifjht enacting states are listed in footnote lio. 12.
0/ 15 use BiJ 1701 - 1720.
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only effective requirement contained in the ILSA is that of
demanding that a property report be shown to purchasers before
completion of the contract. As such the ILSA should be placed .
on the first, or "mandatory disclosure", level of regulation.
It should be noted that during commit tCjB debates on the ILSA
in Congress, there was expressed a recognition that mere dis-
closure would be insufficient protection for consumers. However,
it \%'as felt that additional regulation ^vould be best accomplished
by the states on an individual ba^is.-^ Since 1968 the Office
of Interstate Land Sales Regulation (OILSR) , a subordinate agency
of the Department of Housing and Urban Development (HUD) , has
been continuously criticized for failing to fully enforce the
requirements of the ILSA.-=-^ In fact, the Federal Trade
Commission (FTC) has probably taken a more active role to protect
consumers from dishonest subdividers than has OILSR. — ' Also,
interviews by the present writer with California and NRED
officials indicate their continued dissatisfaction with OILSR' s
efforts.
It was at this point in the history of land sales
regulation (1971) that Nevada enacted Ch. 119. The Nevada
Legislature had a number of alternatives, such as determining
which level of regulation it desired to effectuate and from whigh,
9/ "Hearings on g 2672." Before the Subcommittee on Securities
of the Senate Committee on Banking and Currency, 90th
Congress, First Session, (1067). See also 6Univ. of
Michigan Journal of Law Reform 511, (Winter, 1973) .
10/ 7 Urban Lav;ycr 215, 222 (September, 1975), and 6 Univ. of *
Michigan Journal of Lav; Reform 511, 515, (Winter, 1973).
11/ 12 Huston, L. R. 708 (March, 1975).
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if any, earlier foreign statutes to drav; from. Basically, it
chose the second level or the "permit" type of regulation,
rejecting the more ambitious "fair, just and equitable" level.
It also, at least by implication, rejected the Uniform Act,
preferring to fashion a unique statutory scheme by relying on •
portions of all the sources mentioned above. So v/hile Ch. 119
may be unique as a v;hole, most of its language can be traced to
prior foreign legislation. -=^
Scope of Ch. 119
V?hat follows is an overviev/ of Ch. 119 which is meant
to serve as an introduction to Nevada's statutory scheme of
land sales regulation,
Do^'.i nitions
NKS 119.1^0 defines a "developer" as an ovmer of
subdivided land v;ho offers it for sale. Also, NRS 119.175 states
12/ Tlie following cross-referencing chart has been prepared in
order to make researching efforts more efficient. In the
first column at the far left is that Nl^S Section of Ch. 119
which ir. to be cross-indexed. The second column contains
correr.pondinq section nun^bers of the Intcrr-tate Land Sales
Act (15 use .^ ) . The third column contains corres-
ponding section nun.berL; of California's Subdivided Lands Act
(California Business and Professional Code § ), The
fourth column contains corresponding section numbers of the
1966 Uniform Land Sales Practices 7vct as published in
Uniforra Lnv;r. Ann otated > vol. 7, p, GO-I . This fourth column
is particularly helpful because each section of tlie Uniform
Act is followed by an explanatory comment, references to any
"source" statutes used in the preparation of the Uniform Act,
and references to statutes of those states v;liic]\ liavc adopted
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the scope of responsibility of a developer for the acts of his
subordinates in terms of respondeat superior rather than strict
liability. miS 119.060 defines an "offer" as "every inducement,
solicitation or attempt to bring about a sale". "Sale", is
defined by NRS 119.100 as any conveyance of "an interest in any
portion of a subdivision v/hen undertaken for profit". "Purchaser"
is defined by NRS 119.080 as any person v;ho "acquires or attempts
to acquire an interest in any portion of a subdivision".
There is nothing particularly novel about the above
definitions and all can be traced to earlier foreign statutes
(see chart at footnote Kb. 12). The definition of the term
"subdivision", however, is clearly unique in part. It is unique
not because of what it adds but because of what it lacks. NRS 119.110
defines a "subdivision" as follows:
"Subdivision" means- any land or tract of land in
another state, in this state or in a foreign country from
which a sale is attempted, which is divided or proposed
the Uniform Act. As of 1975 the follov/ing States have
adopted the Uniform Act, sometimes v;ith minor modifications:
Adopting State Statutory Citation
Alaska AS §§ 34.55.00-1 to 34.55.046
Connecticut CGSA §§ 20-329a to 20-329m
Florida FSA gfi 478.011 to 478.33
Hawaii MRS OS 484-1 to 484-22
Kansas KSA g§ 58-3301 to 58-3323
Montana RCM 1947 §?. 67-2117 to 67-2136
South Carolina Code 1962 »'iS 57-551 to 57-571
Utah UCA 1953 S5 57-11-1 to 57-11-21
Althougli there imc several instances v/hcre the Nevada
statutes were taken vcrlniliim from one of those other sources,
usually tliey are not exi^ict equivalents. As a result, each
corrcsixjnding statute should be carefully compared with
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to bo divided over any period into 35 or more lots, pnrccls,
unite or intcrcsLc, including but no'.: limited tO undivided
intcrer.tS/ v/hich nrc ofTcrcd, V.novm, designated or odvcr-
tiscd ar; a corriiT^o.n nnit by a common nnmo or zir. a part of a
convnon promotional plan of advertising and sale."
VTliile the lang\iage is not identical, ITRS 119.110 can
be clearly traced to the ILSA (15 USC 1701(3)), the Uniform Act
§ 1(6)) and California (Ca. B. & P. § 11000) definitions of the
NI^S
Ch. 3 19 before relying on the case lav/ of that correspond-
ing statute.
ILSA
i 119.020
.030
.0^0
.060
.070
.000
.000
.100
.110
.1?0
^140
.150
.160(1) .
(2)
(3)
.170
.175
.100(1)
(^n
(5)
(6)
.210
.220
.230(1)
(2)
(3)
.240
.250
.260
.200
.300
.330
1701(6)
1701(5)
1701(4)
1701(10)
1701(2)
1701(9)
1701(5)
1701(3)
1702
1705
1714(b)
1704(d); 1706(e)
1703(a) (?)
1706(a)
1706(b)
1707(b); 1716
, l-^03(a)(l);
1703(b)
1703(b)
1709
1710
1714(a)
1710
1706(d), (e) ;
1714(d)
1717
1707(a)
1714(c)
Uniform
California
Act
e 11013; 11013,3
§
1(5)
1(2)
1(3)
1(4)
1(1)
11000
1(6)
11000.1
3; 10(el(V.
11010
5
11014
7
11014
8(a),(b)
11018
7
11018.3
8(c)
8(c)
6(b)
10237.7^
16(c)
10(b)
iioia.i
4(2)
11020
16
11020
16
11022
11013.2(a)
11013.2(b)
11013.1
11001
11019 '
11023; 11029.1
16
10(a)
10(c),(d)
12
11(b)
IMc)
a/ T)ii
out
• r.cclion iipplic^r. only to r;i;b:"! ividod lands located
,idc of D^.e .Sialic oC California.
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v;orcl "subdivision". ^iHiat maT;cs Nevada's definition unique is
that it lacks the key phrase "whether contiguous or not . . ,"
v/hich all other definitions usually contain. — ' The ordinary
meaning given to the word "subdivision" is the dividing of the
r.ainc thing, Cov/ell v. Clar k (1940) 99 p. 2d 594, 596. Under the
rules of statutory construction the absence of such a key phrase
raises a presumption that the legislature meant not to adopt it,
expressly or by implication, (see Sutherland Statutory Con-
struction, i 51. 02. vol. 2A) . This presumption is particularly
strengthened v;hen one considers the fact that the Nevada Legis-
lature rejected an zimendment which would have inserted that
specific phrase into NRS 119.110, (see S. B. No. 512, Committee
on Commerce and Labor, April 10, 1975, § 12).
The resulting problem is this. Suppose a developer
chose to subdivide several noncontiguous areas of land, none of
which creates 35 or more parcels; would he be exempt from the
regulation of Ch, 119 because of the definition given by NRS 119.110?
Considering the fact that most developers purchase land only
immediately i:>rior to their subdivision plans it becomes clear
that NRS 119.110 offers an opportunity for developers to
circumvent Ch. 119.
The sugg'jstion has been made that such circumstances
would not escape regulation because of the language "advertised . .
13/ Although California's definition of a "subdivision" also
lacks this key phrase (Ca. B. & P. § 11000), the California
Real Estate Commissioner has been able to promulgate a
regulation to escape the holding of Cove 11 v. Clark . See
Title 10, California Administrative Code H 2003.
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as part of a common promotional plan . . .". Such la«cjuacje
firnt appears in statutory form in tlic Uniform Act (0 1(6)) and
is cxplaj nod by a comment which follows thereto:
"A subdividcr who offers land located in several
different areas or states will be subject to this Act if
the land is disposed of pursuant to a common promotional
plan. 7Q though each case -nust be examined ijidependcntly,
normally a common promotional .plan i:^ one v/hich utilizes
common advertising and sales methods to the extent that the
offeri)ig begins to take on the character of a fungible."
It seems clear to the present vnriter that almost any
attempt to keep separate and to retain some identity to the
advertising methods used for each "less than 35 parcel" subdivision
would create a trialable legal issue. Nor does it seem difficult
to imagine a developer, appraised beforeliand, of being capable of
offering the various parcels in such a v;ay that such offerings
do not "take on the character of a fungible". It should be noted
that neither the IIRED nor thc5r legal counsel necessarily agrees
v/ith the present writer's viewpoint on this subject.
There axc twc other possible ir.cLhods ..hich may be attc;»pt-
cd in order to avoid Uie definition of a subdivision as set
forth by MRS 119.110. Both of these methods are aimed at the
"35 or more lots" qualification and will be discussed only briefly.
First is the method which will be labeled the "internal granting"
method. Under this method one of several partners (but less than
35) will purchase a tract of land from v/hich they wish to create
a subdivision. The first XDartncr v/ill grant to all the partners
equal portions of this original la:;d. Each partner will then
repeat the same process, thereby granting to the same partners
an equal piece of his portion. Obviously, tliis process could
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continue ad infinitum. \Vliile the "internal granting" method
lacks tl^c ingenuity of the "partition" method (dencribed below)
there has not yet been any Appellate decisions on the subject.
Hov;ever, the California Real Estate Commissioner has success-
fully challenged this process at the trial court level. -^-^ The
final possible method of circumventing the NRS 119.110 defini-
tion of a "subdivision" is knov/n as the "partition" method.
Under this method several persons (i.e., 10) purchase a tract .
of land (i.e., 340 acres) as tenants in common. These persons
then seek judicial partition, (i.e., 10 tracts of land of 34 acres
each) . Each of these persons then subdivides his parcel into
34 lots and each claims to be exempt from the NRS 119.110 defini-
tion on the grounds that the original division v/as a governmental
act, not a private one. Such a method v;as specifically held to
.be a "subdivision" . and circumvention was denied in Pratt v. Adams
(1964) 229 C. A. 2d 602, 11 ALR 2d 524.'
In addition it should be noted that both methods
\irauld be vulnerable to whatever effectiveness is contained in
the phrase "conurion promotional plan" described above.
Exemptions
Assuming that the subdivision has not escaped the
scope of Ch. 119 because of the definition given by NRS 119.110,
a developer may still avoid regulation by applying to the NRED
for one of the exemptions provided by NRS 119.120. Some of the
14/ 111 support of the California Real Estate Con-jnissioner see
Caliilornia AGO, vol. 7, p. 66 (1956).
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more important oxcmptions will be briefly mentioned,
ICRS 119.120(1) (b) grants a total exemption if every parcel
v;ithin the su))clivision is 80 acres or larger. ImRS 119.120(1) (c)
grants a partial exemption where the smallest parcel is over
40 acres in size. However, the developer must still comply v/ith
the advertising standards as set forth by NRS 119.180/
(discussed infra) . Various subsections exempt most residential
types of subdivisions.
NRS 119.120(2) offers the developer a total exemption
if he can prove that he is selling real estate "which is free and
clear of all liens, encunibrances and adverse claims and every
purchaser or his or her spouse has personally inspected the lot
which he purchased . . .". This "free and clear** exemption is
either met or the l-JRED will treat the subdivision as being
covered by a "blanket encumbrance", which is defined by NRS 119.020.
A subdivision covered v;ith a blanket encumbrance cannot be sold
unless certain financial arrangements are taken, pursuant to
NRS 119.230, so as to insure that the developer will be capable
of fulfilling his contractual duties.
Chnp>Vcr 119 Licensing R cqu iroipo nts
As stated earlier, Nevada, has a "permit" type of
regulatory scheme, whereby a developer must meet certain specific
requirements or he cannot legitimately commence selling,
(see MRS 119.130.). In order to receive a "license" a developer
must first file an application as prcscril^cd by NRS 119.140,
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v/hich is also known as a "statcmont of record". The Rules and
Regulations of the Nevada Real Estate Division, Adopted Under
Ch. 119 (henceforth "Rules and Regulations") provide a more
detailed description of the application requirements. NRS 119,150
empowers the NRED to fully investigate all applications and to
perform an on-site inspection if necessary.
NRS 119.160(2) is significant because it sets forth
those grounds upon v/hich the NRED shall deny a license. These
grounds were taken almost verbatim from the California B. & P.
Code i 11018, and they are listed below:
(a) Failure to comply v/ith any of the provisions in
this chapter or the rules and regulations of the division
pertaining thereto.
(b) The sale or lease would constitute m.isropresonta-
tion to or deceit or fraud of the purchasers or lessees.
(c) Inability to deliver title or other interest
contracted for.
(d) Inability to demonstrate that adequate financial
arrangements have been rnade for all offsite improvements
included in the offering.
(e) Inability to dem.onstrate that adequate financial
arrangements have been made for any community, recreational
or other facilities included in the offering.
(f) Failure to make a showing that the parcels can hp. used
for the purpose for v;hich they are offered.
(g) Failure to provide in the contract or other \>n:iting
the use or uses for which the parcels arc offered, togothcr
with any covenants or conditions relative thereto.
(h) Agreements or bylav/s to provide for mancvgement or
other services pertaining to common facilities in the
offering, which fail to comply v;ith tlie regulations of the
division.
(i) Failure to emonstrate that adequate financial
arrangements liavc been made for any guaranty or worranty
included in thci offering.
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In order to enforce Cli. 119 licensing roquiremonts,
the ITilED is armed v/ith t\%'o potent remedies. First, the NRED
may o to a District Court and seek injunctive relief against
any / olation of "any provision" of Ch. 119 (see NRS 119.250).
Secon 1 the l>niED may, on its own initiative, issue a "Cease and
Desist c I der" against any unlicensed persons "engaging in
activitic . for v;hich they are not licensed under this Chapter",
(see NRS 1. 9.260) .
Chapter 11 9 . ' rcJosuro Roquirejncnts
Li) « most states v:hich have enacted a "p- rmit" t^'pe
of regulatory .:chcme, Nevada has retained the "mandatory dis-
closure" requi lents of the first level. VThilc Nevada imitated
California's su> "vision "licensing" statutes, it looked to the
Interstate Land f les Act when it drafted its "disclosure"
requirements. Dis -losurc is accomplished by the shov.dng to
prospective purchast rs of a "property report", v.'hich contains
the sajne information -"cquired by the NRS 119. l^'iO "statement of
record". This showing prior to contract signing is required by
NRS 119.1G0(4). NRS 1.1MG0(5) and (6) state the rights of a
purchaser to rescind wh'. e ho has not seen the property report;
whicli are either tliroe cic 's fro:r. the signing of a contract v/here •
the property report was : ^ * shov/n to the purchaser three days
in advance of such signing or three days after being shown the
property report where it v;a.; not shov.-n until after the signing.
An alternative rc;:tdy, in addition to recir.ion, or in
lieu thereof if the tlircc-day ti; c liiait has passed, is contained
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in Nl^S 119.220. This section provides an action for dajnngcs
where there exists a misrepresentation v/ithin the statement of
record or the property report. NRS 119.220 v;as taken almost
verbatim from the ILSA 15 USC i 1709. This civil remedy contains
only three of the five elements of common law deceit; — mis-
representation, reliance and damages. The statute does not
require that the defendant have knowledge of his misrepresenta-
tion or that he intended to induce the plaintiff v;ith such mis-
representation. It should also be noted that NRS 119.220(5)
effectively precludes pumitive damages.
Prior Approval of Advertising
For better or for v;orse, Nevada has been one of the
most advanced states in the area of requiring prior approval of
subdivision advertising. \\Tiile California demands such prior
approval of out-of-state subdivisions, — ' it has no corresponding
statutory requirement for subdivisions located v/ithin that State. — '
Both the California Real Estate Commissioner and OILSR are given
the authority to stop the continued use of misleading advertis-
17/
ing, — but neither can prevent the initial "flood" of such
material. — ' The Uniform Act allows the administrative agency
157 Ca D. & P. Code §§ 10249.1, 10237.7.
16/ However, the California Real Estate Commissioner has
accomplished the same result through a regulation, without
any "specific" statutory authority; see Title 10, California
Administrative Code S 2319.85.
17/ Ca. D. & P. Code S 11019; 15 USC 1714.
18/ This lack of a "preventive" remedy has been a target of con-
sumer protection advocates. See 7 Urban Lav/yer 215,
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the authority to demand prior approval of subdivision ndvcrtis-
3 0/
ing if it deems it necessary. — However, Nevada has the only
statute, NRS 119. 1G0J[1) (a) , v/hich absolutely demands prior
apx^roval of subdivision advertising of lands located in-state.
That section reads as follows:
1. No subdivision or lot, parcel or unit in any sub-
division shall be sold:
(a) Until the division has approved a v/ritten plan
or the methods proposed to be employed for the
procurement of prospective purchasers^ the
sale to purchasers and the retention of pur-
chasers after sale, which plan or methods
shall describe with particularity:
(1) The form and content of advertising to
be used;
(2) The nature of the offer of gifts or other
free benefits to be extended;
(3) The natute of promotional meetings involv-
ing any person or act described in this
paragraph;
(4) The contracts, agroer.ents and other papers
to be employed in the sale of such property;
and
(5) Such other reasonable details as may be
required by the division. The written plan,
or the methods proposed, may be filed as a
part of the application under NRS 119.140
and shall constitute and be treated as a
part thereof.
Nevada leadership in this area is further evidehced
by the fact that the advertising guidelines adopted by HUD
(24 CFR i 1715.15) were based upon NllED guidelines contained in
19/ Uniform Act rj 10 (b) .
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tho Rules and Regulations, (Section VI of the March 25, 1975
publication) .
The requirement that subdividcrs submit their adver-
tising for prior approval was an issue in the Landex trial. That
trial court (Dept, 7, Second Judicial District) held that
NRS 119.180(1) (a) v;as constitutionally valid. In addition.
District Judge Peter Brecn reprimanded the defendant and his
attorneys for their refusal to comply v;ith that statute. In his
Decision dated September " 29, 1975, on page 5, Judge Breen states:
"... Rather than seek a review of the actions of the
Real Estate Division through orderly and proper legal
channels, the attorneys and their defendants decided, as
it v;ere, to take the matter into their own hands, unilater-
ally overruling the Real Estate Division's efforts to
enforce Nevada's statutes. How can v/c expect the average
citizen to obey our lav.'s if the substantial businessman
and his attorney are allowed to select what rules and
decisions they v/ill and will not follow? ..."
As indicated earlier, that decision is expected to be appealed
to the Nevada Supreme Court.
Registered Represeni ative Issue
NRS 119.180 (1) (b) authorizes a developer to employ
persons not licensed under Ch. 645 (Real Estate Brokers and
Salesmen) to sell subdivision parcels. Absent that section such
use of registered representatives would be prohibited by law,
(see NRS 645.240). In 1973 the Nevada Legislature amended
NRS 119.180(2) so as to end the registered representative excep-
tion on January 1, 1975. Several registered representatives
brought suit challenging the constitutionality of tho 1973
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amcndnjcnt. The trial court (Dcpt. No. X, Eighth Judicial
District) ordered summary judgment for tlie State of Nevada,
hov/evcr, it v;as reversed by the Supreme Court on grounds that
some evidcnciary hearing was necessary. The issues are once
again before the same trial court and in the meantime the NRED
is enjoined from enforcing the 1973 amendment against the
named defendants.
State's Right to Sue for Restitution
On the face of Ch. 119, there is no indication that
the Nevada Legislature intended that the NRED should have the
right to sue for restitution so as to allow victimised purchasers
a return on their money. Even v;ithout such express authority,
the majority rule is that a state, once in court, can request
"complete relief", including restitution for victimized
consumers. — ^ In any cast.', Nevada's position appears to bo clear
because of NRS 645.215(1) and (2) which read:
645.215 Real estate division may investigate certain
transactions relating to unimproved land, subdivisions;
injunction in event of fraud, deceit, false advertising.
(1) If the real estate division has reason to
believe that fraud, deceit or false advertising is being,
has been or is to be pertetrated in connection with the
proposed or completed sale, purchase, rental, lease or
exchange of any vacant or unimproved land or subdivision
outside the corporate limits of any city, it may investigate
20/ Sec M itchell v. Robert Do Mario Jov/olry, Inc ., (1960)
361 US 200, 4 Lr.d 2d 323; 005 Ct. 332; and 55 ALR 3d 190,200.
For tlic minority rule see Commonv/calth v. Ponncy l vania
APSCO Systems (1073) 10 Pa. Commonweal Lh 13U, 309 h2d 104.
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the circumstances of such sale, purchase, rental, lease
or exchange.
(2) If such investigation reveals any evidence of
fraud, deceit or false advertising which has influenced
or induced or may influence or induce the sale, purcliase,
rental, lease or exchange, the real estate division shall
advise the attorney general or the district attorney of
the county in v;hich the land or subdivision is located.
The district attorney or, upon the request of the adminis-
trator, the attorney general shall cause appropriate legal
action to be taken to enjoin any further sale, purchase,
rental, lease or exchange until the fraud, deceit or false
advertising is eliminated and restitution has been made
for any loss. [Emphasis addedj
It should also be noted that an order for restitution v;as
requested and granted by the Landex trial court.
Observations
Consumer protection is very much in fashion these
days, yet periodically one must stand back and ask if any good
is really being accomplished. Since the implementation of
Ch, 119 in 1971 the NRED has prosecuted only one case to a final
judcjjr.ent (Landex) and there are no cases prc3e:*uly being prose-
cuted. A number 6f out-of-court agreements have been reached
betv;een NRED and subdividers suspected of violating Ch. 119,
but NRED officials are disenchanted v/ith the results. It is the
present v/riter's impression, from discussions v;ith NRED officials
that additional lawsuits v/ill soon be forthcoming. If such
lawsuits can be completed as successfully as was the Landex trial
court decision, then it is felt that some real headway will have
been made in protecting consumers from unscrupulous subdividers.
Needless to say, any decision by the Supreme Court on the Landex
case v;ill be crucial.
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Another aspect of Ch. 119 implementation is the f act-
that the number of active subdivisions in the State of Nevada
has been halved since 1971. It is hoped that this is because
disreputable subdividers are unable to comply with Ch. 119
requirements. However, there is the distinct danger that even
reputable subdividers are being precluded from their occupa' ion
because of the sheer bulk of the state and federal filing
requirements. One remedy to this problem of duplicate filing is
suggested by NRS 119.120(4) which allows the OILSR application
to be utilized to the extent that the same information is required
by Ch. 119. At present, hov;ever, the differences between the
tv^X) applications are too great and the NRED does not accept even
such partial duplicate filing. At one time it was hoped that
OILSR vADuld accept state filings, v;hich are usually more exten-
sive in scope, but little progress has b.een made here either .-^^
One of the most promising ansv/ers to the problem of
duplicate filing lies in the Uniform Act which has been adopted
by eight states (see footnote No. 12) . Section 20 of that Act
states:
"This Act shall be so construed as to effectuate its
general purpose to make uniform law of those states which
enact it."
\T\\y Nevada rejected the Uniform Act is not clear to the present
writer, since it appears to effect the scime results as the more
21/ nt present the follov/ing state filings are being accepted
by OILSK in lieu of the federal applicaLion: California,
Florida, Hawaii and Hcv; York. Sec 24 CFR 5 1710.26.
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coinplicaUcd statutory scheme of Ch. 119. In any case, if
add ■ l.ional states adopt tlie Uniform Act it may be possible to
formulate a single method of filing. It is suggested here that
the Nevada Legislature might do well to reconsider substituting
the Uniform Act for Ch. 119, particularly because of this goal
of uniformity whi-ch deals directly with the nationwide problem
of subdivision sales practices.
Finally, there is the problem that licensing implies
approval. Both HUD and Nevada property reports have large print
disclaiming any such effect, nevertheless it is felt that the
air of approval is still there. — ' The Uniform Act, Ch. 119
and ILSA all prohibit any such representation of governmental
23/
approval. — ^ However, it has been the present writer's personal
experience that these statutes are violated with impunity. One
subdivider has even been quoted as having found the property
report to bo an excellent medium for advertising. — -^ Any harm
done to consumers by this "implied approval" will only be offset
by an aggressive enforcement of Ch. 119 by the ITRED, and
.particularly by the successful completion of the Landex case
before the Nevada Supreme Court.
2 2/ 6 Univ. of Michigan Journal of Lav/ Reform 511,521
(Winter, 197 3).
2 3/ ILSA (13 use 1716), Ch . 119 (MRS 119.170), Unifom Act (S 6(b))
2-1/ "Consunor Protection in Land Development Sales" by
Ron V7alsh, 44 Conn. Bar Journal 403 (1970).
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Mr. Gonzalez. Thank you very much, Mr. Bames. You have been,
in my opinion, a most valuable witness. And you, yourself, I think
give the reason why, in your prepared statement. And that is: You
come from a State that, as you picture it, was considered the chief
State involved in that type of interstate land transaction.
You have also come from a State where you had no legislation to
speak of, statewide; then you had a weak provision; and then you
had strengthening factors. But also, I think you report that current
efforts are to weaken that law.
Mr. Barnes. That is correct.
Mr. Gonzalez. So it reflects a very valuable experience track record
that we should welcome, and perhaps follow through with specific
questions subsequent to these hearings.
And so I, for one, would ask unanimous consent that we keep the
record open on these hearings for that purpose, subsequent to your
appearance.
We may wish to submit some questions to you, which you would
reply to at your convenience for the record.
Mr. Kelly. Mr. Chairman, reserving: the ricrht to object, I would
certainly have no objection, if I could have some assurance that when
the questions go out and the answers come back, that each member
of this subcommittee have delivered to his office a copy of both.
Mr. Gonzalez. Well, I assume that this has been the case in the
past — ^that is, if they are done expeditiously and within time, before
the transcript is closed. Well, of course it becomes part of the record,
and that is available to us as soon as it is printed up and available.
Mr. Kelly. Well, I understand, Mr. Chairman. But while the rec-
ord is still open, I think that each member of the subcommittee ought
to note this, because otherwise it could very well go into the record,
and we would not be aware of it until it was down the tube. And
I think this is fine, for us to get any pertinent information, but I think
every member ought to know it, if it is going to be done outside of
the duly constituted hearings.
Mr. Gonzalez. Well, when I said "keep the record open," I meant
within the normal, traditional period of time, as we always have in
the case of subcommittee hearings.
Mr. Kelly. Well, further resen'in<r the ricrht to object, can we get
the assurance of the chairman that if the questions go out or answers
come back, that each member of the subcommittee would get a copy
of them?
Mr. Gonzalez. Well, as T say and repeat, this has been my under-
standing from time immemorial here, that when we have requested
submitting: questions for the record to be answered by the witness,
it is implied or understood that it would have to be within the limita-
tions that printing of the record and the return of the transcript
would imply.
That is, the witness himself has to have an opportunity to review
them and answer them, and have ample opportunity to answer for
the record. So it would be no more than the traditional request.
Mr. Keixy. Well, Mr. Chairman, further reserving the right to
object, if we are going to keep the record open, without my objection
it is going to be on the basis that if questions go to the witness, that
I know they went, and what they were. And if he sends answers back,
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I know that they came back before I see them in the record for the
first time.
Because otherwise, there can be a lot going into what will constitute
the "committee record," without the members knowing about it. And
I don't know whether it has been going on in the past, but if it hasn't
been happening this way, I suggest that it should.
Mr. Gonzalez. Well, as far as my experience is concerned here, this
has almost universally been done on almost every committee level
that I have served on. But with the understanding, of course, that it
would be within a reasonable time that the member would submit
the questions.
We have done this with the Chairman of the Federal Reserve
Board, and the like, and what I can't answer for you is whether or
not every member of the subcommittee was given the specific ques-
tions asked by the particular member who requested that at the time.
But I do Know that the individual member requesting it would
get the answers before the record was printed.
Mr. Kelly. Mr. Chairman, further reserving the right to object—
I am not trying to cause this thing to get more monumental than it
is, but what I am suggesting is that if some individual member has
a question for the witness or the deputy attorney general of Nevada,
that there would be no reason why he could not ask that. There would
be no reason why he could not take his questions and answers and
submit them to the subcommittee for insertion into the record.
I have not question about that. But at least, at some time, each
subcommittee member would have an opportunity to know what the
questions were, and what the answers were, before it constitutes a part
of the record.
And so this is the predicate for my objection to keeping the record
open, with the idea that the record could be built out in Nevada where
we would not have an opportunity to know what is coming and going.
Mr. GrONZALEZ. I cau assure the gentleman that that fear is ground-
less, and there would be no reason why
Mr. Kelly. No objection, Mr. Chairman.
Mr. Gonzalez. I thank the gentleman.
They have rung the second set of bells and we have to go over and
record our votes. So we will suspend temporarily for about 5 minutes
and get that chance and return.
[Recess.]
Mr. GrONZALEZ. The subcommittee will come to order and we will
proceed with Mr. Barnes.
I noticed that Attorney General Anaya referred to the presence
of, and he seemed to be impressed by the extent of it but we did not
follow by asking him specific questions, the presence of organized
crime in the fraudulent land sales incidents.
Has that been the experience in Nevada to any substantial degree?
Mr. Barnes. Not to any substantial d( gree. We have had rumors
that the financing for one of the developers was related to — ^the com-
pany was related to organized crime but other than that, that is the
only thing that I have heard.
We have not gotten too much of that in Nevada.
Mr. Gonzalez. You don't have any record of any substantial pres-
ence or visible substantial presence of such a thing as organized crime ?
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Mr. Barnes. Not i-eally. The closest thiiiff to that other than this
financing would be that there has been involvement of an individual
named Leonard Rosen, who is a financial consultant for a company'
called Preferred Equities Corp., which is one of the biffgest subdivi-
sions we have going right now. And he is, I understand, being inves-
tigated by the Federal (lovemment for these offshore tax shelters and
I have heard rumoi's, but other than that, no solid information.
Mr. Gonzalez. I wonder if you could give us a little bit more of an
explanation, a little bit more detail on the Nevada law requiring ade-
quate financial arrangements for all of the promised improvements.
Mr. Barneys. The adequate financial arrangements have been inter-
preted and implemented in basically four dift'ei*ent things.
One would be 100 percent escrowing of funds for all promised im-
provements at the outset of the licensing of the development. The
second would be a third-party bond of some sort for the full amoimt
of the improvements, so that we would not let the developer himself
issue a bond, but if a lK)nding company would do it, that would be
acceptable.
Third, we have also had a policy of allowing a letter of credit for
the amount of the improvements.
And the fourth one is an escrow accoimt that is made up of percent-
age payments of the downpayment and the monthly payments which
are made by the purchaser into an account which is frozen until such
time as the account reaches the full amount of the improvements. The
developer can't touch it until that point.
Mr. Gonzalez. On this third-party bond, does your experience in
Nevada show that they are almost nonexistent or are they available?
Mr. Barnes. They ai*e almost nonexistent. Most bonding companies
won't undertake something like that.
Mr. (lONZALF^. Does this requirement apply to all developei'S, re-
gardless of size ?
Mr. BarnfvS. Yes. My understanding is that the i-eal CvState division
applies that to all developers, i^ecrardless of what size they are.
^Ir. Gonzalez. Does the record show that this practice has limited
or impaired activity in the sale of land?
Mr. Barne«5. That is very haixl to say because you never know why
someone — well, first of all, you don't know if someone doesn't register,
oftentimes, and if you do know that, you don't know why they didnt.
I know the land sales industry, basically, has l)oen impaired sub-
stantially since 1973, when we first got our strong I^and Sales Act.
Whether that is due to the ivquirements that are now placed upon
developers prior to IxMng licensed, or whether it is something due to
the economv. I don't really know. But I would assume that it probably
has dissuaded some developers who would have come in if they did
not have to make these adequate financial arrangements. And, hope-
fully, it has been ones who would have caused i)roblems if they had
lx»en licensed.
Mr. Gonzalez. Who determines the adequacy?
Mr. Barnes. That is determined by the administrator of the State
real estate division.
Mr. Gonzalez. In your opinion, do vou think that that could be done
as easily or as exjx>ditiously or satisfactorily on the Federal level as
it can on the State level ?
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Mr. Barnes. I would doubt that that would be true for purely intra-
state developments. Probably the people in the State itself would be
more able to adequately determine that. However, for the large devel-
opments which are sold throughout the United States, I think probably
the Federal agency could do it better than we could in Nevada or
New Mexico could in their State.
Mr. Gonzalez. I think that the experience some of us have had
with the present Federal law would indicate the difficulty there.
Now as I understand it, the Nevada act has an exemption for real
estate sold free and clear of all liens and which has been inspected by
the purchaser.
What, if any, is your experience under that provision regarding
continuing land sales abuses?
Mr. Barnes. That is one of the provisions that we are most unhappy
about in our own law because it doesn't prohibit the developer from
later encumbering the property and it doesn't mean that just because
it is free and clear, that there aren't other problems that the developer
is not going to promise that there is a river on the property when there
isn't, in fact, or that he is going to put in certain public utilities when
he, in fact, won't.
So that is one of the things that we would like to see taken out of our
own law. However, I doubt that the State legislature would go along
with it.
Mr. Gonzalez. With respect to the parens patriae doctrine and its
inclusion in the Minish bill and its applicability to interstate land
sales transactions, the fear has been expressed by some associations
and individuals that this would give rise to unnecessary lawsuits and
would proliferate frivolous or harassment lawsuits by the State attor-
neys general.
It is true that the Federal presence in the case of antitrust, as was
brought out earlier, is of recent date. But I would like to know, since
you endoi-se the idea also in your statement, I would like to know
your thinking is on that.
Mr. Barnes. Well, I know that when the discussions were held on the
antitrust parens patriae provision, this same objection was raised
and there were some statementvS on that by then Attorney General Mil-
ler after that act was actually signed into law. I think I would pretty
much agree. He was at the time the Virginia attorney general, by the
way, and I think I would pretty much agree with what he said, and that
was that it never makes good political sense to bring a frivolous law-
suit.
People at that time, opponents of the parens patriae portion of the
bill, said that attorneys general throughout the country would use these
things for politically motivated reasons and that there really wouldn't
be anv basis for that.
It is my experience that it always hurts you more politically to file a
lawsuit that is not justified in fact that it does to not file it in the first
place.
So I think that really this is something that is probably raised by
people who are concerned about the beneficial effect that this would
have for the people of the State, and the very unbeneficial effect I think
it would have for the unscrupulous developers.
I don't think it is a valid objection.
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Mr. Gonzalez. I believe the biggest problem that I have seen since
the enactment of the Interstate Land Sales Act, such as it is now, is
that it unwittingly has come to hamstring, and to a certain extent,
hurt, a homebuilder or a developer who happens to be wholly intra-
state who has no intention or desire to advertise interstate or even sell
on an interstate basis. And yet, this has been the problem in my area
because of some peculiar circumstances.
For example, it is a very active military base area and so we have a
lot, if not most, of the retirees living traditionally in the San Antonio
area. We have had cases where a homebuilder and developer attempt to
sell to a locally stationed officer in the armed services and finds himself
under the jurisdiction of the Interstate Land Sales Act, and therefore,
facing such thin^ as payment of a $20,000 fee and other impediments
where the individual purchasing, has originally had a domicile or
home base somewhere outside of the State. But, in the meanwhile, he
may have determined that he would like to retire in the San Antonio
area, and naturally, is soliciting the purchase of the property by per-
sonal inspection and purely through local advertising.
Yet, the interstate portions of the law have been very much present
and created some difficult situations. HUD has interpreted the law in
strict accordance and insists on the coverage and the payment of a
pretty expensive filing fee ; $20,000, 1 think, is pretty expensive for the
developer.
What is your experience with the law, with the Federal law in
Nevada? Has it been concentrating mostly on cases of that nature
where it is purely a local operator and not the big interstate operator?
Mr. Barxes. I can't think of a single instance that I know of in
Nevada where that has happened, where they have gone into a situation
such as you have described. I just can't think of one.
I do agree that that isn't what I would consider a proper applica-
tion or should not be a proper application of the law. But I just can't
think of an occasion like that in Nevada.
Mr. Gonzalez. Well, I am still arguing with HUD because I could
not help but agree with this particular individual, who isn't even
really in my own district, because I have been redistricted and I have
the core or the heart or the inner city of San Antonio and I don't have
all of the city.
And the home that he built is just outside of my district, And, never-
theless, because of my position on the committee, he appealed to me,
and I'm still trying to argue this. Because I agree with your judg ment ,
but this is not the judgment thus far by the administrators in HUD.
T am hoping to convince somebody, but that is where we are.
Thank vou very much.
Mr. Kelly?
Mr. Kelly. Thank you, Mr. Chairman.
In your testimony,' I got the impression that you kind of used the
criteria of size as being some sort of an evidence. I must have mis-
understood. You didn't intend that, did you ?
Mr. Barnes. No, I did not mean to intend that that necessarily
followed. But in our experience, it is usually the large developers who
cause us the problems.
Now not every large developer does.
Mr. Kelly. Well, that is because they are involved in interstate
commerce and not because they are big! So that if you have a big
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developer that is legitimately an intrastate operator, then you would
not expect the law to apply to him just because he is big?
Mr. Barnes. No, I wouldn't. But I will say that even when we were
talking about intrastate — ^no, I would agree with that. Right. Most
of the problems are only the interstate. That is correct.
Mr. Kelly. On this business about putting money up front, wouldn't
you agree with me that that is a super suggestion, because then there
is no worry.
I mean I understood that to be your testimony.
Mr. Barnes. I think that that is one of the best solutions.
Mr. Kelly. Except for the fact that you are just almost making it
necessary for everybody in business to be big or to be solvent. Aid
usually, to be solvent is to be big. And that means that every little
businessman is out. And this is a fairly typical development these days.
We damn business for being big and then kill everybody that isn't.
And then we wind up hating big business and all the little business
is dead. We have to quit if we don't believe in the free enterprise
system.
Mr. Barnes. That is a problem and I know that it probably is
difficult for some of the smaller developments to put all of the money
in up front.
There, of course, are alternatives. I could say the way we have it
now, we do have this letter of credit and third-party bond and this
escrow account.
However, the escrow account, that takes in a portion of the monthly
payments.
Mr. Kelly. Well, let me ask you this : Couldn't it be done within —
we've gotten by for 200 years without absolutely protecting everybody.
Couldn't we maybe get by with just one more 200 years. If we would,
for instance, start slamming the jailhouse door on some of these crooks,
and that means not passing more laws but just prosecuting the ones we
have. And then another situation that we would require these people
to specify what they were going to do and then require them to put on
the literature that the money to do this is not available and you are
depending exclusively on the word of the developer that it will ever
be done.
It is kind of like the warning on a cigarette package. And because
what this would do, it would open up competition and that would
benefit the consumer because when you start reducing, as you have
testified here this morning, the number of developers that are in the
land developing business, that just, in itself, causes the price of land to
go up.
And also, putting this money up front is very expensive because you
could be talking about money being held up for a couple of years or
more. And with money going at 9, 10, 15 percent, that is heavy and the
guy we are protecting is getting so much protection, he can't afford it.
Would there be some limitation on your suggestion in the area that
I have suggested by mv remarks ?
Mr. Barnes. Well, first of all, Mr. Kelly, I do agree with you totally
on your point of enforcement, because I think that that has been one
of the biggest problems that even the current act, there have been a
lot of complaints about it not being properly enforced by OILSR, and
I have seen that myself. I have seen cases where we have had trouble.
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or one case where we have had trouble with the Federal authorities in
trying to really get them to do anything.
They eventually did, but it took a long time.
So that is one of the big problems. But I do feel that if the develop-
er is going to make all of these promises. I think he should be required
to put up something to show that he really means it.
I mean I don't think he has to make these promises. If he can't put
up the money, fine, but he can say, here is the land, and tell them
basically what the situation is and not make the promises.
Mr. Kelly. If we turn you loose on the world, all of these two-faced
companies are going out of business. Do you agree? I mean because
what do they promise ? Happiness ever after, besides white teeth.
But it would seem to me as though the purchaser, by law, is warned
that, look, there isn't a dime in this world other than what is posted
in this box. This is all of the money that this person has put up. There
are no bonds, there is nothing. This is the only money that is actually
in escrow to pay for what he is promising you. And you are relying on
his word.
Now if you do that, you can get skinned. And if you put a warning
like that on there and then people just simply want to trust this per-
son, why should we just simply limit competition, impose costs on
everybody else in order to protect someone that has a fraud wish.
Mr. Barnes. Well, one of the problems, and I do see the problems
for the small developer in putting the money into an escrow account,
but one of the problems that we have with the property report, and
everything that the property report says, is that, for one thing, people
oftentimes don't read it. For another thing, even if they do read it,
they are assured by the salesman that it doesn't count.
Mr. Kelly. But if you require that it be printed in half-inch red
and then it says, don't believe the salesman or anything to keep from
doing things that are really hurting the American consumer because
the increase in the cost of land is one of the heavy problems about the
increase in the cost of homes in America.
Is that so ?
Mr. Barnes. That is so.
Mr. Kelly. So all of this — I mean everyone is wondering why that
is. Well, this is why it is. Because we iust keep protecting people until
they are not going to be able to afford it.
All right. I thank you for your interest on that. On this business
about the political lawsuit, isn't it a real possibility that an enterpris-
ing attorney general, just before election, could file a suit and get the
blast in the paper and then by the time the fact that the suit is no good
emanates from all of the smoke and blaze, the election would be over
and that would be a beneficial use for political purposes of a bad law.
Mr. Barnes. Mr. Kelly, that is always a possibility. However, I
think that the bill provides that in the case that the attorney general
brings a suit which is not well founded or has acted in bad faith,
wantonly, and so forth, that the court may, and I am quoting from the
bill, the Minish bill, H.R. 12574 — it says, "the court may, in its dis-
cretion, award reasonable attorney's fees to prevailing defendant upon
the finding: that the State attorney creneral has acted in bad faith,
vexatiously or for oppressive reasons."
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So, I think that is one safeguard that is in the legislation right now,
and I doubt very seriously that most attorneys general would do it in
the first place. But that is a safeguard.
Mr. Keia.y. Well, let me ask you this : You and I agree that there
are precious few crooks that have the jailhouse doors slammed beliind
them in this area because they have so mucli money and so many law-
yers. That I think if you will check the record, there are even fewer
attorneys general that they slam the i ailhouse door on.
And I think there are probably a lew here, there, and yon that prob-
ably should have just that very thing happen to them. And courts just
aren't realljr noted for their activity about putting the attorneys
general in jail.
I have another question.
Mr. Gonzalez. Mr. Kelly, I hate to limit, but I must. We have got to
vacate this room in less than an hour, and we have three remaining
witnesses that liave been here all morning long. And so I would suggest
that you submit your questions for the record and permit Mr. Barnes
to answer for the record.
And we will proceed. Mr. AuCoin has also come back to the sub-
committee and he may wish to ask a question or two.
Mr. Kelly. Mr. Chairman, we will just from this point on invoke
the 5-minute rule?
Mr. Gonzalez. Well, it has been more than 5 minutes. I have been
careful to make sure that I received no more time than what you have
received thus far. But I don't want you to feel it is an arbitrary cut-
off. But we do have this limitation staring us in the face and we want
to be fair to the three witnesses that have traveled many miles and have
been waiting here patiently, and we are caught with the use of this
temporary facility m a limited way.
Mr. AuCoiN. Mr. Chairman, T will give up my time so we can get
to the next panel.
Mr. Gonzalez. Would it be possible to submit the questions that you
have for the record ?
Mr. Kelly. I have just two more questions, Mr. Chairman. I think
that it probably will take 1 minute. But I will submit them if that is
your preference.
Mr. Gonzalez. Wliy don't we go ahead and take them.
Mr. Kelly. All right, on this personal inspection, wouldn't it be
reasonable to have that to include "or by a personal representative" ?
p]specially where the lot to be purchased is valued at, say, less than
$.5,000 ? Because the cost of transportation to seek a lot could be pro-
hibitive — a prohibitive additional expense imposed by the law, whether
the person wants that protection or not.
Mr. Barnes. You are talking, now, about a presale?
Mr.. Kelly. Yes.
Mr. Barnes. I think I would not have any problem with that, if it is
a personal representative chosen by the purchaser. I wouldn't see any
problem with that.
Mr. Kelly. And couldn't we use possiblv some criteria such as the
value of the land, rather than the size of the lot? For instance, when
you got into this business about the 40 acres, that if you say that the
land is going to have to be valued at more than $1,000 an acre, then you
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are not going to have many jjeople that are buying $40,000 worth of
lots, even if it is 40 acres, in interstate sales.
Mr. Barnes. So you could have an exemption for, say, 40 acres where
the land is valued at $1,000 an acre.
Mr. Kelly. That would just about wind up that traflSc in Nevada,
wouldn't it?
Mr. Barnes. Yes, that would do it.
Mr. Kelly. Thank you, Mr. Chairman.
Mr. Gonzalez. Thank you, Mr. Kelly.
I have three questions that I would like to submit for the record.
[The following are written questions from Congressman Gonzalez
to Mr. Barnes, along with the answers of Mr. Barnes:]
Questions from Ck>NORESSMAN Gonzalez to James Babnes
Question 1. Do you think Federal law should cover transactions where the vast
majority of purchasers reside in the same state as the offered property and where
advertising and promotion is essentially limited to that same state? What should
be done where states provide inadequate protection? And what principles should
be established that will help HUD identify adequate state standards?
Answer. Federal law should cover transactions in all states where the state
protections are not equal to the Federal protections. It is irrelevant whether
the vast majority of purchasers reside in the same state as the offered property
or whether the advertising and promotion is essentially limited to the same
state as the offered property. The state law and program should contain :
(a) a definition of ''subdivision" that is at least equal to the standards set forth
in the Federal definition of "subdivision" ;
(b) the state law should require the developer to deliver a disclosure state-
ment to the purchaser and the information set forth in the disclosure statement
should be at least that required in the Federal act;
(c) the standards for exemptions from the state act should be no broader
than the exemption standards found in the Federal act ;
(d) the state rescission period should be at least as lengthy as the rescission
period in the Federal act ;
(e) the state law must require that individuals who sell subdivision property
must be licensed in that state as licensed real estate agents ;
(f ) the state law must have established standards for advertising at least
equal to the Federal requirements and the state law should preferably require
pre-approval ;
(g) the penalties for violations of the act, such as failure to register, mis-
representation, etc. should be at least as stringent as the penalties contained
within the federal act.
If the state law in question has substantive standards that go beyond mere full
disclosure (which, of course, is all that is found in the Federal law) then
there should be a presumption that the state law is adequate. In determining
the adequacy of the state law the quality of the state employees administering
the law should not be a standard, providing that the state has a civil service
act and recruitment and examinations, etc. for the positions.
Question 2. The Senate bill would exempt all interstate sales within 100 miles
of the purchaser's residence. What impact would that have on protecting
consumers?
Answer. In the case of those states which have a land sales act, the exemp-
tion of all interstate sales within 100 miles of the purchaser's residence wonld
probably have little impact on the protection afforded consumers. However,
such an exemption would have a great impact on consumers who were pur-
chasing land located in an exempt subdivision in a state which did not have
an adequate land sales law. Therefore, such an exemption, if enacted, should
not apply to those states which do not have an adequate land sales law.
Question 3. How common is the use of installment contracts for the purchase
of land in your state? What would be the impact on the land sa^es industry if
Federal law provided that a devel(H)er could only provide financing for the
purchase of the lot if the contract included the protection specified in the
Minish pr(H>06al whereby title is transferred to the purchaser within 30 days ;
formal foreclosure proceedings take place l)efore loss of title ; purchaser estab-
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lishes equity in proportion to payments ; and liquidated damages may not exceed
the developer's proven damages?
Answer. The use of installment contracts for the purchase of land in Nevada
is very common. The impact on the land sales industry, if Federal law did
provide that a developer could only provide financing for the purchase of the
lot if the contract included the protections specified in the Minish proposal
whereby title is transferred to the purchaser within 30 days; formal fore-
closure proceedings take place before loss of title ; purchaser establishes equity
in proportion to payments; and liquidated damages may not exceed the de-
veloper's proven damages, would be that the consumer would be greatly pro-
tected, however such provisions would increase the cost of doing business and
would drive up the cost of individual lots.
Mr. GrONZALEz. We want to thank you again, very much, Mr. Barnes,
for your very valuable contribution.
Mr. Barnes. Thank you, Mr. Chairman.
FText resumes on p. 263.]
[The following corr^pondence was received from the office of the
Honorable Frank J. Kelley, attorney general. State of Michigan, en-
closing a submission "Comments on Proposed Interstate Land Sales
Reform," with attached exhibits :]
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STATF OF MICIilC.AN
DKPAKTMKNT OF ATTORNFY CtNkRAL
xm
SrANLh^ D. Steisboks xf'^.:i
Chief Asiiitant Attorney Gcnrral
9
FRANK J. KELLEY
ATTOR>KY OIlNF.KAI.
LANSING
4S9 I 3
August 9, 1978
Honorable Thomas L. Ashley
Chairman
Subcommittee on Housing and Community Developments
Rayburn House Office Building
Washington, D.C. 20515
Dear Congressman Ashley:
This submission relates to the proposed "Interstate Land
Sales Reform Act of 1978" and the impact on State regulation of
sales of what may be loosely termed recreational land. Attorney
General Kelley had hoped to appear before your Subcommittee on
August 2, 1978, and offer testimony. Unfortunately, the press of
business precluded his being able to appear. The combination of
short notice and an airline strike prevented me from appearing in
his stead.
I understand that not withstanding a series of roll call votes,
the session was productive and much useful information was provided
to you. I am advised that the record is still open and the enclosed
submission will still be considered.
Once again, let me apologize for Michigan not being physically
represented and offer my assistance should further hearings and in-
formation be needed.
Very truly yours,
FRANK J. KELLEY
Attorney General
Frederick H. Hoff^J^cker
Assistant Attorney General in Charge
Real Estate and Vehicle
Regulation Division
1000 Long Blvd., Suite 12
Lansing, MI 48910
Telephone: (517) 374-9750
».*-'>' 1
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COMMENTS ON PROPOSED
INTERSTATE LAND SALES REFORM
The Michigan Legislature, in 1972, passed the "land
sales act" 1972 PA 286, MCLA 565.801 et se£; MSA 26.1286(1)
et seq , (Appendix A) which becaine effective October 1, 197 3.
Pursuant to the Act, supra , the Land Sales Division of the
Department of Licensing and Regulation promulgated rules (Ap-
pendix B) to implement the legislation. Our law, from a dis-
closure standpoint, was patterned after the "Interstate Land »
Sales Full Disclosure Act" 15 USC 1701 et seq , and from an en-
forcement standpoint embodies many of the features of the pro-
posed "Interstate Land Sales Reform Act of 1978", HR 12574.
Prior to commenting on the proposed Act, a brief review of the
land sales industry vis-a-vis the State of Michigan will provide
helpful backgrovind.
Prior to the Federal Act, Michigan citizens enjoyed
very little in the way of protection from out-of-state developers
and virtually no protection, except the limited advantage of pos-
sibly viewing the land of in-state developers. A feeble attempt
at regulation was attempted using the Real Estate License Law, 1919
PA 306, MCLA 451.201 et seq ; MSA 19.791 et seq , as a vehicle. Both
the efficacy and legality of this system where suspect and the usual
horror stories of no title, misrepresentation and outright fraud
abounded. Attorney General Kelley and a cadre of public interest
groups and legitimate developers worked closely with the Legislature
and provided the impetus for our present statute.
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TOTAL
IN-STATE
OUT-OF-STATE
326
242
84
119,189
29,051
90,138
235
198
37
366
120
'1,073
1.39
1.22
2.27
Michigan, without being parochial, is somewhat unique
in that with our pleasant geography, four seasons recreation and
relatively high standard of living, it is a development state as
well as a market state. A breakdown of currently effective regis-
trations reflect:
Effective Registrations
Lots or parcels registered
Number of Developers
Average nuirber of lots per
registration
Average registrations per
developer
We feel that because of our stringent registration require-^
ments, many developers are not marketing in Michigan. Also, out-of-
state developers are registering only a small portion of their total
offering.
The complaint history, since enactment of our State law,
reflects a relatively low number. While we could be tempted to at-
tribute that fact to our stringent law and firm enforcement posture,
factors such as the economy, energy crises and soft market conditions
are of equal effect. The breakdown quantitatively is:
IN STATE OUT STATE CONSUMER AGENCY INITIATED
72 37 48 61
93 24 50 67
73 34 65 42
41 27 40 28
NO. OF
PERIOD
COMPLAINTS
10/74 - 9/75
109
10/75 - 9/76
117
10/76 - 9/77
107
10/77 - 6/13/78
68
TOTALS
401
279 122 203 198
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It should be noted that one complaint may be from a property
owners group while for reporting purposes, it would be treated as one
complaint.
An analysis of the complaints breaks out as follows:
TYPE OF COMPLAINT
1. Offering or advertising of
unregistered lemds
2. Sale of unregistered lands
3. Unable to obtain deed
4 . Unable to record deed
5. Unpaid taxes
6 . Incompleted roads
7. Inability to obtain water
8. Inability to obtain electric
9. Inability to obtain sewer
10. Incompleted recreational
facilities (amenities)
11. Use of unapproved adver-
tising by registered
developer
K2. Misrepresentation or failure
to disclose pertinent facts
13. Failure to comply with
rescission right
14. Complaint relating to
Property Owners Assoc.
15. Use of unapproved contract
10-1-75 thru
9-30-76
10-1
9-
-76 thru
30-77
10
-1-77 thru
3-31-78
TOTAL
44
30
18 ,
92
5
3
8
5
9
3
17
1
1
1
3
2
4
6
3
2
5
: 1
1
3
5
6
6
9
45
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TYPE OF COHPLAINT
16. Unclassified
17. Possible violation of
other acts (referred)
18. Non-compliance with
annual renewal pro-
visions
PERIODS:
10-1-75 thru
10-1-76 thru
10-1-77 thru
TOTAL
9-30-76
9-30-77
3-31-78
14
14
9
37
2
4
6
TOTALS 116 106 51
GRAND TOTAL 273
Michigan then may be cited as an atypical example in that a
good statute and a commitment to enforcement provide adequate protection
for our citizens and those of other states who are contemplating pur-
chasing recreational land in the "Wolverine State". Our success, in
large measure, is attributable to the fine cooperation we have always
received from our counterparts in the Office of Interstate Land Sales
Registration. Requests for information have always been expeditiously
responded to both at the central and regional office level. A spirit
of cooperativcness between the states fostered in part by the good
offices of the National Association of Attorneys General has been
another effective tool in dealing with developers located far outside
our individual borders.
Because of the interstate nature of the industry, it is in-
cumbent upon the Federal Government to be in the fore front of protecting
prosF>ective purchasers without preempting those states that have effec-
tive regulatory systems. If every state was in Michigan's enviable
position, then the need for a federal presence would be diminished.
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Sadly, this is not the case. Regulations, which do not inhibit or
stremgle responsible development and a healthy land sales industry
is needed. It appears the market is once again improving and sales
activities are being intensified.
From that base. Attorney General Kelley would then generally
endorse HR 12574 and urge its enactment. Following is a section by
section review of the HR 12574 and a comparison to Michigan law:
SECTION 1702 - EXEMPTIONS
1702(a)(1) Michigan has a 25 lot threshold for registration with a
limited exemption for up to 50 lots if fully platted,
recorded and no amenities are promised or advertised.
1702(a)(2) Michigan does not have a "size" exen^ition; the proposed
40 acre requirement would provide adequate protection.
1701(3) A "housekeeping" change.
1702(a)(4) Michigan has a "court order exemption". This proposal,
to capture sales pursuant to Bankruptcy Court orders, is
extremely significant and fills a regulatory void. Because
of the Federal posture of most bankruptcy proceedings, this
change provides valuable and necessary protection. ATTORNEY
GENERAL KELLEY STRONGLY SUPPORTS THIS PROVISION.
SECTION 1703 - PROHIBITION AND RIGHTS OF REVOCATION
Michigan provides for a 5 day "buyer remorse" period which
begins on the date the consumer receives a legible and
executed copy of the contract. The proposed legislation
provides a 30 day period plus an additional 3 years in
certain circumstances. Obviously, the longer a consumer
33-716 O - 78 - 14
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to consider a decision, one of two events will occur;
either procrastination until the end of the period or
a reasoned decision based on the opportunity to make
inquiries and gather the necessary facts. Hopefully,
the latter will occur. The other changes to this sec-
tion ease the burden of proof on a consumer seeking re-
cession or the agency in an enforcement action.
SECTION 1705 - INFORMATION REQUIRED IN STATEMENT OF RECORD
Michigan employs a system of previewing and approving
advertisements and promotional materials of all media.
The contents thereof are compared with the Statement of
Record for accuracy and veracity and an approval number
assigned that appears in the ad. While such a system
is administratively burdensome, it serves as a check in
an area historically abused.
From an enforcement standpoint, having promotional
material available is very desirable. While the Michi-
gan system may be inappropriate at the National level,
the 2U:>ility to monitor what is being said by comparison
with what is on file is very helpful. Additionally,
should the developer deviate from what it filed, ad-
ministrative remedies may be imposed.
SECTION 1708 - EFFECT ON STATE LAWS
THE PROPOSED LEGISLATION IS PREEMPTIVE IN NATURE AND
NOT SUPPORTED BY ATTORNEY GENERAL KELLEY. STATE REGU-
LATIONS SHOULD NOT BE PREEMPTED UNLESS THE INCONSISTENCY
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PROVIDES A LESSER DEGREE OF PROTECTION TO THE PUBLIC
INTEREST. ATTORNEY GENERAL KELLEY RECOMMENDS THIS
SECTION BE AMENDED TO REFLECT THAT POSITION.
SECTION 1709 - DAMAGE AWARDS
The proposed legislation tracks the Michigan system.
We provide for 6% interest on the amount of actual
damages from the date of payment less an/ income the
consumer may have received. «
SECTION 1711 - STATUTE OF LIMITATIONS
The proposed legislation is consistent with the Michi-
gan Statute except the maximum period is 6 years from
the sale or lease.
SECTION 1714 - ADMINISTRATIVE REMEDIES
The proposed legislation is very similar to those reme-
dies in our state law. The ability to issue a cease
and desist order prior to hearing in extraordinary cir-
cumstances has proven to be very successful and urges
developers to expeditiously proceed through the hearing
process. The developer is protected from agency abuse
of the device by the judicial review procedure.
(NEW) CIVIL PENALTIES
The Michigan Statute does not provide for civil penal-
ties. Such a device is an effective deterrent to a
potential violation.
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SECTION 1717 - CRIMINAL PENALTIES
Michigan provides felony penalties of $25,000 or up
to 10 years imprisonment for willfull fraudulent con-
duct; any other violation is a misderaeanor subjecting
a violator to $2,000 or a maximum of 90 days imprison-
ment. Only two criminal prosecutions have been concluded.
SECTION 1718 - REGULATION OF ADVERTISING
This section is necessary to effectively deal with ad-
vertising and is consistent with the Michigan approach.
SECTION 1720 - PUBLIC EDUCATION
The best form of consumer protection is an informed
consumer protecting themsclf. No matter how good a
registration and disclosure system is devised, too
often the government is involved in seeking remedial
relief. An effective program to inform and educate
the public is the catalyst for an effective program.
(NEW) "PARENS PATRIAE" RIGHT TO SUE
Attorney General Kelley favors "parens patriae" legis-
lation as a tool that benefits the public as well as
government at both the national and state level. The
system sets forth an effective vehicle that safeguards
a developer from multiple recoveries or vexatious actions
while giving injured consumers a viable recourse. As
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seen in the "Antitrust Improvements Act", a rash of
irresponsible lawsuits has not resulted. You have
probably been inundated by favorable comment by the
Attorneys General and negative imput from the industry.
Rather than rehash the pros of "parens patriae", suf-
fice it to say Attorney General Kelley strongly en-
dorses this section.
(NEW) IMPROVEMENTS DEALING WITH BASIC SERVICES
This provision is consistent with the Michigan statute
and has proven to be effective. Performance or surity
bonds are also acceptable alternatives to an escrow ac-
count. The same system is utilized for assurances that
promised amenities will be provided and in place as prom-
ised to the purchaser.
All in all, HR 12574 represents a salutory effort to pro-
vide more protection to consumers without being unduly burdensome on
developers. With the exception of the preemption issue. Attorney Gen-
eral Kelley enthusiastically endorses the bill. Conversely, S 3084
is in the nature of a "developers bill" and docs little to enhance
consumer protection in this area which has been subject to abuse.
Many consumers buy this type of land for retirement or recreational
purposes. They should be assured of reality and not "pie in the sky".
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-p-'-y-r-'—r- r
LAND SALES ACT
ACT 286 OF 1972, AS AMENDED
PRINTED JUNE 1974
:(g^ff STATE OF MICHIGAN
Department of Licensing and Regulation
LAND SALES DIVISION
1008 & Washington Ava. Lanting. MIehlgwi 48K*
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NOTICE
The statutory provisions and rules contained in this booklet are not to be
considered the final authority on the current law. While every effort has been made
to insure the accuracy and completeness of this booklet, it is impossible to include
changes in the law which occur after this booklet has been printed.
This booklet contains the law effective on June 1, 1974.
Revisions to the statutory provisions and rules contained in this booklet may
be obtained from the Michigan Department of Licensing and Regulation, Land
Sales Division, 1008 South Washington Avenue, Lansing, Michigan 48926.
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TABLE OF CONTENTS
LAND SALES ACT
ACT 286 OF 1972
565.801 Short title
565.802 Definition
565.803 Subdivisions, disposition of lots,
partial, units, or interests 565.819
565.804 Offers and dispositions of in- 565.820
terests in land, inapplicability
565.805 Excluded dispositions
565.806 Registration; property reports; 565.821
unfair acts; voidability of con-
tracts; recession; form of con- 565.822
tract; third parties
565.807 Application, filing, forms, execu-
tion, contents; registration fee,
payment
565.808 Property report, form, contents 565.823
565.809 Prohibited uses of property re-
ports
565.810 Alteration or amendment of 565.824
proposed property reports, ap-
proval, incorporation in reports;
advertising and disposition pend-
ing approval
565.811 Consolidation of subsequent 565.825
registrations with prior registra-
tions, same promotional plan,
amendment of property report;
effect of failure to timely reject
consolidation of registration 565.826
565.812 Material changes in information
contained in application for 565.827
registration, reporting 565.828
565.813 Conditions for registration, 565.829
enumeration, examination to de-
termine compliance with condi- 565.830
tions
565.814 Notice of filing of application for
registration; orders of registration
or rejection; amendments of ap- 565.831
plications; certificates of registra-
tion; property reports
565.815 Developer's reports, form, con-
tents, time of filing; renewals of
certificates of registration
565.816 Conditions for sales of units or 565.832
interests within subdivision sub-
ject to blanket encumbrance
565.817 Advertising material, submission
for approval, orders, failure to
timely reject; filing of amend-
ments to applications for ap- 565.833
proval of advertising
565.818 Material used to induce prospec- 565.834
tivc purchasers to visit subdivi- 565.835
sion, contents; developer's par-
ticipation in campaign, disclos-
ure, assurances that obligations
can be met
Rules, promulgation, contents
Investigations of subdivisions,
necessity, extent, form, ex-
penses, waiver
Contracts for disposition of sub-
divided land, contents
Penalty for failure to pay registra-
tion and inspection fees, amount,
grounds for imposition, collec-
tion; suspension or revocation of
registration, unpaid fees
Investigations, authorization, ex-
tent, purpose, statements, oaths,
subpoenas, proceedings
Cease and desist orders and
orders to take affirmative action,
grounds for issuance; temporary
cease and desist orders, notice,
hearing
Revocation of registration,
notice, hearing, grounds; findings
of fact, necessity, statement of
underiying facts; cease and desist
order as alternative
Injunctions, ground; receivers;
conservators; bonds
Offenses, enumeration, penalties
Other violations, penalties
Service of process, methods,
nonresidents
Registration fee, time of pay-
ment, amount; annual renewal
fee; inspection expenses, pay-
ment
Deceptive acts or false state-
ments and omissions, liability to
purchaser; joint and several liabil-
ity; contribution; tender of re-
conveyance, time; limitation of
actions
Subdivided lands within state,
subdivider's principal office in
state, or offer or disposition of
subdivided lands made in the
state, applicability of act, juris-
diction of circuit courts
Repealed by P.A. 1973, No. 184,
immediate effect January 3, 1974
Condominiums
Effective date
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LAND SALES ACT
P.A. 1972, No. 286, Eff. Oct 1, 1973
AN ACT to regulate the disposition of lots, parcels, units or interests in lands
within real estate subdivision; to require registration; to protect the purchaser from
unfair and deceptive trade practices; to provide for the filing of bonds and
performance assurances; to regulate advertising, promotions and sales contracts; to
provide for the payment of fees; and to provide penalties.
The People of the State of Michgian enact:
565.801 Short titio
Sec. 1. This act shall be known and may be cited as the 'Mand sales act**.
585.802 Definltiont
Sec. 2. As used in this act:
(a) ** Advertising** means the publication or causing to be published of all material which
has been prepared for public distribution by any means of communication. The term does
not include stockholder communications such as annual reports and interim financial
reports, proxy materials, registration statements, securities, prospectuses, applications for
listing securities on stock exchanges, and the like; prospectuses, property reports, offering
statements, or other documents required to be delivered to prospective purchaser by an
agency of another state or the federal government; all communications addressed to and
relating to the account of persons who have previously executed a contract for the
purchase of the developer*s lands, except where directed to the sale of additional lands.
(b) '*Agent** means any person who represents, or acts for or on behalf of, a devek)per
in disposing of subdivided lands or lots in a subdivision, and includes a real estate broker
as defined in Act No. 306 of the Public Acts of 1919, as amended, being sections 451.201
to 451.219 of the Michigan Compiled Laws, but does not include an attorney at law whose
representation of another person consists solely of rendering legal services.
(c) **Blanket encumbrance'* means a trust deed or mortgage or mechanics lien or any
other lien or financial encumbrance, securing or evidencing money debt and affecting lands
to be subdivided or affecting more than 1 lot, parcel, unit, or interest of subdivided land; or
an agreement affecting more than 1 lot, parcel, unit, or interest by which the developer
holds the subdivision under an option, contract to purchase, or trust agreement, except a
lien or other encumbrance arising as a result of the imposition of a tax assessment by a
public authority so long as no portion thereof is past due.
(d) "Contiguous land** means any additional subdivided land adjacent to or adjoining the
subdivided land included in any earlier subdivision for which a certificate of registration
has been issued and which is offered under the same common subdivision name and the
same common promotional plan of advertising and disposition.
(e) "Department** means the department of licensing and regulation.
(f) "Developer** means a person, or his agent, who, directly or indirectly, offers
subdivided land for disposition, or who advertises subdivided land for disposition.
(g) "Director** means the director of the department of licensing and regulation or any
person designated by him to act in his place.
(h) "Disposition** means a sale, lease, option, assignment, award by lottery or as a
prize, or any offer or solicitation of an offer to do any of the foregoing concerning a
subdivision or any part of a subdivision.
(i) **Notice** means a communication by mail from the department. Notice to developers
shall be deemed complete when mailed certified return receipt requested to the deveIoper*s
address currently on file with the department.
(j) "Offer** means every inducement, solicitation, or encouragement of a person to
acquire a lot, unit, parcel, or interest in subdivided land.
(k) "Option** means, and is limited to, an offer to sell or to purchase respecting which a
consideration of not more than 15% of the total purchase price is exchanged to guarantee
that the offer will not be withdrawn or revoked for an agreed period of time.
(1) "Person** means an individual, corporation, government or governmental division or
agency, business trust, estate, trust, partnership, unincorporated association, 2 or more of
any of the foregoing having a joint or common interest, or any other legal or commercial
entity.
(m) "Purchaser** means a person who acquires or attempts to acquire or succeeds to an
interest in land.
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(n) "Subdivision** and **subdivided land** means any land, wherever located, improved
or unimproved, which is divided or proposed to be divided for the purpose of dispositioD
into 25 or more lots, parcels, units, or interests, and includes any portion thereof.
Subdivided lands include land located outside this state which is promoted by mail,
telephone calls, solicitation, or advertisements within or directed into this state. The terms
include any land, whether contiguous or not, if 25 or more lots, parcete, units, or mterests
are offered as a part of a common promotional plan of advertising and sale where
subdivided land is offered for disposition by a single developer or a group of developers
acting in concert. If the land is contiguous or is known, designated, or advertised as a
common unit or by a common name the land shall be presumed, without regard to the
number of lots covered by each individual offering, as being offered for disposition as put
of a common promotional plan.
565.a03 Subdivitiont, ditpotltion of lots, partial, units, or Intarattt
Sec. 3. The disposition of lots, parcels, units or interests in land from subdivisions is sulgect
to regulation and control pursuant to this act which is to^be administered by the department.
565.804 Offers and ditpotltlont of intaraatt in land, Inappllcabnity
Sec. 4. Unless the method of disposition is adopted for the purpose of evasion of this act, as
the procedure for application for and approval of exemption is determined by rules of the
department, this act does not apply to offers or dispositions of an interest in land:
(a) By a purchaser of subdivided lands for his own account in a single or isolated
transaction.
(b) If fewer than 25 separate lots, parcels, units, or interests in subdivided lands are
offered or to be offered after September 30, 1973.
(c) On which lot, parcel or unit there is a commercial or industrial building, shopping
center, dwelling unit, or apartment, or as to which there is a legal obligation on the part of
the seller or his assignee or agent to construct such a building within 2 years from date of
sale, lease, option, assignment, award by lottery, or as a prize.
(d) For cemetery lots or interests.
(e) A subdivision as to which the plan of sale is to dispose to 10 or fewer persons.
(f) To any person who acquires such lots for the purpose of engaging m and does engage
in, or who is engaged in the business of constructing residential, commercial, or industrial
buildings for the purpose of resale; or constructing commercial or industrial buildings lor
his own use; or the lease of such lots to persons engaged in such business.
(g) Pursuant to court order.
(h) Securities currently registered or securities transactions exempted by order of the
corporation and securities bureau of the department of commerce.
(i) By a person electing to make offers or dispositions under any 2 or more different
exemptions.
(j) A campground devek>ped pursuant to Act No. 171 of the Public Acts of 1970, being
sections 325.651 to 325.665 of the Michigan Compiled Laws or a mobile home park
devek>ped pursuant to Act No. 243 of the Public Acts of 1959, as amended, being sections
125.1001 to 125.1097 of the Michigan Compiled Laws.
(k) In a subdivision which has fewer than 50 lots, parcels, units or interests and which
has been fully recorded under Act No. 288 of the Public Acts of 1967, as amended, being
sections 560.101 through 560.293 of the Michigan Compiled Laws, in the office of the
registrar of deeds and in which no amenities are promised or advertised. Nothing in thb
subsection shall limit the application of section 27 to a devek>per or agent of a devek>per.
565.805 Excludad dispoaltiona
Sec. 5. Unless the method of disposition is adopted for the purpose of evasion of this act,
as the procedure for application for and approval of exemption is determined by rules of the
department, the provisions of this act do not apply to:
(a) Offers or dispositions of evidences of indebtedness secured by a mortgage or deed of
trust of real estate.
(b) Offers or dispositions of securities or units of interest issued by a real estate
investment trust regulated under any state or federal statute.
(c) Offers or dispositions of any interest in oil, gas, or other minerals or any royalty
interest therein if the offers or dispositions of such interest are reguhited as securities by
the United States or by an agency of this state.
(d) Condominiums located in Michigan and regulated by the corporation and securities
bureau of the department of commerce.
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(e) Offers or dispositions of an interest in lands by a Michigan state agency, city, village,
township, county, or any other governmental unit, or United States governmental unit,
body or subdivision.
565.806 Registration; property reports; unfair acta; voidability of contracts; rescission;
form of contract; third parties
Sec. 6. Unless the subdivided lands or the transaction is exempt by this act:
(a) A person may not offer or dispose of any interest in subdivided lands located in this
state nor offer or dispose in this state of any interest in subdivided lands located without
this state prior to the time the subdivided lands are registered in accordance with this act.
(b) A person may not dispose of any interest in subdivided lands unless a current
property report is delivered to the purchaser and the purchaser is afforded a reasonable
opportunity to examine the property report prior to the disposition.
(c) A person may not engage in any unfair or deceptive act or practice in the conduct of
and disposition of subdivided lands. Disposition of subdivided lands by option on an
option or by assignment of less than the total options held by the seller, is presumed to be
an unfair and deceptive practice. Disposition by instrument purporting to be an option is
presumed unfair and deceptive if the stated consideration for the purported option exceeds
15% of the purchase price of the subdivided land or if the option does not separately state
the purchase price.
(d) Any contract or agreement for the disposition of a lot, parcel, unit or interest in a
subdivision covered by this act, where the property report has not been given to the
purchaser in advance of the time of his signing, is voidable at the discretion of the
purchaser. In addition, the purchaser has an unconditional right to rescind any contract,
agreement or other evidence of indebtedness between the purchaser and the developer, or
revoke any offer within 5 days from the date the purchaser actually receives a legible copy
of the signed contract, agreement, or other evidence of indebtedness or offer and the
property report as provided in this act. Predating of a document does not defeat the time in
which the right to rescind may be exercised. The burden of proof the document was not
predated is upon the developer. An act of the developer in assigning or pledging a contract
or agreement shall not waive the purchaser's right to void or rescind the contract or
agreement as provided by this subsection. Each contract or agreement shall be
prominently labeled and captioned that it is a document taken in connection with a sale or
other disposition of lands under this act.
Each contract or agreement for the disposition of a lot, parcel, unit, or interest in a
subdivision shall prominently contain upon its face the following notice printed in at least 8
point type which shall be at least 4 point bold type larger than the body of the document
stating:
NOTICE TO PURCHASER
YOU ARE ENTITLED TO CANCEL THIS AGREEMENT AT ANY TIME IF
YOU HAVE NOT RECEIVED THE PROPERTY REPORT IN ADVANCE OF
YOUR SIGNING OF THIS AGREEMENT. IN ADDITION, YOU ARE
ENTITLED TO CANCEL THIS AGREEMENT FOR ANY REASON WITHIN 5
DAYS FROM THE DAY YOU ACTUALLY RECEIVE A LEGIBLE COPY OF
THIS DOCUMENT.
The contract or agreement shall contain sufficient space upon its face in immediate
conjunction with the above notice for the signature of each person obligated under the
instrument acknowledging that the person has read the notice. A third party who is
unrelated to the developer may, in connection with the purchase of, or the making of a
loan secured by such contracts or agreements, rely on a document furnished by the
developer, and signed by a purchaser acknowledging receipt of a property report in
advance of signing a contract or agreement.
Rescission occurs when the purchaser gives written notice to the developer at the
address stated in the contract or agreement. Notice of rescission if given by mail is
effective when it is deposited in a mailbox properly addressed and postage prepaid. A
notice of rescission given by the purchaser need not take a particular form and is sufficient
if it indicates by any form of written expression the intention of the purchaser not to be
bound by the contract or agreement.
(e) No act of a purchaser shall be effective to waive the right to rescind as provided in
this section. However, the right of rescission terminates 5 years after the date the
purchaser signs the contract or agreement.
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565.807 Application, filing, fonnt, execution, contents; registration fee, payment
Sec. 7. Before subdivided lands are offered for disposition, the developer shall file with the
department an application upon forms to be supplied by the department. A registration fee
shall accompany the application. The application may be filed before a plat has been recorded
as provided for in section 172 of Act No. 288 of the Public Acts of 1967, being section 560.172
of the Michigan Compiled Laws, provided the plat has received final approval of the
preliminary plat under section 120, as amended, of that act. The application shall be fifed as
prescribed by the department's rules. The application shall be signed by an authorized agent
of the applicant and include, but is not limited to, the following documents and information:
(a) An irrevocable appointment of the department to receive service of any lawful
process in any civil proceeding arising under this act against the developer or his agent.
(b) The applicant's name and address, and the forms, date, and jurisdiction of the
organization; and the address of each of its resident agents, officers, and directors in tite
state; the name, address, and principal occupation for the past 5 years of every director
and officer and each owner of 10% or more of the shares of the applicant and any person
occupying a similar status or performing similar functions; the extent and nature of his
interest in the applicant and the subdivided lands as of a specified date within 30 days of
the filing of the application.
(c) A legal description of, based on a survey by a professional land surveyor, and a
statement of the total area included in the subdivision, and a statement of the topography
thereof, together with a map showing the division proposed or made, the dimensions of the
lots, parcels, units, or interests and the relation of the subdivided lands to existing streets,
roads, and other off-site improvements.
(d) The states or jurisdictions in which an application for registration or similar
document has been filed and any order, judgment, or decree entered in connection with the
subdivided lands by the regulatory authorities in each jurisdiction or by any court.
(e) A statement, in a form acceptable to the department, of the condition of the title to
the land comprising the subdivision, including all encumbrances and deed restrictions and
covenants applicable thereto with data as to recording.
(0 Copies of the instruments by which the interest ii\ the subdivided lands was acquired
or proof of marketable title to subdivided lands.
(g) Copies of instruments which will be delivered to a purchaser to evidence his interest
in the subdivided lands and of the contracts and other agreements which a purchaser will
be required to agree to or sign, together with the range of selling prices, rents, or leases at
which it is proposed to dispose of the lots, units, parcels, or interests in the subdivisions.
(h) Copies of instruments creating, altering, or removing easements, restrictions, or
other encumbrances affecting the subdivided lands.
(i) A statement of the present condition of access to the subdivision, the availability of
sewage disposal &cilities and other public utilities, including water, electricity, gas, and
telephone facilities, in the subdivision, the proximity in miles of the subdivision to nearby
municipalities and the nature of any improvements to be installed and by whom they are to
be installed and paid for and an estimated schedule for completion, together with a
statement as to the provisions for improvement maintenance.
(j) A statement of the current zoning and any existing tax and existing or proposed
special assessments which affect the subdivided lands.
(k) If there is a blanket encumbrance against any subdivision or portion thereof, a
description of the encumbrance and a statement of the consequences for an individual
purchaser of a failure by the persons bound to fulfill obligations under the instrument
creating the encumbrance and the steps, if any, taken to protect the purchaser in such
eventuality.
(1) A narrative description of the pronK)tional plan for the disposition of the subdivided
lands together with copies of all {idvertising material which has been prepared for public
distribution by any means of communication.
(m) Such financial statements of the developer as the department may require.
(n) The proposed property report.
(o) A statement that the devek>per has or has not been subject to any injunction or
administrative order entered within the past 10 years restraining a &lse or misleading
promotional plan involving land dispositions.
(p) Such other information and such other documents and certifications as the
department may require as being reasonably necessary or appropriate for the protection of
purchasers.
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866.808 Property report form, contents
Sec. 8. The property report shall disclose fully and accurately the physical characteristics of
the subdivided lands offered and shall make known to prospective purchasers all unusual and
material conditions relating to noise, health, safety, and welfare which affect the subdivision
and are known to the developer. The proposed property report submitted to the department
shall be in a form prescribed by its rules and shall include the following:
(a) The name and principal address of the developer.
(b) A general description of the subdivided lands stating the total number of lots,
parcels, units, or interests in the offering.
(c) The significant terms of any encumbrances, easements, liens, and restrictions,
including the current zoning classification and the name and address of the governmental
office where a complete current copy of the zoning ordinances may be inspected, affecting
the subdivided lands and each lot, unit, parcel, or interest and a statement of all existing
taxes and existing or proposed special assessments which affect the subdivided lands.
(d) A statement of the use for which the property is offered.
(e) Information concerning existing or proposed improvements, including streets, water
supply levels, drainage control systems, irrigation systems, sewage disposal systems, and
customary utilities and the estimated cost, date of completion and responsibility for
construction and maintenance of existing and proposed improvements which are referred
to in connection with the offering or disposition of any lot, unit, parcel, or interest in
subdivided lands.
(0 Such additional information as may be required by the department to assure full and
fair disclosure to prospective purchasers.
565.809 ProMbited uses of property reports
Sec. 9. The property report shall not be used for any promotional purposes. A person may
not advertise or represent that the department approved or recommends the subdivided lands
or disposition thereof. A portion of the property report may not be underscored, italicized or
printed in larger or heavier or different color type than the remainder of the statement unless
the department requires it.
565.810 Alteration or amendment of proposed property reports, approval, incorpora-
tion in reports; advertising and disposition pending approval
Sec. 10. The department may require the developer to alter or amend the proposed property
report in order to assure full and fair disclosure to prospective purchasers and a change in the
substance of the promotional plan or plan of disposition or development of the subdivision
may not be made after registration without prior written approval of the department nor
without approval of appropriate amendment of the property report. A property report is not
current unless all amendments are incorporated. The department may allow, in writing,
continued advertising and disposition pending approval of amendment.
565.811 Consolidation of subsequent registrations witli prior registrations, same
promotional plan, amendment of property report; effect of failure to timely
reject consolidation of registration
Sec. 1 1. If the devek>per registers additional subdivided lands to be offered for sale, he may
consolidate the subsequent registration with any earlier registration under this act offering
subdivided lands for sale under the same promotional plan, and the property report shall be
amended to include the additional lands so registered. The consolidation of registration of
additional subdivided lands shall be deemed registered after 30 days unless a rejection is
entered issuing a specific statement of the deficiencies within 30 days thereof or a delay agreed
upon.
565.812 Material clianges In information contained in application for registration,
reporting
Sec. 12. The developer shall report immediately any material changes in the information
contained in the application for registration.
565.813 Conditions for registration, enumeration, examination to determine com-
pliance witli conditions
Sec. 13. Upon receipt of an application for registration in proper form, the department shall
initiate an examination to determine compliance with the following conditions for registration:
(a) The developer can convey or cause to be conveyed the interest in subdivided lands
offered for disposition if the purchaser complies with the terms of the offer and when
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appropriate, that release clauses, conveyances in trust or other safeguards have been
provided.
(b) There is reasonable assurance that all proposed improvements will be completed as
represented.
(c) The advertising material and the general promotional plan are not false or misleading and
comply with department rules and afford full and fair disclosure.
(d) The developer has not, or if a corporation, its officers, directors and principals have not,
been convicted of a crime involving lands dispositions or any aspect of land sales business in
this state, the United States or any other state or foreign country within the past 10 years.
(e) The property repon requirements of this act have been satisfied.
505.814 Notic« of filing of application lor reglttratlon; orders of rogiatration or
rafaction; amandmants of applications; cartlflcatas of raglatraHon; proparty
iaauanca of notica; tima for antry of ordars; jaiiura to timaly rajact,
affact; filing datas of amandmants to applications
Sec. 14. (1) Upon receipt of the application for registration in proper form, the department
shall issue a notice of filing to the applicant. Within 60 days from the date of the notice of
filing, the department shall enter an order registering the subdivided lands or rejecting the
registration with notice of specific deficiencies therein. If an order of rejection is not entered
within 60 days fi-om the date of notice of filing, the land shall be deemed registered unless the
applicant has consented in writing to a delay. If any amendment to the application for
registration is filed prior to the time when the land shall be deemed registered, the application
shall be deemed to have been filed when the amendment was filed except that an amendment
filed with the consent of the department or filed pursuant to an order of the department stiall
be treated as being filed as of the date of the filing of the original application for registration.
issuanca of cartlflcata of ragistratlon and approval of form
of proparty raport, grounds
(2) If the department affirmatively determines, upon inquiry and examination, that the
requirements of this act and the rules promulgated pursuant to the act have been met, it shall
issue a certificate of registration registering the subdivided lands and approve the form of the
property report.
Corractlon of application for ragistratlon; rajaction of ragiatratlon
(3) If the department determines upon inquiry and examination that any of the requirements
of this act or the rules promulgated pursuant to this act have not been met, it shall notify the
applicant that the application for registration must be corrected in the particulars specified
within 15 days from receipt of notice unless extended in writing by the department. If the
requirements are not met within the time allowed, the department may enter an order rejecting
the registration which shall include the findings of fact upon which the order is based.
Changes, amandmants to cartlflcatas of ragistratlon, suspension of
certificate of rogiatration; raporta of material changea;
registration of amendments
(4) If at any time subsequent to the issuance of the certificate of registration, a change
occurs affecting any material fact required to be contained in the application, the developer
shall file an amendment thereto within 30 days. Upon receipt of any amendment or report of
material change, if the department determines such action to be necessary or appropriate in
the public interest or for the protection of purchasers, it may suspend the certificate of
registration until such time as the amendment shall be deemed registered. The amendment
shall be deemed to be registered after 30 days unless a rejection is entered or a delay agreed
upon.
Untrue statements or omissions In applications, suapenalon of
registration after notice and opportunity for hearing;
cessation of suspension
(5) If it appears to the depanment at any time that an application, for which there has been
issued a certificate of registration, includes any untrue statement of a material &ct or omits to
state any material fact required by this act or necessary to make the statements not misleading
or deceptive, after notice and after an opportunity for hearing at a time fixed by the
department within 20 days after the notice, the department may issue an order suspending tlie
registration. When the application has been amended in accordance with the order, the
department shall so declare and thereupon the order shall cease to be effective.
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Compliance with subdivision control act, nocessity
(6) The department shall not issue a certificate of registration if it is determined that the
offering is for a subdivision of land until the developer complies with the provisions of Act
No. 288 of the Public Acts of 1967, as amended, being sections 560.101 to 560.293 of the
Compiled Laws of 1948, if the director determines that the subdivision is required to conform
to that act.
565.815 Deveiopors* reports, form, contents, time of filing; renewals of certificates of
registration
Sec. 15. (1) Within 30 days after each annual anniversary date of an order registering
subdivided lands, the developer shall file a report in the form prescribed by the rules of the
department. The report shall reflect any material changes in information contained in the
original application for registration.
(2) The department may permit the filing of annual reports within 30 days after the annual
anniversary date of the consolidated registration in lieu of the annual anniversary date of the
original registration.
(3) A certificate of registration which has not been revoked or is not suspended shall be
renewed annually upon compliance with this act.
555.816 Conditions for sales of units or Interests witliin sulKllvision subject to blanlcet
encumlKance
Sec. 16. The developer shall not sell lots, units, parcels, or interests within a subdivision
subject to a blanket encumbrance unless 1 of the following conditions or the equivalent as
determined by rules promulgated by the department is met:
(a) All sums paid or advanced by purchasers are placed in an escrow or other depository
acceptable to the director until the fee title contracted for is delivered to the purchaser by
deed together with complete release fix>m all financial encumbrances; or the developer or
the purchaser default and fail to perform under their contract of disposition and there is a
final determination by a court of competent jurisdiction or the director as to the
disbursement of such moneys or they be voluntarily returned to the contract purchaser.
(b) The fee title to the subdivision is placed in trust under an agreement or trust
acceptable to the department until a proper release from each blanket encumbrance
including all taxes is obtained and title contracted for is delivered to such purchaser.
(c) A bond, cash, certified check, or irrevocable bank letter of credit issued by a bank
authorized to do business in the state is furnished the department in the name of the state
for the benefit and protection of purchasers of the lots, units, parcels, or interest, in such
amount and subject to terms as approved by the department. The bond shall be executed
by a surety company authorized to do business in the state and which has given consent to
be sued in this state. The bond or agreement accompanying the cash, certified check, or
irrevocable bank letter of credit shall provide for the return of moneys paid or advanced by
any purchaser, on account of purchase of any lot, unit, parcel, or interest if the title
contracted for is not delivered and a full release from each blanket encumbrance is not
obtained. If it is determined that the purchaser by reason of default or otherwise, is not
entitled to the return of the moneys, or any portion thereof, then the bond, cash, certified
check, or irrevocable bank letter of credit may be released by the department in the
amount of moneys to which the purchaser of a lot, unit, parcel, or interest is not entitled.
(d) The blanket encumbrance shall contain provisions evidencing the subordination of
the lieu of the blanket encumbrance to the rights of those persons purchasing fi-om the
developer or evidencing that the developer is able to secure releases from the blanket
encumbrance with respect to the property.
565.817 Advertising material, submission for approval, orders, failure to timely reject;
filing of amendments to applications for approval of advertising
Sec. 17. (1) All advertising material not accompanying the original application shall be
submitted to the department for approval prior to its use in the state.
(2) Within 15 days from the date of receipt of the proposed advertising, the department
shall enter an order approving or rejecting the advertising. If an order of rejection is not
entered within 15 days from the date of receipt, the advertising shall be deemed approved
unless the applicant has consented in writing to a delay. If any amendment to the application
for approval of advertising is filed prior to the time when the land shall be deemed approved,
• the application shall be deemed to have been filed when the amendment was filed except that
an amendment filed with the consent of the department, or filed pursuant to an order of the
department, shall be treated as being filed as of the date of the filing of the original application.
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565.818 Material used to Induce prospective purchasers to visit the sulKlhflslon,
contents; developer's participation in campaign, disclosure, assurances that
obligations can be met
Sec. 18. The director may require that any material used by a developer or his agent to
induce prospective purchasers to visit the subdivided land contain certain additional pertinent
information. The information may include but is not limited to, terms and conditions of the
offers and the nature and extent of the developer's participation in the campaign. The director
may require reasonable assurances that such obligation incurred by a developer or its agents
can be met.
565.819 Rules, promulgation, contents
Sec. 19. The department shall promulgate rules in accordance with and subject to Act. No.
306 of the Public Acts of 1%9. as amended, being sections' 24.201 to 24.315 of the Compiled
Laws of 1948. The rules shall include but need not be limited to:
(a) Provisions for advertising standards to assure full and fair disclosure.
(b) Provisions for escrow or trust or trust agreement or other means reasonably to assure
that all improvements referred to in the application for registration and advertising will be
completed and that purchasers will receive the interest in land contracted for and full and fair
disclosure in the property report informing the purchaser.
(c) Provisions for operating procedures.
(d) Provisions requiring instruments to be executed in recordable form.
(e) Provisions relating to apportionment of taxes.
(f) Other rules necessary and proper to accomplish the purpose of this act.
565.820 Investigations of subdivisions, necessity, extent, form, expenses, wahrer
Sec. 20. The department shall investigate every subdivision offered for disposition in this
state and may:
(a) Rely upon any relevant information concerning subdivided lands obtained from the
federal housing administration, the United State veterans administration or any other federal
agency having comparable duties in relation to subdivision of real estate.
(b) Accept registrations filed in other states or with the federal government and cooperate
with similar agencies in other jurisdictions to establish uniform filing procedures and forms,
uniform property reports, advertising standards, rules and common administrative practices.
If a statement of record has been filed with and the property report accepted by the federal
office of interstate land sales, and department may accept a copy of that statement of record
and property report as part of the disclosure requirements under this act and accept an
addendum to the statement of record and property report which shall satisfy the additional
requirements of this act.
(c) Require the applicant to submit reports prepared by registered or licensed engineers as
to any hazard to which any subdivision offered for disposition is subject in the opinion of the
department, or any other factor which affects the utility of lots, units, parcels or interests
within the subdivision and require evidence of compliance to remove or minimize all hazards
stated by competent engineering reports.
(d) Make an on site inspection of each subdivision prior to its registration and periodic on
site inspections thereafter. The developer shall defray all actual and necessary expenses
incurred by the inspector in the course of the inspection.
(e) Require the developer to deposit with the department the expenses to be incurred in any
inspection or reinspection, in advance, based upon an estimate by the department of the
expenses likely to be incurred.
(f) Where an on site inspection of any subdivision has been made under this act, an
inspection of a subsequent application for registration of contiguous land may be waived and
an inspection thereof shall be made at the time of the next succeeding on site inspection.
565.821 Contracts for disposition of subdivided land, contents
Sec. 21. Every contract for disposition of subdivided land shall state clearly the legal
description of the lot, unit, parcel or interest disposed of and shall contain disclosures as
required by the federal truth in lending act. Public Law 90-321, and the rules promulgated
thereunder.
565.822 Penalty for failure to pay registration and Inspection fees, amount, grounds
for imposition, collection; suspension or revocation of registration, unpaid
fees
Sec. 22. Any developer who foils to pay when due, after written notice by the department.
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the registratioii and inspection fees provided in this act and continues to dispose of or offers to
dispose of subdivided lands, is liable civilly in an action brought by the attorney general on
behalf of the department for a penalty in an amount equal to treble the unpaid fees. The
department may suspend or revoke a registration for which any application or inspection fee
provided in this act is unpaid, after written notice by the department.
585.823 lnv««tlgationt, authorlzallon, extent, purpose, ttatementt, oaths, subpoonss.
Sec. 23 (1) The department may:
(a) Make necessary public or private investigations within or outside of this state to
determine whether any person has violated or is about to violate this act or any rule or order
hereunder or to aid in the enforcement of this act or in the prescribing of rules and forms
hereunder.
(b) Require or permit any person to file a statement in writing, under oath or otherwise as
the department determines, as to all the facts and circumstances concerning the matter to be
investigated.
(2) For the purpose of any investigation or proceeding under this act, the department or any
officer designated by rule may administer oaths or affirmations, and upon its own motion or
upon request of any party may subpoena witnesses, compel their attendance, take evidence,
and require the production of any matter which is relevant to the investigation, including the
existence, description, nature, custody, condition and location of any books, documents or
other tangible things and the identity and location of persons having knowledge of relevant
focts, or any other matter reasonably calculated to lead to the discovery of material evidence.
(3) Upon fiiilure to obey a subpoena or to answer questions propounded by the investigating
officer and upon reasonable notice to all persons affected thereby, the department may apply
to the circuit court of Ingham county for an order compelling compliance.
(4) Except as otherwise provided in this act, all proceedings under this act shall be in
accordance with Act. No. 306 of the Public Acts of 1969, as amended.
555.824 Cease and desist orders and orders to take affirmative action, grounds for
• issuance; temporary cease and desist orders, notice, hearing
Sec. 24. (1) The department may issue an order requiring a person to cease and desist from
the unlawful act and to take such affirmative action as in the judgment of the department will
carry out the purposes of this act, if it determines, after notice and hearing, that a person has
done any of the following:
(a) Violated any provision of this act.
(b) Directly or through an agent or employee knowingly engaged in any false, deceptive or
misleading advertising, promotional or sales methods to offer or dispose of an interest in
subdivided lands.
(c) Made any substantial change in the plan of disposition and development of the
subdivided lands subsequent to the order of registration without, obtaining prior written
approval from the department.
(d) Disposed of any subdivided lands which have not been registered with the department.
(e) Violated any lawful order or rule of the department.
(2) If the department makes a finding of fact in writing that the public interest will be
irreparably harmed by delay in issuing an order, it may issue a temporary cease and desist
order. Prior to issuing the temporary cease and desist order, the department whenever
possible by telephone or otherwise shall give notice of the proposal to issue a temporary cease
and desist order to the person. Every temporary cease and desist order shall include in its
terms a provision that upon request a hearing will be held within 30 days to determine whether
or not it becomes permanent.
585.825 Revocation of registration, notice, hearing, grounds; findings of fact,
necessity, statement of underlying facts; cease and desist order as
alternative
Sec. 25. (I) A registration may be revoked after notice and hearing upon a written finding of
fact that the developer has done any of the following:
(a) Failed to comply with the terms of a cease and desist order.
(b) Been convicted in any court subsequent to the filing of the application for registration of
a crime involving fraud, deception, false pretenses, misrepresentation, &lse advertising or
dishonest dealing in real estate transactions.
(c) Disposed of, concealed or diverted any funds or assets of any person so as to defeat the
rights of subdivision purchasers.
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(d) Failed foithfully to perform any stipulation or agreement made with the department as an
inducement to grant any registration, to reinstate any registration or to approve any
pronK)tional plan or property report.
(e) Made intentional misrepresentations or concealed material facts in an application for
registration.
(2) Findings of &ct, if set forth in statutory language, shall be accompanied by a concise and
explicit statement of the underlying &cts supporting the findings.
(3) If the department finds after notice and hearing that the developer is guilty of a violation
for which revocation could be ordered, it may issue a cease and desist order instead.
565.826 Injunctiont, grounds; receivers; conservators; bonds
Sec. 26. If it appears that a person has engaged or is about to engage in an act or practice
constituting a violation of this act or a rule or order hereunder, the department, with or
without prior administrative proceedings, may bring an action in circuit court of Ingham
county to enjoin the acts or practices and to enforce compliance with this act or any rule or
order hereunder. Upon proper showing, injunctive relief or temporary restraining orders shall
be granted and a receiver or conservator may be appointed. The department is not required to
post a bond in any court proceedings.
565.827 Offenses, enumeration, penalties
Sec. 27. Every developer or agent of a developer who authorizes, directs, or aids in the
publication, advertisement, distribution, or circularization of a false statement or
misrepresentation, made with knowledge of its falsity, concerning a subdivision offered for
disposition or who knowingly fails to comply with the terms of a final cease and desist order
and every person with knowledge that an advertisement, pamphlet, prospectus, or letter
concerning a subdivision contains any written statement that is false or fi-audulent, who
issues, circulates, publishes, or distributes the same or causes the same to be issued,
circulated, published, or distributed or who knowingly fails to comply with the terms of a final
cease and desist order, is guilty of a felony and may be fined not more than $25,000.00, or
imprisoned not more than 10 years, or both. Each violation constitutes a separate offense.
585.828 Other violation, penalties
Sec. 28. Any violation of this act other than as provided in section 27 is a misdemeanor and
every violator may be fined not more than $2,000.00 or imprisoned for not more than 90 days,
or both, for each offense.
585.829 Service of process, methods, nonresidents
Sec. 29. (1) In addition to the methods of service provided for in any other provision of law,
service may be made by delivering a copy of the process to the office of the department if the
plaintiff, which may be the department in a proceeding instituted by it, does both of the
following:
(a) Sends a copy of the process and of the pleading by registered mail to the defendant or
respondent at his last known address.
(b) Files its affidavit of compliance with this section in the case on or before the return day
of the process or within such time as the court allows.
(2) If any person, including any nonresident of this state, engages in conduct prohibited by
this act, or any rule or order and has not filed a consent to service of process and personal
jurisdiction over him cannot otherwise be obtained in this state, the conduct authorizes the
department to receive service of process in any noncriminal proceeding against him or hn
successor which grows out of the conduct and which is brought under this act or any rule or
order hereunder, with the same force and validity as if served on him personally. Notice shall
be given as provided in subsection (1).
565.830 Registration fee, time for payment, amount; annual renewal fee; Inspectloii
expenses, payment
Sec. 30. (1) Except as provided in subsection (2), a registration fee shall be paid with the
application for registration and shall be set by rule which shall provide a basic fee of $250.00,
plus an additional fee of not more than $50.00 for each 50 lots, units, parcels or interests
included in the offering.
(2) A registration fee shall be paid with the filing of an application for registration
consolidating additional lots with a prior registration and shall be set by rule which shall
provide a basic fee of $200.00. plus an additional fee of not more than $50.00 for each 50 lots,
units, parcels or interests included in the offering.
(3) A fee shall not be charged for amendments to the property report as a result of
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amendments to the initial filing, unless the department determines the amendments are made
for the purpose of avoiding the payment of a fee, in which event the amendment may be
treated as an application for registration consolidating additional lots with a prior registration.
(4) A fee not to exceed $25.00 shall be paid with each submission of advertising for
approval.
(5) In addition to the payment of inspection expenses as provided in section 20, an annual
renewal fee set by rule shall be paid.
565.831 D«oepCiv» ads or false statomenls and omisaioffit, liability to purchaaar; Joint and
aavaral liabMty; contrllNition; tandar of raoonvayanca, tima; limitation of actkma
Sec. 31. (I) A person who disposes of subdivided lands in violation of section 6 or who, in
disposing of subdivided lands engages in a deceptive act or practice, makes an untrue
statement of a material fact or omits a material &ct required to be stated in a registration
statement or property report or necessary to make the statements made not misleading, is
liable as provided in this section to the purchaser unless in the case of an untruth or omission
it is proved that the purchaser did not rely on the untruth or omission.
(2) In addition to any other remedies, the purchaser under subsection (1) may recover the
consideration paid for the lot, parcel, unit, or interest in subdivided lands together with
interest at the rate of 6% per year from the date of payment, property taxes paid, costs and
reasonable attorneys* fees, less the amount of any income received from the subdivided lands,
upon tender of appropriate instruments of reconveyance. If the purchaser no longer owns the
lot, parcel, unit, or interest in subdivided lands, he may recover the amount that would be
recoverable upon a tender of a reconveyance, less the value of the land when disposed of and
less interest at the rate of 6% per year on that amount from the date of disposition.
(3) Every person who directly or indirectly controls a subdivider liable under subsection (I),
every general partner, officer, or director of a subdivider, every person occupying a similar
status or performing a similar function, every employee of the subdivider who materially aids
in the disposition and every agent who materially aids in the disposition is also liable jointly
and severally with and to the same extent as the subdivider, unless the person otherwise liable
sustains the burden of proof that he did not know and in the exercise of reasonable care could
not have known of the existence of the facts by reason of which the liability is alleged to exist.
There is a right to contribution as in cases of contract among persons so liable.
(4) Every person whose occupation gives authority to a statement which with his consent
has been used in an application for registration or property report, if he is not otherwise
associated with the subdivision and development plan in a material way, is liable only for false
statements and omissions in his statement and only if it is proved he knew or reasonably
should have known of the existence of the true facts by reason of which the liability is alleged
to exist. However, if the person is a registered professional licensed by this state whose
statement was part of his representation of another person in rendering professional services,
liability hereunder shall not exceed that resulting from a duty to exercise a reasonable degree
of care and skill ordinarily possessed and exercised by members of that profession similarly
situated.
(5) A tender of reconveyance may be made at any time before the entry of judgment.
(6) An action shall not be commenced pursuant to this section later than 3 years from the
time performance of all promises, statements, or representations contained in any registration
statement, property report, purchase agreement, contract, option, or other evidence of a
disposition of subdivided lands is to be completed. Where the cause of action arises out of any
deceptive act or practice or the omission to state a material fact, the action shall be
commenced no later than 3 years from the date the person discovers or should have
reasonably discovered the deceit or omission. An action shall not be commenced by a
purchaser more than 6 years after the sale or lease to the purchaser.
5e5.832 Suixllvidad lands within atata, autKlivldar's principal offica in atata, or offar or
diapoaitlon of subdividad landa mada In tha atata, appiicability of act,
Jurisdiction of circuit courts
Sec. 32. Dispositions of subdivided lands are subject to this act and the circuit courts of this
state have jurisdiction in claims or causes of action arising under this act, in the following
cases:
(a) The subdivided lands offered for disposition are located in this state.
(b) The subdivider's principal office is located in this state.
(c) Any offer or disposition of subdivided lands is made in this state, whether or not the
offeror or offeree is then present in this state, if the offer originates within this state or is
directed by the offeror to a person or place in this state and received by the person or at the
place to which it is directed.
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565.833 Repealed by P.A. 1973, No. 184, ft 2, imd. Eff. Jan. 3, 1974
This section, added by P.A. 1972, No. 286, ft 33, contained a saving clause applicable to
preexisting registration and allowed 90 days for the effecting of the consolidation of prior
registrations.
866.834 Condominiums
Sec. 34. No portion of this act shall have any effect on or take precedence over the
application and enforcement within the state of Act No. 229 of the Public Acts of 1963, as
amended, being sections 559.1 to 559.31 of the Compiled Laws of 1948.
565.835 Effective date
Sec. 35. The provisions of this act shall take effect October 1. 1973, except that section 19
shall take effect April 1, 1973 and the department shall make available such rules, and all
necessary forms and instructions for and may accept and process applications for registration,
applications for approval of exemption, applications for approval of advertising and
applications for consolidation of registrations and may make examinations, investigations, and
conduct inquiries incident to such applications prior to October I, 1973 so that persons
regulated by the dct can be in compliance therewith on October I, 1973.
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CEPARTMENT OF LICtNSING AND REGULATION
DIVISION OF LAND SALES
GENERAL RULES
K-. leo wnh Secretary of State, July 27, i973.
Tne.^' rules lake effect 15 days after filing with the Secretary of State (by
author ty conferrea on the department of licensing and regulation by section 19
of Act No. 286 of the Public Acts of 1972, as amended, being section 565.819
of the Micniyan Compiled Laws).
TABLE OF CONTENTS
General Provisions R 338.3201 - R 338.3219
Exemptions from the Act R 338.3221
Registration of Non-Exempt Subdivided Lands. . . R 338.3231 - R 338.3238
Protection of Purchasers R 338.3241 - R 338.3259
Advertising and Sales Promotions R 338.3261 - R 338.3317
Means to Assure Receipt of Contractual Interests R 338.3321 - R 338.3327
Means to Assure Completion of Improvements . . . R 338.3331 - R 338.3335
Taxes and Assessments R 338.3341 - R 338.3345
Declaratory Rulings, Investigations and Hearings R 338.3451 - R 338.3466
Pago
1
Part 1.
5
Part 2.
6
Part 3.
10
Part 4.
]6
Part 5.
31
Part 6.
33
Part 7.
J5
Part 6.
36
Part 15
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MICHIGAN DEPARTMENT OF LICENSING AND REGULATION
DIVISION OF LAND SALES
PART I. GENERAL PROVISIONS
R 3J'{.j?ai. Definitions A.
.^u'lc- ;. (1) The terms and definitions used in the act have the same meaning
givcr tncrein when used in these rules.
(2) "Act" means Act No. 286 of the Public Acts of 1972, as amended, being
sections 565.801 to 565.835 of the Michigan Compiled Laws.
(3) "Advertising material" means the pamphlet, circular, form letter,
fact sheet, sign, radio, television, telephone presentation, newspaper or magazine
advertisement, or other sales literature or advertising communication addressed to
or intended for distribution to prospective subscribers or purchasers, not otherwise
excepted under section 2(a) of the act, and includes radio and television scripts.
Multiple listing books and other publications, the distribution of which is
restricted to real estate brokers and salesmen licensed by the State of Michigan
and their employees shall not be considered "advertising" within the meaning
of the act or these rules.
(4) "Advertising submission" means a single piece of advertising material, as
defined in rule 1(3).
(5) A common promotional plan shall not include a multiple listing service
or real estate brokers offering unrelated properties in their regular course of
business, unless such plan Is adopted for the purpose of evasion of the act.
R 338.3202. Definitions 1 to S.
Rule 2. (1) "Interest in land" includes a certificate of participation in.
Interest in, share, membership in a corporation, profit or non-profit, whose
purpose is to develop or make available real property and impro/ements thereto
for recreational, vacation or second home site unless such inter-est, certificate
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of participation, share or membership is registered and in compliance with 1964
PA 265, as amended, being sections 451.501 to 451.818 of the Michigan Compiled
Laws, unless such interest, certificate of participation, share or membership
plan is adopted for the purpose of evasion of this act.
(2) "Person authorized to appear to represent a developer" means a person
who is an employee of a developer, the developer, his agent, or an attorney at law
who files an appearance on behalf of a developer.
(3) "Subdivision" and "Subdivided lands" includes condominium projects
consisting of 10 or more units and any portion thereof not included within the
terms of Act 229 of the Public Acts of 1963, as amended, being sections 559.1
to 559.31 of the Compiled laws of 1948.
R 338.3204. Documents.
Rule 4. (1) A document to be filed with the department shall be typewritten
or in legible handwriting on 1 side of the paper only. One copy of each exhibit
or document shall be submitted, unless the director requires more than 1 copy. A
document shall be reduced or folded to a size not to exceed &^ by 13 inches. All
papers filed pursuant to these rules shall become part of the department's records.
(2) The use of verified photographs as part of documentation is permitted,
except that the photographs shall not be permitted in lieu of proper legal
descriptions of real property or other required written documents.
(3) The use of verified copies of original documents is permitted.
(4) An affidavit or affirmation as prescribed in the department forms shall
be executed for each of the following documents: statement of record; partial
statement of record; consolidation registration; registration amendment; annual
registration renewal; application for advertising approval; partner, officer,
director or principal disclosure; consent to service to process; and broker's
application.
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.X 238.5206. Fees.
Rule 6. Ine following fees shall accompany documents submitted for filing:
(a) Registration fee - $250.00 plus $1.00 for each lot, unit, parcel or
interest included in the application.
(b) Consoiirlation registration fee - $200.00 plus $1.00 for each additional
lot, unit, parcel or interest added to the original application.
;c Annual registration renewal fee - $100.00 plus $0.25 for each lot, unit,
parcel or interest included in the application.
(a) Advertising submission fee - $15.00 for each submission, which was not
suDmitted with an original registration or a consolidation, except
tnat a fee for a classified ad of 2 column inches or less shall be
$0.25.
R 338.3208. Address of director.
Rule S. Tne official address of the director for delivery and receipt of all
mail, telegrams, information, filings, registration, fees, and other material
requirea Dy the act or these rules is:
Director of Land Sales Division
Michigan Department of Licensing and Regulation
1008 South Washington Avenue
Lansing, Michigan 48926
R 358.3218. Modification of rules.
Ru.e 18. The director, in order to achieve the purpose intended by the act,
may add to, waive, modify or otherwise condition, or change any requirement
created by these rules in case of particular factual circumstances.
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13B.3219. ciecission of Emergency Rules.
^'•Ic: 19. 'hf^ emergency rules promulgated by the Department of Licensing and
•^o.'\»t:')n. (,'ivision of Land Sales and filed with the Secretary of State on
r •' /f^, W:-', are rescinded.
' -s <>7.' ' 'f •rin.eii'' to Comply with rules.
II ■; :> A.. ii.pMcation for registration for wMr.h a i.or.ire of filing has
. ^ ».n.>,, = ,,., . > ;•; (> .effective date of these rules, shall be amended to comply
:♦:•■• these ;-/l^-:'; .
!"\ RpoKi) ^iticiis tn effect on the effective date of these rules shall be amended
, : . -: . : ' . I" ? i ' t ra t J on or the annual renewal » whichever comes first.
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PART 2. FXEMPTIONS FROM THE ACT
R 338.3221. Statutory exemptions.
Rule 21. Except as otherwise provided by rules promulgated by the department
as duthori7ed Dy the act, the act shall not apply to offers or dispositions of
inrerp^ns in land specified in sections 4 and 5 of the act unless the method of
disposition is adopted for the purpose of evading the act.
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PART 3. REGISTRATION OF NON-EXEMPT SUBDIVIDED LANDS
R 338.3231. Statfiments of record and property reports; contents and filing.
Rule 31. '1,^ A developer shall apply for a registration of non-exempt
su'j'Jivided la-^c^ by means ?>' a statpnent of record and nropprty report in
accor^^ance wUh the act and this part.
(?* A statement of record shall be madp on the form supplied by the department.
A proD'^rty rpnort shall bp in thp fom prp^rribed by thp department. They shall
be ^u'^y cyeculed.
(?) ^ statement of record and property report shall include, but not be lir»1ted
to, :^^ >>forration required by sections 6 to 10 nf the act. The property report
sha«! ^icluoe on its face the foilowlnn language In 12 point bold capital type:
"THF DEVELOPER DOES NOT DISCRIMINATE ON THE BASIS OF RACr,
COLOR, RELIGION, SEX, OR NATIONAL ORIGIN IN THE OFFER TO SELL,
SALE. FIfiANCIMC, OR OTHER 'JlSPOSITION OF LAND INCLUDING THE
rVlKING AVAILABLE OF ALL IMPROVEMENTS, OR OTHER AMENITIES OF
ins SUBDIVISION. "
'/) A ■;'w^tP-n»ent of record and a property report shall be filed with the
director by personal delivery at, or certified mail to, the address set forth
<-. rt-V 8.
(b^ The rpqistration fee shall accomr»any a stjtemer.*: o^ record and property
ron< -t, ard shall uc oaid by check or ^nontv '^rde- , riy.ble to the "State of
••^ichln;*". **
"? ■?3S.?;:?r. statement*; and reno***': rff'T.tive dr*.'^s.
R-.!)(^ 3". '•; The property r-rr.-^» i ^t^M -i..1M<>rpd ? part of the statement
of r^cr>r(i fo*" tnc purpose o^ d*'terr -.''fi'i Kac • jctive date and suspension of
the ►^ffect^ve date.
/; y^^' p'fcctiv*^ d^tr of the st3te*rent o' recor ^hall bp no later than
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60 days after the date of notice of filing which shall be issued to an applicant
within 10 days of receipt of the application by the department unless:
(a) The applicant has consented In writing to a delay.
(b) The dppartnent has entered an order of rejection with notice of
specific deficiencies therein.
(c) If any amendment to the statenent of record Is filed before the time
of the registration, the statement of record shall be considered to have be^n
filed when the amendment was filed, unless the amendment is filed with the consent
of or pursuant to order of the department. In such case, the amendment shall be
con<;1dered as filed as of the original notice of filing date.
R 338.3233. Statements; rejection.
Rule 33. (1) A notice of deficiency and order of rejection with respect to
a statement of record or an amendment may be issued by the director within 45 days
after the date of notice of filing, if before Its effective date the director
has reasonable grounds to believe that the statement of record or ainen<hient Is
on its face incomplete or inaccurate.
(2) An ordrr of ^^ejection with respect to a statement of record may be Issued
to an applicant if it appear; to the director that the developer has attempted or
made ir.tpnlional mi'sreprr^ent^tions, or concealed or omitted material facts In
t>ic starrimont, or has attempted to Qw»6e or has evaded the provisions of the act,
or has raric nislead^'-g or dpcpptlve statements. A developer may correct the
particulars specified in an order of rejection within 15 days after receipt of
the order unless othorwiso extendpd by the department.
R 33R,3?34. ^t.^temonts and rpj)*rts; amen-' -rt, suspension and consolidation.
Pule 3^. r») An an-ndment to ^n offt • o statement of record shall be
filed within IC days after a cn^nqe wh1c» < Tfects a naterlaUfact. If the
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department considers It necessary or appropriate In the public Interest or
for the protection of purchasers, it may suspend the certificate of registration
until the amendnent Is considered registered and an intent to reject is entered
or a delay agreed upon.
(2) If a developer registers additional subdivided lands to be offered for
sale, he may consolidate tlie subsequent registration with any earlier registration
offering subdivided lands for sale under tiie same promotional plan and the
property report shall be amended to Include the additional lands so registered.
The consolidation of registration of additional subdivided lands shall be
considered registered after 30 days unless an Intent to reject Is entered with a
specific statement of deflclences within 30 Uays thereof or a delay Is agreed upon.
(3) If, In connection with lots previously offered for sale and covered by
an effective statement of record, the developer Intends to offer additional lots
as part of a common promotional plan, either a new or a consolidated statement shall
be filed. The developer shall answer specifically each question In the statement
and submit a new property report. The developer shall not Incorporate by
reference answers to questions In the previous filing. Supporting documentation
may be Incorporated by reference where it applies to both the original filing and
to the additional lots to be offered. In all other respects, the consolidated
statement shall confonn to tl»e requirement s of an initial statoment filed in
accordance with these rules.
R 338.3235. Registration under othe»* law.
Rule 35. (1) A registration of a subdivision In effect under any other act
of this state shall remain in full force and effect, except that within 30 days
after the effective compliance date of the act in section 35, the developer shall
comply with the additional requirements of the act.
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(2) If a statfiment of record has bei'n filed with and accepted by the Office
of Interstate Land Sales Registration, Department of Housinq and Urban Develop-
ment, U.S. Government, the department may accept a copy of same as part of the
disclosure requirements under the act if the material Is accompanied by a
statement under oath by the developer, certifying that the copies are copies of
all documents upon which the federal statement of record was based and stating
the effective date of the federal filinq. An addendum fom prescribed by the
department shall be fuMy executi^d and submitted to the department In addition
to the certified federal statement of record.
R 338.3P36. Investigations and certificates of registration.
Rule 36. (1) After receipt of a properly executed statement of record,
the department shall examine and investigate the matters therein In accordance
with sections 13 and 20 of the act.
(2) After inquiry and examination, the department shall Issue a certificate
of registration if the requirenents of the act and these rules are met. The
department shall also approve the form of the property report.
P 33fc.3238. Annual reports.
Rule 38. A ricv«»loppr shall file an annual report In the form prescribed by
i. <e oepartment witi.ir 30 days after each annual anniversary date of an order
registering subdivided lands. The report, as a minimum, shall reflect any
naterial changes in information contained in the original statement of record
and property report. An annual report of a consolidated registration Is permitted
within 30 days after the annual anniversary date of the consolidated registration.
Paynent of the fee required by rule <■ shall accompany the annual report.
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PART 4. PROTECTION OF PURCHASERS
R 338.3241. Unfair acts and practices; documents.
Rule 41. (1) It Is unfair for a person to use a contract, agreement, deed, option
or other evidence of disposition of lands under the act which contains provisions
vfhereby a purchaser or prospective purchaser agrees, without his written consent
thereto in a separate document or by conspicuous type In any such Instrument!
(a) To waive a right afforded by the act; the Interstate Land Sales
Full Disclosure Act (82 Stat. 590; 15 USC 1701 et. se^.); and the Consumer Credit
Protection Act cotrmonly known as the Federal Truth In Lending Act, and any rules
or regulations promulgated thereunder.
(b) To assume all risk of loss to the property without title passing to
the purchaser or actual possession being In the purchaser.
(c) To a prior or subsequent sale of the optioned or purchased property.
(d) To waive as against an assignee of the developer, a mortgagee, or
subsequent holder, a claim or defense arising out of the transaction that the
purchaser would have against the developer.
(e) To forfeit all prior payments upon default.
(f) To acceleration of the unpaid balance of a contract upon default.
(g) To lose possession of the property without notice of and a prior hearing
in a court of competent jurisdiction.
(h) To waive a right to redeem the property after default.
(i) That an assignee, mortgagee or subsequent holder of the developer is
not obligated to perform as to the purchaser.
(2) It is unfair for a developer, his agents, servants, employees or others
acting on his behalf:
(a) To offer to or induce a purchaser to execute a document, paper, or
writing without all spaces filled in or inapplicable spaces clearly stricken.
(b) To alter or deface a document, paper, or writing without the knowing,
intelligent, and voluntary consent of the parties thereto.
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R 331^.3242. Unfair acts and practices; discrirination.
Rule 42. It Is unfair for a developer, his agents, servants, enployee^,
or others acting 6n his behalf to discriminate on the basis of race, color, religion,
sex, or na/ional origin in an offer to seli, sale, financing, or other disposition
of land including making available the use of all improvenents, or other aai^ities
of the existing or proposed subdivision.
R 338.3?43, Unfair acts and practices; general
Rule 43. (1) It is unfair for a person to use a nethod of rebate of Interest,
or finance charge which reauires or results in a purchaser paying a greater
amcun; of interest or finarce charge upon prepayment than he would have paid if
he had financed for thdt s^iorter period up to the time of prepayment.
txampie: Use of "Rule of 78's* of "sum of the dig1t>" methods.
(^} ft '.s unfair tt>- n developer, his agents, servants, employees, or
others acting on his behalf:
(a) To maKe a pr-jmise with no present intent to perform it.
(b) To fail to revral to the purchaser or prospective purchaser all
torms, ronditions, nr'tUes, and amounts of any contract, agreement, option, deed,
property report, or other evidence of the purchaser's indebtedness.
\z) "o 'iubstitute dr-other lot» unit, parcel, or interest In land for
^hai purcndser* or optioned without the kr>Dwing, intelligent, and voluntary consent
thereto by tne purcnaser
(j) 't is unfair for a aeveloper to fail to afford to a purchaser all
rights, privilpgos, or acvantdges that ere represented or implied are available
to H purch.**er as the result of the purchase.
R 338.325i. i/eceptivc <»ct^ anc practices.
Rule '»!. The methods. Acts, and '^r.jctires listed in rules 52 to 59 are
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deceptive, and a developer, his agents, servants, employees, or others acting
on his behalf shall not engage in thetn.
R 338.3252. Deception; approvals and memberships.
Rule 52. (1) Representing that the developer, his agents, servants, employees,
or others acting on his behalf, have sponsorship, approval or certification they
do not have.
(2) Representing that land has been inspected by the department and/or received
approval whether in fact it has or has not.
(3) Representing the necessity, desirability, or the advantage to a prospective
purchaser of dealing with a developer, by a false connection with or endorsement by
the government, nationally known organization, or membership in a professional
association.
R 338.3253. Deception; availability of land and utilities.
Rule 53. (1) Representing the availability of land without clearly and
conspicuously disclosing in immediate conjunction therewith any limitation on
availability, location, or quantity.
(2) Using the developer's personnel to repeatedly announce that lots are being
sold when in fact this is not the case or to make false repetitive announcements of
the same lot being sold.
(3) Representing a utility service as "available" or some similar representation,
unless such utility service is installed in the subdivision and ready for use, or use
is assured under financial arrangements made for Installation, and such arrangements
are disclosed.
R 338.3254. Deception; access to subdivisions.
Rule 54. (1) Representing or implying that a subdivision is restricted to owners,
purchasers or their families by means of guards or private roads or facilities, the
use and enjoyinent of which require special identification, unless this Is true.
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;2) Representing that d prospective purchaser has to pay a refundable or
non- refundable temporary nembership fee In order to visit, tour, or Inspect a
subdivision for the reasons that such Is restricted to members only when In
fact such offer is made systematically and on a regular basis to all persons
solicited for purchase.
R 33C.3255. Deception; visits and free goods and services.
Rule 55. (1) Fallinq to reveal In ar offer to induce a person to visit, inspect,
or t&ur a Subdivision all terms, cond1t<ons or prerequisites that have to be met
by any person.
{2) Offering or representing that goods or services are "free" without
clearly or conspicuously disclosing In Immediate conjunction with the offer or
represpf.tatlon all terms, conditions, or prerequisites to the receipt, retention,
or use of the goods or services.
R 338.3P56. Deception; price, value and credit.
Rul#» 56. (1) Representing or Implying that a prospective purchaser has to
act quickly to purchase land at a savings since the price thereof Is about to
increase unless In fact a decision has been made to Increase the price and that the
increase does take effect.
(2) Representing that the price of land to a prospective purchaser Is a
discount or reduction from a regular price unless In fact the represented
regular price was tne customary and regularly sold-at price for a reasonable
prior period of time.
(3) Representing or suggesting that the p«>ice of land Is a savings wh^n compared
to other prices sold at by conpet1tr»rs of tr.fi developer unless such other land
with f^€ higher price has the same cH^racteristlcs, attributes and qualities of
the offered or advertised land ino ; en compared-to prices are not fictitious.
Lxamp'.e: "Lake front lots this weoi S5,000. Compare at $8,000."
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(4) Failing to reveal the cost of the land to the developer where it is
represented the purchaser is making an investment, which will increase in value
due to the sole efforts of the developer.
(5) Representing that a purchaser is making an investment in real estate
which will increase in value as the result of the effort of the developer unless
this is true.
(6) Offering or representing that credit availability is easy when in fact it
is not.
(7) Offering or representing that credit terms are easy when in fact they
are not.
(8) Misrepresenting or causing others to misrepresent the interest rate or
finance charge as other than it actually is.
R 338.3257. Deception; repurchases, refunds, consideration for referrals.
Rule 57. (1) Representing to a purchaser or prospective purchaser that the
developer will buy back, resell, list, or otherwise dispose of purchased property
unless, in fact, this is true.
(2) Representing or inducing a purchaser or prospective purchaser to buy land
or execute a contract, agreement, option for a consideration, or other evidence
of indebtedness on the basis that if the purchaser is not satisfied a refund will
be made, unless this is true.
(3) Representing or promising a commission, bonus, discount, reward, over-ride,
or prize for referring other purchasers to the developer, where such promise or
representation Is similarly made to those referred.
R 338.3258. Deception; promotion schemes, documents.
Rule 58. (1) Representing that a developer, salesman, agent, servant, employee,
or other acting on behalf of a developer is conducting a survey, contest, poll,
or other similar inquiry, when in fact it is a systematic marketing approach in an
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effort to sell property.
(2) Representing to a prospective purchaser that he or she is specially selected,
when in fact they are not.
(3) Obtaining a prospective purchaser's signature to a contract, agreement,
option, or other evidence of indebtedness by representing it is only a reservation,
receipt, or temporary membersnip certificate.
(4) Failing to clearly and conspicuously inform a purchaser that a contract,
promissory note, or other evidence of indebtedness could be assigned.
R 338.3259. Deception; miscellaneous.
Rule 59. (1) Misrepresenting the necessity, desirability, or advantage to a
prospective purchaser of dealing with a developer, by misrepresenting a developer's
alleged advantages of size.
(2) Offering or representing to sell or lease lots, units, parcels, or interests
in land which in truth the developer does not intend or want to sell or lease.
(3) Knowingly making a statement or illustration which creates a false impression
of the kind, quality, nature, and value of the land offered when later, the purchaser
may be routinely switched from the advertised land to other land.
(1) Failing to clearly and conspicuously disclose the use to which contiguous
lar.d has boon ;)Uc whore tne disclosure is material to the use of the lot or subdivision
ir: I .rhi v,f rr-L Dositive representations made.
(5) Engaging in any other method, act, or practice which has the capacity or
tendency to deceive.
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PART 5. ADVERTISING AND SALES PROMOTIONS
R 338.3261. Effect of standards.
Rule 61. Precise rules to determine that material Is misleadinq, or that
a pl*n of nele or development lacks adequate safequards and assurances to
prospective purchasers, cannot be made which will be applicable in all situations.
Without an intent to l^mit its consideration or determination to the general
standards set forth in these rules and without an attempt to compel any particular
form or method of advertising, promotion, development, or sale of subdivided
lands, the standards in rules 62 to 70 are guides for a person preparing to
file advertising material and for department personnel. These standards are not
considered to be all-inclusive for the department in evaluating advertising
to determine whether it is false, deceptive, or misleading and fails to make full
and fair disclosure within the Intent of the act and these rules.
R 338.32C2. General standards.
Rule f;2. (1) Claims and representations contained In advertising shall be
accurate and provable.
(2) Advertising shall net misrepresent farts or create misleading impressions.
(3) Advertising shall not contain a statement which, though true. Implies
an untruth.
{Ay Advertising shall not make a derogatory or unfair reference to comnrtitlvo
developments, subdivisions, or properties.
[h) Advertising shall not reprint published material unless information
contained in the reprint is representative, truthful, relevant, and pertinent to
the property being offered.
(6) Advertising shall not contain a statement, photograph, or sketch portraying
the use to which land ran be put unless the land can be put to such use without
unreasonable cost.
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(7) Advertising shall not contain an asterisk or any other reference symbol
as a means of contradicting or substantially changing a previously made statement
or as a means of obscuring a material fact.
(8) Advertising shall not use a name or trade style which implies that the
advertiser is a non-profit research organization or public bureau or group, when
such is not true. Advertising of such an organization is prohibited when the
true nature of the plan of sale or ownership is misrepresented or concealed.
i'j) Maps, plats or representations shall clearly indicate the estimated date
that development will be completed. If completion dates are over a period of years*
then a series of shadings, outlines, or coding may be used to indicate estimated
dates of completion.
R 338.3263. Distances.
Rule 63. (1) Where a conmunity is referred to, advertising shall state the
location of the subdivision and the mileage from the approximate geographical
center of the subdivision in road miles to the approximate downtown or geographical
center of the community.
(?) Where an amenity or improvement is referred to, advertising shall disclose
with reasonable specificity, the location of such amenity or improvement In
relation to the size and location of the subdivision.
(3) Advertising shall not use such terms as "minutes away", "short distance",
"only miles", "near", and terms of similar import to indicate distance, unless
the actual distance in road miles is used in conjunction with the terms.
R 338.3264. Sketches and pictures.
Rule 64. (1) Advertising shall not contain an artist's sketch to portray
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a proposed improvement or non-existent scene without an indication that the
portrayal is an artist's sketch and that the improvement is proposed or the
scene does not exist. An artist's conception of an existing improvement or
scene shall be representative and state that the rendering is an artist's
conception.
(2) Advertising shall not contain before and after pictures for comparative
purposes without the analysis of the pictures.
R 338.3265. Improvements and facilities.
Rule 65. (1) Advertising of an improvement to a subdivision or any specific
part thereof which is not completed shall not be made unless it is stated in
unmistakable terms that the improvement is merely proposed or under construction
and the estimated date of the promised completion indicated.
(2) Advertising shall not describe land as a homesite or lot if potable
water is not available. Advertising shall give reasonable assurance that a
septic tank will operate or a sewer system is in existence unless facts to the
contrary are included in each advertisement pertaining to that property.
(3) Advertising shall not contain a statement, photograph or sketch relating
to a facility for recreation, sports, or other convenience not presently in
existence, unless it is stated that the facility is not on the land and the
distance thereto in miles is given, or that the facility is merely proposed.
(4) Advertising shall not refer to a governmental facility, wherever located,
unless money has been budgeted for actual construction of the facility and is
available to the public authority having the responsibility of construction, or
an actual disclosure of the existing facts concerning a governmental facility
is made.
(5) Advertising shall not refer to a governmental facility under study, unless
it is fully disclosed that the facility is merely proposed and under study and
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no reference Is made to the location or route of the facility until such has
been decided by the responsible public authority.
R 338.3266. Roads, streets, waterways, and floods.
Rule 66. (1) Advertising which refers to "roads" and "streets" shall make
affirmative disclosure as to the nature of the roads and streets, such as paved,
gravel or dirt. To be described as improved or paved, a road and a street shall
be constructed and surfaced according to county, city, or other acceptable
authority specifications, or satisfactory guarantees made for such construction
and surfacing.
(2) Advertising shall not refer to property as waterfront unless the property
being offered actually fronts on a canal or other body of water.
(3) Advertising which uses the term "canal" shall disclose the approximate width
and approximate depth of water in the canal and whether or not it provides access
to open water.
(4) Advertising shall disclose if the land or any part of it is regularly
flooded or substantially covered by standing water for extended periods of time
during the year, unless adequate drainage is assured by bonding or other means
acceptable to the department.
R 338.3267. Access and easements.
Rule 67. (1) Advertising of land which does not have available legal access
to the purchaser shall disclose that fact and its effect.
(2) Advertising which refers to legal access shall be accompanied by phraseology
to indicate whether the access is usable as a passage for conventional automobiles.
(3) Advertising shall not refer to the exis.ence of a road easement or a
road right-of-way unless the easement or right-of-way has been dedicated to the
public or to appropriate property owners and recorded in the public records of
the county where the property is located.
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(4) Advertising which indicates the size of the tract offered shall
indicate the size and kind of all easements to which the property may be subject.
If the property is subject to easements which are unusual in size, this fact
shall also be noted. Maps, plats, representations, or drawings shall indicate
the dimensions of the tract and all easements.
R 338.3268. Consideration, prices and values.
Rule 68. (1) Land shall not be advertised as "free" if the prospective
purchaser is required to give any consideration therefor. Land shall not be
advertised for "closing costs only" when these costs are substantially more
than normal, or when additional land has to be purchased at a higher price or to
render the land usable.
(2) Advertising which refers to a property exchange privilege shall state
clearly any qualification concerning the exchange privilege.
(3) Advertising shall not refer to a pre-development sale at a lower price
because the land has not yet been developed unless there is a plan of development,
and a subdivision plat has been recorded, or reasonable assurance is available
that the plan will be completed.
(4) Advertising shall not indicate a discount on property that appears to
effect a price reduction from the advertised price. A discount may be given
for quantity purchases, cash, larger payments, or for any reasonable basis. The
purpose of this standard is to eliminate the use of fictitious pricing and
illusory discounts.
(5) Advertising shall not contain false statements concerning future price
increases by the subdivider.
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(6) Advertising shall not make predictions of specific or inmediate price or
value increases of lots, parcels, or units of advertised lands when the subdivider
does not have control over such price increases.
(7) Advertising shall not compare land values unless it is clear who is
making the comparison and it is relevant and fair.
R 338.3269. Taxes and assessments.
Rule 69. (1) Advertising containing statements regarding taxes and the
amounts thereof shall employ the latest available figures.
(2) Advertising referring to the purchase price of land shall also Include
any additional compulsory assessment or cost to the prospective purchaser, that
are known, or should have reasonably been known, at the time of disposition.
(3) Advertising referring to a promised improvement for which a prospective
purchaser will be assessed shall disclose that fact.
R 338.3270. Miscellaneous standards.
Rule 70. (1) Advertising shall not represent that the land offered for
sale may be subdivided or resubdivided unless it includes necessary and relevant
information regarding the estimated cost of future subdividing.
(2) Advertising shall not infer or imply that the subdivider will resell
or repurchase the land being offered at some future time unless the subdivider
has agreed with the department to resell or repurchase land for or on behalf of
purchasers and has given reasonable assurances to the department to demonstrate
his ability to perform this agreement.
(3) Advertising which refers to oil. gas, or mineral rights shall disclose
all pertinent facts pertaining to such rights.
(4) Advertising which refers to gifts, bene'us, or vacation certificates
shall disclose the terms and conditions of offers therein iQ conspicuous print.
(5) Advertising may contain the unqualified term "development" only to
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de<icribe « subdivision, the plat o^ which has been rocordcd.
(6) Advertising shall not contain the tenns "guarantee or guaranteed refund"
unless the refund is unconditional.
(7) A newsletter giving information as to a place, facility or nyent more than
10 miles distant fron land involved, or make a prediction applicable to an area
greater than the land involved^ as for instance, fijturo population of an entire
state, shall carry a disclaimer as follows:
"Information contained In this newsletter is general to
(name of state). Property for sale by (development company) may not
be affected at any foreseeable time by any pldcj, facility, event,
or prediction described."
(8) Advertising which forecasts a future event or population trend shall
be by a qualified person and pertinent to the offering.
R 338.3?81. Visitation programs; general disclosures.
Rule HI. (1) The terms, conditions, and prerequisites to use and enjoyment
of a visitation program shall be disclosed in promotional natcrial, advertising,
and on any certificate. This includes, but Is not limited to, the developer's
participation in the program, the nature of any gift or other benefit, including,
but not limited to, what the prospect will actually receive, when he will receive
it, the obligation he is under, if any, and the fact, if t»-L'e, that the participant
is to pay his own transportation, food, lodging, or other fMcidental 'jxperses, and
all ctf-er conditions or linitations placed op tl'c r.ift or benefit.
(2) Material for a visUation program, wh.>''(r written, television script or
radio prescrtatlon, s^.all disclose, in immcdiu'.r conjunction with the offer of
a visit to land, the expenses of whic ./ill be paid in wholn or in part by others,
that a person enjoying the visit will r.r subjected to a sales promotion for land
•jni'i^jr, ^* ^jch is not trwo, fi"jrr is 3 disclosur** that >* p«»"'>n?» is not o«.l i'],it"d
rr** rpquirec' as a tenn or corjition of the use and oninyro? t of the visit, to
p-irticipat*? in, listen to,- or othrrwisi* he subjected to a «^alps promotion for
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land and such is in fact honored.
R 33P..378?. Visitation pronrans; specific di<iriosures.
Rii1t» ?,?. (1) In th*» nrorotion of a visitation plan, the developer or his
»^prrsentative shall clearly identify themselves.
(?) The names of certificate companies with whnm the developer has contracted,
if any, sh^r bo disclosed.
(3) Promotional material including advertising and certificates shall disclose
the identity of hotels, motels, places of lodging, transportation companies,
restaurants, attractions, or other similar establishments which honor, subscribe
to, or participate in the visitation plan.
(4) A certificate or other written material evidencing the riqhts of a donee,
I)€nef1c1ary, or certificate holder shall contain a fixed expiration date for the
rights.
R 33a.3?R3. Visitation programs; guarantees.
Rule ti3. (1) Promotional material for a visitation program. Including
advertising and certificates, shall disclose the guarantees made by a developer
to insure a participant's use and enjoyment of a v.isit.
(2) A program which uses as a part thereof the granting or giving of a
discount coupon or other similar discount program shall disclose In Iracdiate
cnnjuricLion ti:ert>wilh the Guarantees that have l>een made to insure the participant's
use and enjoyment thereof.
R 338.3284. Visitation programs; procedures.
Rule P4. (li A visitation program shall b«» "'escribed as part of the
statement of recorrf or described S'^narately a'. .rrtlsinn material.
(?) A certificate to be used in a visitation f-rogram shall be submitted to
the department and shall meet the advertising standards as set forth In this part.
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(3) The department shall be advised of a material change, including identity
of the certificate companies, hotels or facilities before institution of the
material change.
(4) When a participant in a visitation program is obligated to listen or be
subjected to a land sales promotion, the developer shall supply, a copy of the
property report and forms of agreement as provided in the act.
R 338.3291. Promotional plans; general provisions.
Rule 91. The department will not enter an order registering a subdivision
and will consider the general promotional plan false and misleading, and the
plan of sale or development lacking adequate safequards and assurances, if:
(a) The fee title holder is not bound by part 6.
(b) The plat or plan of the subdivision by which lots, tracts, or parcels
are offered for sale has not been duly recorded in the plat records of the county
where the lands are located if required by law, and the streets, roads, alleys,
easements, parks, and other public areas shown thereon have not been dedicated to
the appropriate private or public authority. Sales maps which are not so recorded
may be used if they are not designed to deceive or would not tend to deceive
prospective purchasers, state in conspicuous print that they are maps only and
not plats, and include additional disclaimers in conspicuous print to prevent
misleading purchasers.
(c) The contract or agreement given to a prospective purchaser by the
developer upon payment of the first money by the prospective purchaser is not
sufficient in fonn to immediately vest an interest in the land in him and to
afford notice to all persons of his interest by recordation thereof.
(d) The developer does not provide adequate safeguards, approved by the
department, reasonably assuring contract purchasers who have complete refund
privileges for more than 30 days, that if the refund privileges are exercised
the developer will be in a position to refund in accordance with his agreement.
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R. 338.3292. Promotional plans; encumbrances on land and contracts
Rule 92. The department will not enter an order registering a subdivision
and will consider the general pronotinnal nlan false and misleading and the
plan of sale or development lacking adequate safeguards and assurances, if:
(a) Title to the subdivision is so encumbered that the lands to be offered
cannot be used for any purpose expressly or impliedly represented in the plan nf
sale and advertising without the removal of the encumbrance, unless adequate
safeguards are c*;tablished to reasonably assure the encumbrance will be removed
before the time the subdivider promises to deliver the interest contracted for
(b) The developer allows a mortgage, lien, or encumbrance to be placed
and remain on the subdivision, or a part thereof, other than specific lots upon
which improvements are constructed, and other than those in existence at the
time of registration of the subdivision, without notifying the department and
furnishing adequate safeguards reasonably assuring each purchaser that upon
payment of the purchase price provided in the sales agreement, title to the
property v;ill br delivered with all promised improvements as contracted. The
$;«fegnards shall be subjt-rt to review and approval by the departjnent at its
discretion.
(r) The f.v;ner transfers, assigns, selH, pledges, or oives as collateral
^ecui^ity, '.lies contracts on a subdivisinn without notice and snlimi^^ion to
the departmrnf of evidence of adequate safeguards to reasonably assure that each
contract purchaser, upon paymont of the purchase price provided in the sa^cs
agreement, wtll recievo tMf» tit.lr. to the lands as promised and improvements, if
any. The safeguards shall be s-nject tr, •••vie-.v and approval by the department a.
its discretion.
R 33n.3?<<fj. Promotional plans; "roup nieetinr-
Rule 9b. (1) If an advertisinn or promotional plan inrluc*ji promotional
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group meetings, the standards In thi«; rulo shall hr iis<»d as ? nuld" hy tho
director In determining whether or not the nature and rnaoner o^ conduct inn the
•neetings ^rp such as to fully disclose all si(jnific<!nt facts c^ncrrrinn the
subdivision.
(2) The department shall be notified in writing of the meeting not less than
15 days before its date. Notice shall consist of the date, hour and place of
♦^he meeting and the nawes of the developer and real estate hroker involved.
(3) The meeting shall be conducted in a place open to department personnel
fo*" inspection and monitoring.
(4) Department personnel as authorized by the director shall have free
access to the meeting and sales presentations.
(5) The advertising in the meeting is subject to the standards of advertising
contained in these rules.
(6) A false or dunwny buyer shall not be used to initiate sales or buying climate
or for any other purpose, nor shall it be indicated that lots, pat^cels, units or
interests have been sold, when in fact, they have not ^>€en sold.
(7) An oi^al statement to a prospective purchaser at t>e "'eetine shall he
completely consistent with written material approved by the departrert.
(8) A prospective purchaser who expresses a desire or intent to leave the
meeting at any time during o*' after the meeting may not in any manner be impeded
from departing, pressured to remain, or denied any benefit promised in exchange
for attending the meeting, including any transportation.
R 338.3301. Inferences; effect.
Rule 101. An inference reasonably to be drawn from advertising or promotional
n^aterial v/ill be considered to be a positive assertion unless the inference is
negated therein in clear and unrist •• ^^I'le terr*. )r urHess adequate safeguards
have been provided by the drveloper to reasonably guarantee existence of th«
thing inferred. Advertising and pror.otional material v/ill be judged on the tasis
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of the positive representation contained therein and the reasonable Inferences
to be drawn therefrom. Unless the contrary affirmatively appears In advertising
or promotional material, the Inferences set forth In rules 102 to 104 Mill be
assumed to have been intended.
R 338.3302. Inferences; homes Ites and building lots.
Rule 102. When homesltes or building lots are advertised without qualification
the Inferences are that:
(a) The lots are usable for such purpose without any further Improvement
or development by the prospective purchaser.
(b) There is an adequate potable water supply available.
(c) The lands have been approved for Installation of septic tanks or
that an adequate sewage disposal system Is Installed.
(d) No further major draining, filling, or sub-surface Improvement Is
necessary to construct dwellings, eicept for reasonable preparation for construction.
(e) The Individual homesltes or building lots are accessible by automobile
without additional expense to the purchaser over an existing rlght-of-wi^f.
(f) No other fact or circumstance exists to prohibit use of the lots
as homesltes or building lots.
R 338.3303. Inferences; other lands.
Rule 103. When lands are advertised without qualification as usable for a
particular purpose other than homesltes or building lots, the inference Is that the
land is immediately accessible and usable for such purpose by purchasers without
the necessity for draining, filling, or other improvement before putting the lands
to use for such purpose, except for reasonable preparation for construction, and
that no fact or circumstance exists to prohibit use of the lands for such purposes.
R 338.3304. Inferences; miscellaneous.
Rule 104. (1) When title insurance, abstract, or attorney's opinion Is
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advertised, the Inference Is that the seller can and will convey fee simple title
free and clear of all liens, encumbrances, and defects except those which are
disclosed in writing to the prospective purchaser before purchase.
(2) When a recreational facility, improvement, accommodation, or privilege
is advertised, the Inference is that it is on the land at the present time and
available to the purchasers of lots at no additional expense, unless otherwise
specified.
(3) When an Improvement is advertised, the Inference is that It is completed,
unless It is advertised as proposed, and sufficient guarantees have been made
for its completion.
R 338.3307. Presumptions.
Rule 107. It will be presumed by the director that:
(a) Advertising filed for approval will be that used to offer for sale
or to Induce persons to acquire an Interest in the title to all lands which are
described in or referred to in the material or supporting data filed with the
department until changes in advertising for this purpose are submitted to and approved
by the department.
(b) Advertising published, disseminated or broadcast by or in behalf of
an owner or entity owning more than 1 subdivision Is being used to offer lands
in all subdivisions registered by that owner or entity unless an express limitation
is made by that owner or entity to the department or by the department.
(c) Advertising published or disseminated by or on behalf of a sales
agent is being used to offer lands in all subdivisions for which the person is
a sales agent unless an express limitation is made to or by the department.
R 338.3311. Letters of transmittal.
Rule 111. Each submission of advertising to the department, either as part
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of « Statement of record or as a subsequent suNnlsslon. shall be acca«ipan1#d by
a letter of transmittal which given a brief, written description of each
advertisement to assure that all future correspondence and orders conceminq it
win clei»ny identify it. The letter of transmittal shall be signed by the
developer or his authorized representative and shall verify that the statements
naiie and the representations contained therein have been reviewed and the
advertisement is truthful and correct to the best of his knowledge and belief
with regard to thp statement*^ contained therein.
R 338.3312. Identification of material.
Rule 112. (1) Advertising submitted to the department, either with the
original statement of record or by sub«;equent filing, shall be assigned a
numlier «;o thp department or the applicant may refer by the number to a specific
piece of advertising. Advertising relating to more than 1 subdivision owned
by different persons but being sold through a common sales agent shall foe
assigned a designated number. However, this designation does not permit filings
relating to separate subdivisions or parts of subdivisions without payment of
the appropriate fee for each parcel, tract, or subdivision to which It relates.
(2) The developer shall print on advertising material approved for use, the
numl)er assigned by the department to that specific piece of material.
R 33a. 331 3. Material with statements of record.
Rule 113. (1) advertising material submitted with a statement of record
shall J)e considered in accordance with part 3.
(2) Advertising material not suhnitted with a statement of record shall be
siibnitteri to thp departnrnt frr ipproval befr.ro Us use in this state. This
advertising will hp approved or rejected by ♦.•'. d»fpartment within 15 days after
Us recp^pt. Where ar order rf rojection is »iot entered within that time, t»ie
advertising will ht^ deemed approved unless the applicant has consented in writing
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to a d^'lay. If an aRiendment to th#» Application for approval of advert U1 no <s
filed before the time when the land Is registered, the application shaM he
considered filed vihen the amendment was filed, unl#*ss an anendnent Is filed
with the consent of the department or pursuant to Its order. In such rase, the
application shall be treate<J as filed on the date of filing the original
application.
P. 338.3314. Oeterml nations and rejections.
Rule 114. In reviewing any advertising submitted by an applicant, the
department shall determine whether It makes a full and fair disclosure or Is false
and misleading within the Intent and meaning of the art and these rules, by
examining the form, language, and content of the advcrtislno and supporting
data and any other available Information to ascertain wliethcr the express and
Implied representations therein are true and make a full and fair disclosure.
If It appears that the representatlftns are not true and do not make a full and
fair disclosure as to all subdivided lands to which the filing relates, the
department will enter an order of rejection or take such other action as It
rc>"sider< neces*.3ry.
R 338.3317. Out of state advertising.
Rule 117. When advertising approved by the department is disapproved In
another st?te or jurisdiction, the advertising may he channcd to meet the
requirements of that state or jurisdiction without prior approval by the
department if:
(a) The department 1$ inwediAtcl" rotlfled of the change.
(b) A copy of the advenlslr.o .- s 'tanged Is filed with the department
w< thill "10 days.
(c) A copy of correspondence from the oti'er state or ju'-lsdictlon
requiring the change is filed with Ve department within ^^ days.
(d) The changed advertising <s rsed only in the state or jurisdiction where
the change v^as required.
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PART 6. »t£ANS TO ASSDRC RECEIPT OF COMTRACTUAL INTERESTS
R 338.3321. Subordination of blanket encumbrance liens.
Rule 121. A blanket encunbrance shall evidence subordination of Its lien to
the rights of persons purchasino from the developer and that the developer is
able to secure releases frori the blanket encunbrance with respect to the property.
The provisions shall be acceptable to the department. For purposes of this
rule, subordination of the lien is satisfied by a release clause Mhlch by Its
terms unconditionally provides for the releasf^ of contiguous and non-contiguous
s<>parate lots, units, or parcels being offered to purchasers, so th«t the purcha^#»r
or Ipsspp of a lot, unit, nr parcel shall obtain legal title or other Interest
contracted for» frpr- ard clear of the blanket pncumbrance upr»n conpl lance
with tenns and ronditions of the purchase or lease from the developer.
R 338.3324. Trust and esrrow accounts.
Rnl#» 124. If f^^n pnnBThpri nrj instrumrnt does not contain adiHfuate r^lMse
clausc<i, the lien, mortgage, or other cnciinbrance shall be considered obJecflooahlA
upIpss adequate reserves are maintained in a trust or escrow account. In
determining adequacy of the account, the department will be guided by the
farts and rircumstanr.es of each individual case, but the account shall comply
with the following:
(a) Funds «:hal1 be kept and maintained in an account separate and apart
from the owner's personal ^unds.
(b) The acrount shall ^^ establis'.oJ in a bank or trust cnnpany doing
lu«;ine*,s in this state, or another state wtic-re the account is required to be
maintained there by the laws of that state arKi approved by the department.
(r) Monthly statements shall be furnished to the department for a new
acrount for the first t months, and in the '!' rartment's discretion, quarterly
or semi-annually thereaftnr.
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(d) The trust or escrow agreement «ha11 state that Us purpose Is to
protect the purchaser or prospective purchaser In case of default on a lien,
?rortgage, or other encunbrance. and shall authorl7e the dcpsrtnent to Inr.peft
the records of the trustee relating thereto, and that upon order of the department
or a court, the trustee shall release and pay over the funds to the department
or a purchaser^ or the holder of the blanket encumbrance.
(e) The department, by Its director, shall execute an acknoMledgrent on
the face of each agreement. This acknowledgment Indicates approval of the form and
content of the agreement, but shall not be construed to make the department a
party thereto.
P 338.3327. Instruments of sale.
Rule 127. An Instrument evidencing sale or disposition of an Interest In a
subdivision shall be executed In a recordable form In accordance with the laws
of the state where the land Is located. An applicant has the burden of an
affirmative showing of this compliance.
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PART 7. MEANS TO ASSURE COMPLETION OF IMPROVEMENTS
R 338.3331. Improvements for public use, convenience or necessity.
Rule 131. A subdivision or a part thereof on which construction of a promised
improvement for public use, convenience, or necessity has not been completed,
shall not be registered for disposition. However, an incompleted improvement
does not constitute an objection if completion of the improvement is assured by
substantial completion, an irrevocable bank letter of credit, bond, or similar
undertaking posted with a public authority and acceptable to the department, or
by adequate reserves established and maintained in a trust or escrow account.
In determining adequacy of the account, the department will be guided by the
facts and circumstances of each individual case, but the account shall comply
with the following:
(a) Funds shall be kept and maintained In an account separate and apart
from the owner's personal funds.
(b) The account shall be established in a bank or trust company doing
business in this state, or another state where the account is required to be
maintained there by the laws of that state and approved by the department.
(c) Monthly statements shall be furnished to the department for a new
account for the first 6 months and in the department's discretion, quarterly
or semi-annually thereafter.
(d) The trust or escrow agreement shall state that its purpose Is to
protect the purchaser or prospective purchaser in case the owner falls to
complete construction of promised improvements or to satisfy any obligations
or liens encumbering the purchaser's title by reason of the construction, and
shall authorize the department, to inspect the records of the trustee relating
thereto.
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(e) The department, by its director, shall execute an acknowledgment
on the face of each agreement. This acknowledgnent indicates approval of the
form and content of the agreement, but shall not be construed to make the depart-
ment a party thereto.
R 338.3332. Improvements not for public convenience, use or necessity.
Rule 132. A subdivision or a part thereof on which construction of a promised
Improvement not for public use, convenience or necessity has not been completed,
shall not be registered for disposition to the public. However, the Incompleted
Improvement shall not constitute an objection if completion Is assured by:
(a) An adequate plan of development, including financial resources
cownitted to carry out the plan as provided in rule 135, which plan is subject
to the department's continuing review and approval.
(b) In case of failure of a developer to establish an adequate plan or
to adhere to the plan once established, the department may require establishment
of a trust or escrow account.
R 338.3335. Financial security.
Rule 135. (1) The department may accept surety bonds, escrow accounts,
irrevocable bank letters of credit, or any other financial security which it
considers adequate In assuring a plan of development has adequate safeguards and
assurances. In determining the security required, the department shall examine
the status of Improvements, the over-all cost of Improvements, the terms of
purchasers' contracts, the financial condition of the subdivider, and such other
data as it considers necessary. The department shall consider whatever financial
security has been posted with other governmental authorities in making its
determination.
(2) A surety bond will not be approved by the department unless it is on the
form provided by the department.
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PART 8. TAXES AND ASSESSHENTS
R 338.3341. Developers' duties.
Rule 141. (1) In « transaction for the sale of land under the act in Mhlch
taxes are to be paid by either party, a developer shall:
(a) Certify that there are no taxes, other than current taxes, owing
on the property Involved at the date of filing the statement of record, a
consolidated statement of record, or an amendment to either.
(b) Provide a form of escrow accounting satisfactory to the department
In accord with (2) If part of the purchasers' funds paid In or payable 1^ the
terms of the Instrument disposing of the land Is to be used for payment of taxes.
(2) In order that a purchaser will receive the Interest In lands contracted
for, If the developer apportions real property taxes prospectively and requires a
purchaser to pay such taxes In a lump sum or on a periodic basis, the developer
shall place In the escrow account 100X of the payments, with which to pay taxes
when due.
R 338.3345. Purchasers' responsibilities.
Rule 145. (1) A purchaser Is not responsible for payment of taxes or assess-
ments levied before the effective date of his agreement with the developer or his
agent, unless such taxes are prospective In nature. If so. they maty be prorated
and the Instruments evidencing the sale or disposition of an Interest in a
subdivision shall so state.
(2) A purchaser shall not be assessed a service or collection fee or be required
to pay a consideration for the assessment or allocation of taxes on the land involved
In the transaction. In excess of that charged by a unit of government.
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PART 15. OECIARATORY RULINGS. INVESTIGATIONS. AND HEARINGS
R 338.3451. OecUratory rulings.
Rule 251. (1) Th€ department, on request of an interested person, way issi":
a declaratory ruling as to the applicability to an dctual statement of facts of
the act or a rule herein when he subnits to the department the following:
(a) A clear and concise statement of the actual statement of facts.
(b) If the interested person desires, a brief or other reference to
legal authorities upon which he relies for determination of the applicability of
the act or a rule to the statement of facts.
(2) The department. If It determines It will Issue a declaratory ruling,
shall furnish the person with a statement to that effect and set forth the time
In which the department will Issue the ruling.
(3) A ruling shall repeat the actual statement of facts, the legal authority
on which the department relies for Its ruling, if any, and the ruling It makes.
A ruling once Issued Is binding on the department and the department may not
retroactively change the ruling, but nothing In this rule shall prohibit the
department from prospectively changing a ruling.
R 338.3455. Officers to administer oaths and affirmations.
Rule 255. The following officers of the department are designated to administer
oaths and affirmations du-lnrj any investigation or proccf'lir.n undor the act:
(a) Director of the department.
(b) Director, land sales division.
(c) Assistant director, land «:ilos division.
(d) Chief investigator, land s •i*>s division.
(e) Presiding officer of a hca^i .n.
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R 338.3456. Officers to Issue subpoenas and Institute discovery.
Rule 256. (1) The following officers of the department are designated to
subpoena witnesses. Issue subpoenas duces tecum, and Institute discovery
proceedings. In accordance with Michigan general court rules In any investigation
or proceeding under the act:
(a) Director of the department.
(b) Director, land sales division.
(c) Assistant director, land sales division.
(2) Nothing In this rule shall be construed to abrogate the authority of a
presiding officer prescribed in the administrative procedures act of 1969, as aaended
R 338.3461. Rejections by department.
Rule 261. (1) The department may reject an application for advertising
approval or a statement of record, including a property report, for a subdivision
if the developer fails to comply with the act or these rules or the departiMnt's
requirements thereunder. Before entering an order of rejection, the departnent
shall notify the developer by certified mall of its decision In a notice of
intent to reject for deficiencies. This notice shall toll the running of the
60 day period if the developer shall undertake to correct the deficiencies.
(2) The final decision shall be by further order.
(3) An order of rejection shall automatically be entered after 15 days follOMing
the date of mailing of the notice of Intent to reject unless the developer
corrects the deficiencies to the department's satisfaction within that time or the
department extends the time to correct to a day certain.
R 338.3463. Hearings; notices and conduct.
Rule 263. (1) Parties shall be notified of a hearing by certified mall at
their last known address, which shall be sent not less than 20 days kefore the
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date of the hearing.
(2) A hearing shall be open to the public and shall be conducted In accordance
with the adnlnl strati ve procedures act of 1969, being act 306 of the Public
Acts of 1969, as anended, and sections 24.201 to 24.315 nf the Michigan Compiled
Laws,
(3) A hearing shall be conducted by a presiding officer who shall be
appointed by the director of the land sales division of the dppartment. The
decision of such director shall be the final decision.
R 338.3464. Hearings; appearances, pleadings.
Rule 264. (1) A party may appear at a hearing In person or by a duly
authorized representetlve or attorney.
(2) If a party falls to appear after proper service of notice, the
director of the land sales division, if no adjournment is granted, may proceed
with the hearing and make his decision In the absence of such parties.
(3) An adjournment or continuance may be granted by the director of the
land sales division or the person he designate*; for good cause shown by a party
to the hearing or on his own motion or after stipulation and agreement betwpen
all parties, but a request for adjournment shall be made In writing not less than
5 days before the date set for the hearing.
(4) A party may file a written answer to charges or claims made or may
present an oral statement at the time of the hearing. Cople?; nf written pleadings
and briefs shall be served on the director of the land salef 'vision and all
other parties not less than 5 days before the date set for t e tearing.
R 338,346S. Hearings; evidence.
Rule 265. (1) Testimony shall be under oath or affirmation.
(2) A deposition shall be taken only on order of the director of the land
sales division upon a showing that it Is Impracticable or Impossible to obtain
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necessary evidence otherwise. It shall be Uken In accordance wttli prmrltlMt
for Uking depositions In civil cases, as set forth In the N1chl9Mi gtncrtl
court rules or other applicable court rules.
R 338.3466. Decisions, orders, and rehearlngs.
Rule 266. (1) Ulthln a reasonable tine aft^r conpUtlon of • hMrlng,
the director of the land sales division shall send by certlfltd Mil to ttm
last known address of the parties the decision and orders uhlch shall Inclndt
findings of fact and conclusions of law.
(2) A rehearing nay be granted by said director upon appllcotlofi In wrltliig
by » party to the hearing or upon his own notion in accordaiico with tilt
adnini strati ve procedures act of 1969. as wended. A rehearing shall be
noticed and conducted In the sane nanner as an original heerlng.
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Mr. Gonzalez. We have Herman J. Smith, vice president of the
National Association of Home Builders; David D. Roberts, the vice
chairman of the legislative committee of the National Association of
Realtors, who is accompanied by our good friend Albert Abrahams,
who is a vice president for governmental affairs; and we have
J. B. Belin, Jr., president of the American Land Development
Association.
Grentlemen, we are confronted with a factor here on the continued
use of this hearing room. We will have access to it for about an hour,
and then we will have to vacate it.
We are very grateful, because each of you has perfected a very fine
written statement. We are goin^ to suggest that, for the time that
we conduct this as a panel, and if you would be kind enough to sum-
marize your statements to help keep us within the period allotted to
use this room, and of course to have a chance to ask questions, I would
be very grateful.
Perhaps we could start with Mr. Belin.
STATEHEirr OF J. B. BEUH, JB., PBESIDENT, CHAIBHAN OF THE
BOABD, AHEBICAH LAND DEVELOPHEHT ASSOCIATION; ACCOH-
PANIED BT OABT A. TEBBT, EXECUTIVE VICE PBESIDENT, WH-
TJAM B. INOEBSOIL, OENESAL COTTNSEL, AND OEOBOE 0. POTTS,
DIBECTOB OF PTTBUC AFFAIBS
Mr. Beun. Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, my name is Bruce
Belin. I am president and owner of Belin & Associates of Houston,
Tex., a real estate development company currently developing five
recreational, resort, and residential projects in Texas, including the
award-winning April Sound near Houston. I am presently serving
as president and chairman of the board of the American Land Devel-
opment Association.
Accompanying me today are Gary A. Terry, our association's exec-
utive vice president; William B. In^rsoll, general counsel; and
Greorge G. Potts, director of public aflPairs. Our association represents
leading national and international companies which develop recrea-
tional, resort, and residential real estate.
In the interest of time, Mr. Chairman, I will not read our printed
statement in its entirety, but I do request that the complete text and
exhibits be included in the hearing record.
It. is not our intention to hamper OILSR's efforts to help buyers
inform themselves and to protect themselves from the irresponsible
element which exists in real estate as, unfortunately, in every other
business. But we do not believe such protection has to be at the expense
of the honest, responsible developers who predominate in our in-
dustry. We therefore are compelled to speak out against what we
consider are perhaps well intended, but nevertheless overly restrictive
attempts to legislate even more regulation of our industry.
H.R. 12574, introduced originally as H.R. 10999, would amend the
act substantially, adding more regulation. In our opinion, this bill
would do considerable harm to developers — indeed, perhaps forcing
many of them out of business altogether — while not producing the
desired result of greater buyer protection.
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One of the major provisions of the bill would ^ve all purchasers
and lessees an "unconditional 30-day rescission penod" from the date
of the consummation of the sales transaction.
Apparently, the purpose of this provision is to allow a buyer a
period to reflect objectively on the correctness of his purchase. How-
ever, we stron^lv feel that the present 72-hour, 3-business-day re-
quirement provides adequate and reasonable protection to any pur-
chasers who might have acted on impulse.
While a number of States have rescission periods exceeding the
present 3-day Federal requirement — for example. New Jersey is 7
days. New York is 10 days, California is 14 days — many of our
member companies operating in those States maintain that such
lengthy rescission periods do little more than encourage purchaser
irresponsibility and permit overzealous sales persons to close sales by
reminding the customer that he has "nothing to lose, since you can
easily cancel this transaction if you change your mind."
We must reflect that, in no other type of "arm's length" real estate
transaction is there such a rescission period; and it seems grossly
unfair to single out one particular industry for such treatment, par-
ticularly when it goes beyond what would be necessary for adequate
buyer protection.
However, the automatic 30-day rescission period pales when <me
considers the proposal for a 3-year period of revocation for the buyer
given under certain specified conditions. The effect would be that the
buyer has a 3-year "option," but the developer would be contractually
bound. And if at any time during that period the buyer changes hfc
mind for any reason — for example, he later decides he would rather
have a new boat or a car — ^the developer must cancel the contract and
give a full refund. It seems obvious, Mr. Chairman, that no business
could operate under these conditions.
In short, ALDA believes such provisions allowing for 30-day and
3-year rescission periods are unreasonable, unnecessary, and would
place an unconscionable burden upon the developer.
Another provision of the proposed bill would mandate that tiie
"statement of record" contain copies of all advertising used by the
developer, giving HUD specific statutory authority to regulate
advertising.
Any such regulation of advertising which requires prior submission
or approval from OILSR would t^ a bureaucratic nightmare, and
would cripple the developer's ability to make timely changes to take
advantage of market nuances.
OILSR already has advertising guidelines as part of its land sales
regulations which serve to put the developer on notice as to what is
expected in advertising.
The final provision of H.R. 12574 upon which I would like to com-
ment is that dealing with the escrowing of moneys for so-called "basic
services" promised but jj not completed, and the option granted the
purchaser to void his contract and receive full refund if these services
are not delivered.
The problem these proposals are designed to correct seems obvious.
Their objective is the right one — to require the developer to perform
his part of the contract. However, while on the surface this might
seem to provide significant protection to the purchaser, in reality it
^Mi be harmful to him.
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The cost to the developer of placing in escrow moneys of such kr^e
amounts will have to be borne by the purchaser in the cost of the
property because, unless the developer is permitted to use such moneys
to keep the project viable and economically feasible, the project could
fail.
Such an economic burden will interfere with the developer's ability
to perform his contract and complete these very same services. In
fact, many present developers who already are providing such basic
services, and more, would be forced out of business.
There are only a few in our industry who could afford to escrow
at the beginning of a project the full cost of promised improvements.
In effect, the developer's entire line of credit with his lenders could
be tied up just meeting this single requirement.
Instead, Mr. Chairman, the common law remedy for damages appli-
cable to failure to complete performance on a timely basis would seem
to be a more just and reasonable remedy.
The administration's proposals— section 421, title IV of H.R.
11265 — also would amend the act substantially, with the apparent
intent of alleviating some of the problems we have addressed.
Section 421 (e) of the HUD bill would have the effect of eliminating
completely the so-called "free and clear of liens" exemption in the
act. This exemption — which we view as founded in logic and equity —
was intended by Congress to provide an exemption from regulation
for developers who have title to the land and sell lots which are free
and clear of all liens, encumbrances, and adverse claims to buyers who
inspect personally the offering before purchasing.
Its repeal would not be in keeping with the purposes of the act
and the Congress intentions in enacting it. This proposal would serve
to permit OILSR to expand further its jurisdiction over developers
never intended to be covered in the first place.
One of the major provisions of the administration's proposed amend-
ments would give all purchasers and lessees an imconditional 14-day
rescission period. Our previously stated objections to lengthened rescis-
sion periods would apply also to HUD's proposed 14-day period.
In summary, we feel that both Congressman Minish's bill and the
HUD proposals amount to added sutetantive regulation of our in-
dustry. If adopted, they would pile unnecessary burden upon devel-
opers already struggling to comply with myriad Federal and State
laws.
Mr. Chairman, OILSR has regulated segments of the real estate
development industry which were never intended by Congress to be
regulated. We would point out also that there have been many changes
in our industry — especially the recreational part of it. This is simply
not the same industry that it was in the late sixties and early seventies.
Reports by public interest groups and the press have tended to focus
on practices by high volume lot sales companies. Many of these
companies and most of the objectionable practices are rapidly
disappearing.
Mr. Chairman, the act does need to be amended. As you know, the
Senate has acted to do so in section 71 of S. 3084. Permit me now to
comment briefly on the major provisions of the Senate-passed
amendments.
The sale or lease of condominiimis would be exempted specifically
from the act. We do not believe Congress intended that condomir'
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urns — or land on which a condominium is contracted to be built withm
2 years — should be regulated under this statute, just as land on which is
located a residential, commercial, or industrial building is exempted.
Because they are not exempted from the act, OILfSK can ana has
threatened to assert jurisdiction over condominium developers.
Mr. AuCoiN [presiding]. Mr. Berlin, I notice you are reading word
for word from your prepared testimony, and you have four pages
of your prepared statement left.
I am concerned only because the other gentlemen — I want to insure
that they have an equal opportunity to make statements and to still
allow time for questions.
So that I would encourage you, if ^ou could, to summarize as best
you can the highlights of the remaining part of your testinumy. The
full part of it will be in the record, as you know, and then we can
get into questions and answers.
Mr. Belin. All right, sir.
S. 3084 would provide for an intrastate exemption for the developer
who sells less than five lots, or 5 percent of his total lots, whichever
is greater, in one calendar vear, to out-of-state purchasei^ provided
the developer gives clear title to the property and the buyer makes an
onsite inspection.
Sales to purchasers residing within a 100-mile radius — an easy 1-day.
roundtrip drive — of the property site, again subject to clear title ana
onsite inspection, would oe exempted, "nxis solves the problem faced
by the developer operating on the boundary betwe^a several States,
such as here in the Washington, D.C., area. While he may otherwise be
exempt from the acts purview, OILSR can and does hold that sudi a
developer is selling on an "interstate" basis, and is therefore subject
in Federal regulation.
Under the Senate measure, a new provision would be added to define
the term "sale or lease" to mean occurring at the time a contractual
relationship is created between the developer and the purchaser. In
its latest proposed revision of the regulations, OILSR served notice
that it considered the "sale" to continue from the date of the signing
of the contract by the buyer until the contract is paid in full or a deed
has been delivered to the buyer, whichever comes later.
We feel this is a very important provision. As I stated earlier, the
practical effect of such a definition by OILSR would be to extend the
statute of limitations by allowing it to run the entire length of the
contract period, with the concept of a "contmiung sale" and for up to
3 years bevond the contract.
Such a definition would impose the "continuing sale" upon the entire
act, thereby extending the statute of limitations. Our case seiurch
reveals that the definition in S. 3084 follows the prevailing opinion of
the courts: 9 out of 11 of the cases we uncovered disagree with the
agency's concept of a "continuing sale."
The Senate bill would add new language to the act to clarify the
terms "liens," "encumbrances" and "adverse claims" so that it is dear
that they do not refer to U.S. land patents and similar Federal grants
or reservations common to most land in the Western United States —
an omission which OILSR has used to defeat claims by developers for
the "free and clear" exemption under the act. Requests for exemption
under this section are rarely granted by OILSR.
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Finally, because of oontenticms that the amendments would not cmly
exempt developers — ^under certain circumstances — ^from the registra-
tion requirements of the act but would also exempt these same devel-
opers from the antifraud provisions of the act, langua^ was added to
the bill to assure that the antifraud provisions would m fact apply to
those developers exempted imder S. 3084.
Yesterday, Mr. Chairman, you heard a detailed description of how
a purely interstate developer, specializing in off -site sales, operated
severalyears ago to defraud thousands of consumers, many m New
York. Tnat case, as well as several others which have been prosecuted,
were sad and despicable. Clearly, those actions fall under the intent
of the act and should be regulated and prosecuted accordingly.
Today, however, we are before you asking that small, intrastate de-
velopers be exempted from the act because it was never the intent of
Congress to regulate them under this statute. The Senate amendments
simply clarify the act on that point, and do not call for substantive
re^atory dianges.
The large, interstate land companies — such as the one described
}resterday oy Ms. Hynes and those which have been the subject of ac*
tion by the Federal Trade Conmiission — would in no way qualiffr for
the exemptions provided for under S. 3084. The present act, with the
clarifying Senate amendments, properly administered and with vis;-
orous euK^rcement and prosecution when necessaiy, would adequately
protect consumers if such fraudulent acts should reoccur.
Ms. Halloran of INFORM mentioned our association's most recent
industry survey in claiming that our industry ^^seems to be riding on
the shirt-tails of the current real estate boom," as she put it^ She cites
our survey, which among other things, concluded that sales are on the
upswing because 78 percent of the survey respondents had better sales
in 1976 than in 1975. Since most of our industry continued in a deep
recession in 1975, when sales were often nonexistent or certainly at the
lowest ebb ima^nable, the fact that 78 percent indicated increased
sales the f oUowmg year — 1976 — is not surprising in the least. Nor, in
our view, does it signify anything more than the fact that the recession
had finally come to an end in 1976. To imply that this means a return
by our industry to the days of the 1960's and early 1970's is totally
without merit.
Congressman Minish, in his testimony yesterday as well as several
months ago before the Senate Banking Committee, charged that "liter-
ally millions of consumers continue to be defrauded by land developers
each year." We testified before the Senate Committee, and we do so
here today, that we are unaware of any such valid figures, and do not
know where they come from. We seriously question the figures and
the assertion.
In conclusion, I want to reiterate the American Land Development
Association's conviction that consumers should and must be protected
from fraudulent, irresponsible real estate developers — ^the primary
goal of the Interstate Land Sales Full Disclosure Act of 1968.
By endorsing the interstate land sales provisions of S. 3084, this sub-
committee could take an important step toward assuring responsible
regulation of our industry bv clarifying Congress' intentions as to
whom and how the law is to be applied, without sacrificing any con-
sumer protections. We commend section 715 of S. 8084 to you.
38-718 O • 78 • 18
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Thank you, Mr. Chairman, for allowing us this opportunity to ap-
pear before jrou today. We would be pleased to answer any questions
the subcommittee may have.
[The prepared statement of Mr. Belin, on behalf of the American
Land Development Association, with attached exhibits, follows :]
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Statanoent of
J.B. BEZJN, JR.
President and Chaixxnan of the Boazd
Before the
SubcGnmittee en Housing and GGnnunity Developnent
House Oonmittee on Banking, Finance and Urban Affedrs
Oonceming
Interstate Land Sales Full Disclosure Act Anendments
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Mr. Chaiznan and lumijejLB of the SiAnmiittae, ny nana is Bnioa Balin.
I am pcesident and OMner of Belin and Associates in Houstcn, Texas, a raal
estate developnent ocnpany currently developing five recxeational, lesort and
residential projects in Tescas, including the AwBrd-winning April Sound p tD J ec t
near Houston. I am presently serving as president and chaimtm of the board of
the American Land Develo(inent Association (AIDA) .
Aoocnpanying me today are Gary A. Terry, our Association's executive vloe
president; William B. Ingersoll, general counsel; and George G. Potts, director
of public 2if fairs.
nie American Land Develoiinent Association r epresents leading national and
intematicnal ocnpanies which develop recxeational, rosort and residential real
estate. Our m erob ers build and sell vacation hemes, condominiums, planned unit
developnents, destination resorts, new and retirement oonnisiities, mobile home
parks and recreational vehicle parks and campgrounds. Vtiile our meatership in-
cludes the real estate developnent subsidiaries of some of the nation's Innjesl
corporations operating in ^JStfifigJialfi oonmeroe, many of our menber conpaniss are
family-owned or are limited partnerships and can be classified as email, intrastate
developers. Some of our menber firms, large and small, are considered builders
of primary residential homes, and a few operate as real estate agencies.
Nevertheless, the Interstate Land Sales Full Disclosure Act (U£ED/hst) of
1968 aiffects directly most, if not all, of our members. I hasten to point out,
however, that in our opinion the ILSTO/Xct was not intended to regulate some of
theee oonfsanies — namely those operating primarily on an intrastate basis or as
home builders or real estate brokers.
Background and Explanation of the Act
It would be appropriate at this point, Mr. Chairman, to provide the Suboondttee
with a brief background and explanation of the Act, its intended scope and how it
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has been adtainistflrad — f xcn our point of viav — for nearly ten years rem by
the Department of Housing and urfoen Develqpnent (HUD) . HcMever, in the interest
of time, we have attached this infoonation as Ebdiibit A, and I respectfully re-
quest that it, as well as sevend other exhibits related to that information, be
included in the hearing record.
Since the enactment ten years ago of the Interstate Land Sales Full Disclosure
Act, we have seen HUD's Office of Interstate Land Sedes Registration (OILSR) expand
its regulatory authority over se^nents of our industry vihich mb f ael were not
intended by Congress to be covered mder the Act. In our opinion, the II£FD/Act
vas intended, and should continue to be a disclosure rather than regulatory
statute. Yet, through its ability to vdthhold effective registration and through
various informal requirenents, we believe OII^R has generated regulatory powers
in eKJtiini storing the Act.
Moreover, the oonpanies %^ch the law was intended to cover are suffering
unduly today f ran %iihat often seems to be isteven formal and informal rules and
procedures enplpyed by OILSR. The agency's registration policies — %4hich we
feel are too stringent and lack flexibility and predictability — as well as the
sheer oonplexity of the rules themselves have resulted in a substantial regulatory
burden for £dl who have had to cope with the Act, especially for anall developers.
We are aware that much of OILSR' s expEmsion of its regulatory role, and
many of the attendant problems, were those inherent in administering a new program
with new people. In fairness, we feel that the agency and the Act have in fact
stopped many abuses by a few unscnpulous developers and have liJcely prevented
others from occur ing.
It is not our intention to hanper OILSR' s efforts to help buyers inform
themselves and to protect themselves frcm the irresponsible element which exists
in real estate as, unfortunately, in every other business. But we do not believe
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such pEOtectixxi has to bs at the eaqpenae of the hcnsst, responsible dewslopers
who predominate in our industry. We therefore are ormpplletl to apeak out against
what %e consider are perhaps %#ell intended, but nevertheless overly r e s t r ictive,
attenpts to legislate even more regulation of our industry.
I would liJce now to aomnent on the three major proposals which have been
put forth to amend the ILSFD/Act.
H.R. 12574, "Interstate Land Sales Reform Act of 1978"
Ihis proposed legislation, introduced originally as H.R. 10999, would aoend
the Act in several veys, with the apparent intent of strengthening the law to
provide greater protection for real estate buyers by increasing the regulation
of land sales. Unfortmately, under many of its provisions, the measure would
not produce the desired results and would do considerable harm to developers —
indeed perhaps forcing many of them out of business sdtogether.
nie bill would extend the Act's coverage to include subdivisions of 40 or
more lota , replacing the threshold of 50 or more lots in the present Act. Ad si ttedly,
analler developers, often the very ones viho least deserve regulation and can least
afford the additional burden, would be brought in under federal regulation. In
short, this seems to be just another exenple of expanding the Act's jurisdiction
with little or no corresponding benefit to the consuner. Mbuld it be 30 lots next
year? And 20 by 1980?
The Act's jurisdiction would also be expanded, under this proposal, to cower
lots which are less than 40 acres in size, i.e. eliminate the pr es e nt exeniytion
for lots five acres or larger. Proponents of this provision point out, perhaps
correctly, that the so-cedled "five acre exenption" often tenpts irresponsible
developers to subdivide property into larger unusable lots in order to escape
regulation; attracts "fly-by-night" subdividers; and results in the subdividing
of narginally usable land. Conversely, consviners purchaising lots in excess of
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five acz«B in sias genecally hawa the f Inasicial aeans and ta t o wl edjg — gt the
ability to fdre an attcmey with such expertise — to buy such property withont
the need for the disclosure pcotecticn aiffocded wider the Act. Also, as one
AIi3A manber points out, such extension of jurisdiction oould hanper certain
developers* ahilitifts to disprwp of surplus property not a part of its oaman
pronotional plan. Moreover, since it is often a practi c al necessity that such
larcye lots be offered with fewer inprowenents than is offered with aranller lots,
the sale of such inoosplicated property (raw land in many cases) hardly requires
the extensive disclosures required under the Act.
Uhder H.R. 12574, court-ordered sales of lots in connection %iith bankruptcy
proceedings would no longer be exempted, sdthough presumably all other types of
court-ordsred sales would continue to be exenpt. While AIDA agrees %n.th the
apparent intent of this provision, to inpoee auboantically a regulatory burden
upon such a distressed situation may be unfair to the creditors. Moreover, such
a prevision may well be unconstitutional since the rights of bankruptcy are estab-
lished in the Oonstitution.
Gne of the major provisicns of the bill would give edl purchasers and lessees
an i«oonditioncd 30-day rescission period from the date of the consmation of the
sales transaction. J^pparently the purpose of this provision is to aHau a buyer
a period to objectively reflect on the correc tn ess of his purchase, especially
%dhere he might have been subjected to a "high pressure" sales presentation. How-
ever, we strongly feel that the pr ese nt 72-hour (three business days) requirenent
provides adequate and reasonable protection to any purchasers who might have cKrted
on inpulse. Miile a ninber of states have rescission periods exceeding the
present three-day federal requirenent, e.g. New Jersey seven days. New York ten
days, California 14 days, many of our menber coipanies operating in those states
maintain that such lengthy rescission periods do little more than encoureKje
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purchaser irresponsibility and pennit over-zealous salespersons to close sslss
by reninding the custcmsr that he has "nothing to lose sincae you can easily osnoel
this transaction if you change your mind."
Here are scrae artiitionni undesirable results of lengthy rescission pe r iods
based on the eocperienoes of seme of our nenbers;
— it is very difficult for individual property OMners
to abt£dn financing for hone construction and othsr
djifjcovements to their properties, since lending in-
stitutions %#ill shy aHoy frcn such oonnitnBnts %d.th a
rescission period of this duration due to "prolonged
exposure ;
—developers %«ould find it very difficult to obtain
financing of the "paper" generated by the on-going
sale of properties;
— the developer cannot recognize a "sale" for aooo u n t-
ing purposes until the rescission period is over,
creating severe pcoblcns for his financial statoe-
ments; and
— it requires the developer to invest in and carry
a substantially higher muter of lots in inventory.
Because of the seasonability of our business, it
is not uxxxmon for 50 perce nt of a developer's
sales to occur in a two or three nonth period (par^
ticularly in the mid-west and northeast) . If the
buyer has a 30-day period to cancel the sale, that
buyer's lot must remain in linbo for the full period
and all monies received held in escrow. Ihis in
turn necessitates having perhaps double the noEmal
supply of lots in inventory, and at a development
cost which often amounts to several thousand dollars
per lot, an excessive amount of the developer's
capital %«ould be tied up in inventory.
Me nuBt reflect that in no other type of "arm's length" real estate transaction
is ther^ such a rescission period, and it seems grossly unfair to single out one
particuleur industry for such treatsient, particuleurly when it goes beyond what would
be necessary for adequate buyer protection.
However, the autcmatic 30-day rescission period pales v^ien one considers the
proposal for a three-year period of revocation for the buyer given under certain
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apecifiad oonSitiaMl It appears Ukaly that naarly aU developen would £aU
vflthin one of the three mfwUHmnl areae ti i yija ii ng a throe yoar reaciaalon
period — a penalty that at best oust be considered extraordinary when applied
to the pnctioBS of any business. Fbr eoean|>Ie, many developers raqiuire a nrinliam
10 peroGnt down peiynant and most bnq/ers do not and cannot p^^ full cash for the
pr o perty . The effect would be that the buyer has a three-year "option", but the
den^Blaper %«ould be oontractually bound, and if at any time during that period the
buyer changres his ndnd for any reasons (e.g. he later decides he would rather hove
a nev boat or car) , the den^elaper nust canoel the contr a ct and give a full refund.
It seems obvious, Mr. Chalzman, that no business could operate under theee conditions.
A developer's sales contracts are an i j uxact ant asset of his coqpeny and are the
basis for his financial agreements with his lenders.
More specifically, the predictable results of this provision would be to pro-
hibit any purchases on the same day a oontract is preeented to the buyer — despite
the fact that many buyers may live within a day's drive of the pro j ec t , personally
inspect the p rop erty and are given ample opportunity to study the Property Report.
It %iiould also do awey with installment contracts in land sales — a cGonon and
««11 accepted means of purdiasing today and maybe the only means available to the
buyer to finance his purchase.
Vnaeac this legislation, there is p ro p os e d a requirement that title be trans-
ferred within 30 days. Ttds is mreaaonable and inpracticad since the paper work
alone nonnally takes at least that long. The present HUD exnfytion (24 CFR 1710.11)
allows for 120 days, a reasonable time for title transfer. Another provision voild
aeemingly deny the developer the right to charge interest on any loans he malces
to the buyer. This is a ocmnon and acceptable pratioe in husinftss today, well
regulated by federal truth-ln-lending laws. It is sonetimes argued that, since
the buyer does not get full use of his p rop er ty until the installment loan is paid
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in full, the developer shcxild not be permitted to charge ixtterest on the loon.
Me disagree %d.th this proposition, however, because the buyer still has "oHner^
ship" rights en the property itfhile the loan is being paid off, and mere oftan
than not he gets full use of the project's facilities and recreational amities.
Also, the use for which the land is intended in nany projects is for outdoor
camping and recreational vehicle parking. OSiere would be no fairness in allGMing
the installment purchaser full use of his purchase, Kihile denying the seller the
right to reaacnable charges for extending credit.
Me vKuld generally suqpport the provision regarding forfeitures. Most developers
will do everything possible to prevent a forfeiture, and will work witii the buyer
yto nay have enoountered unexpected difficulties in paying for the property. Onoe
a lot is sold, ocmnissians paid and recordings made, a forfeited lot presents
mnerous problems for the developer and a forfeiture is the last thing he wonts
to happen. The ooninon belief aniong casual critics of this industry that developers
make a "killing" on forfeited lots is sijqply false.
In short , MJA believes such provisions allowing ft)r 30-day and thr ee ye ar
rescission periods are unreasonable , unneoessary and would place an mconscionable
burden upon the developer .
Another provisicn of the proposed bill would mandate that the Statement of
Reoord contain copies of all advertising used by the developer, giving HUD specific
statutory authority to regulate advertising . Any such regulation of advertising
i4iich requires prior submission or approval from OII^SR would be a bureaucratic
nightmare, would cripple the developer's ability to institute an effective advertising
progran, and %«ould greatly han|)er his ability to make timely changes to take advan-
tage of market nuances. Advertising is a flexible product which must be changed
often on short notice, depending upon changing market conditions, seasonal variations,
etc. Tte advertising industry %#orks on strict deadlines and «dth the tiae it
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pccbably %«111 requiza to get it approved, effective and useful advertising by
developers would no longer exist. Bear in ndnd that OII£R already has adver-
tising guidelines as part of its land sales regulations which serva to put
the registrant on notice as to what is e x pe cted in advertising. Used properly
by OUSR, the present guidelines would aocGmplish the apparent purpose of
this pTGpoeed pcovisiGn — to insure that developers* advertising is not
false cr deceptive. One final %iccd on advertising: the provision that changes
in sdvertising would not be considered "material" unless it reflects "substan-
tial changes in the representation made by the developer. . ." would not be
effective since OII^R's past reoord indicates a preoonoeived notion by the
agency that every change is material .
fd£A supports the genend principle of recovery by injured buyers of
reasonable court costs, attorneys' fees, appraisal costs and travel costs, as
well as the right of specific performanoe in lieu of damages, as the bill pro-
poses. However, practical experience says that such previsions tend to en-
couraige unwarranted laweuits and add further to the work of the already over-
burdened court system. If there is any deterrent now to spurious lawsuits,
it is that deterrent which arises fran the prospec t of having to pay court
costs, attorneys* fees and other such expenses. To establish the prospect
of such expenses being reooverable by the purchaser could lead to abuses by
purchasers and their attorneys in launching legal action of a ecale not %«ar^
ranted by actual daneqes. Instead, what might be oonsidered is a provision
for additional recoveries if it is proven that the developer intentionedly
disregarded his obligations to ths purchaser.
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H.R. 12574 Mould Mt ttm etatute of lindtatlcni tar all oauns of aotloi at
three years after diaoovery of a vioLatlcn — but no noKe than asvwi yean afbar
the sale or lease. In our opinion, lengthening the tern of the etatni of liaita-
tions would only enoourage pcocrastination on the part of the buyer, iten he
should be reaponslve and attentive to his obligations as a buyer. AUoidiig ttia
statute of liaitatiGns to run for as long as seven years after the "aale" or
"lease" nay be almost the same as having no statute of linritatione at aU. m^
Bnnnuse OII£R is presently pcoposixig a nev definition for sale or lease, sAintain-
ing that the sale does not occur until the oontract is ocnpleted, all psa—i>B
made in full and title is p ass ed to the buyer. Sinoe eany developers xegolarly
finance installment oontracts for 10 years or nore, the statute of 1 ImitaHrwe
oould ronain in effect for at least 17 years. This would be di s astn o us to busi-
ness and surely oontary to public policy that there be finality to huainaei tKane-
actions. I will ocanent in more detaU on the definition of "sale" later in w^
testimony.
under tie bill, the Secretary of HUD would be authorised to issue osms and
desist orders against developers, and new civil pfwwilties would be eetabliihad
in the fonn of fines up to $5,000 for each violation and finee for orialnal
charges of up to $10,000 anVor inpriaonnent for one to sevwi years. Qiweu— lit
regulation of our industry is already so prolific and the risks so great esen for
accidental violation of soma rule or requircMnt that it is hard to belisee that
stif fer penalties would even be an effective deterrant. Civil and criaiiial pen-
alties, it seens, should be viewed in li^^ of the confusing pcoliferatiGD of sag-
ulation. It is nearly inpossible for a developer today to be in strict ocapli-
anoe with all regulations at all times. Yet, under this provision, the develflper
is faced with penalties oonparable to an individual %iho willfully oosadts a aeri-
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CKV falfliy, ••9* , au Md Tdtitmcy, Hm penalty, ne mdkmdJt, Mnild te in h—ping
with the danags to nci«ty and tiis intait of the violator. Thus, KUi feels
sucii additicnal poiiers and fines axe unRBoessary sinae the pissmt penalties
seen s e waia enou^ to act as a deterrant. QZIfiR's pr e s e nt poMsr of suapension
ahould affoKd purchasers adequare pcotecticn. Finally, a oease and daeist
order issued %«ithout justif ioaticn can heeler seriously a legitinate dsvelflpar
Wiile the issues axe faeijig Utigated. If this authority is to be given to the
Secxetaxy, the developer ehould also be given the right of xeoowecy for daaegee
when such ccdexs are iapccperly issued, or when pxanatuxe itdblAc mmcunoeaBt±
of intention to issue a oease and desist ocder is meds before a hearing on the
issue is first held.
A new section of the Act, auttaprizing state attorneys general to bring
civil actions en behalf of their residents, has bsen prop o s ed in this bill.
Althou^ it is difficult to perceive this as a legitinate function of a state
attorney general's office, ym find it equally difficult to cippuse such a provi-
sion in principle. However, we wonder if it is txuly a proper use of taxpayers*
fmds. It would seem to give the attorney general a great esomt of new poli-
tical "cLout" %^th oonsunexs, but it could also create a problem in txying to
decide which civil actions should be brought of the several oonplaints filed
yritti them. As the many govemnent bureaucracies which are unencunbered %d.th the
concerns of tine, effort and eoqpense in such actions, they could cater to almost
any ocnplaint filed with than, harxassing businees and clogging the courts even
further.
l!he final provisian of H.R. 12574 upon «hich I would like to oj u ntaiL is
that dealing %^th the escrowing of ■enies for so-called "basic serviQes" promised
but not ooRfOeted, and the option granted the purchaser to void his contract and
receive full refund if these services are not delivered . The problem these pro-
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ponds ar« designad to oocxect wibim obvious, and thair ol^Jactive is tte rii^
one — to require the developer to perfoon his part of the co ntra c t . HoMBvec,
Wiile on the surface this ndght seem to provide significant protsotion to the
purchaser, in reality it can be haznful to him. The cost to the deveLaper of
placing in escrow monies of such large amounts will have to be borne by the pur-
chaser in the cost of the pcoperty because, unless the dswalaper is panaitted
to use such monies to keep the project viable and econoaiioally feasible, the pEO-
ject could fail. Such an eoonanic burdai will interfere witii tha deveIoper*s
ability to per f orm his ccntract and conplete these very sama servioas. In fact,
many present developers %iho already are providing such basic sarvioes, and sdes,
vKXild be forced out of business. There are only a few in our industry ite> oould
afford to escrow the full cost of pconised incxovemants, bearing in mind that
many developers have several developnents undaruey at ttia same time. In effect*
the developer's entire line of credit %^th his landers could be tied up just aset-
ing this single requirement. And, bonding is generally mavailable to oowar
such situations.
As to giving the btyer the option to void his coi iU acL and receive fiill
refund, please consider theee points:
—providing the purchaser %ath such a quick, convenient
means of getting out of his co n t r act is freug^ with the
same inequities as a developer %iho cancels the biker's
interest if the buyer falls a month behind in his nonthly
payments on lot purchase (an action no legitimate,
responsible developer would take) ;
~cert2dn OGnstructicn delays are unavoidable and certainly
beyond the control of the developer, e.g. , strikes,
material shortages, iaius\ially inclement weather, tnapomry
restraining orders and, as in the case of one of our meoe
bers in the %#est, the bankruptcy of a road contractor doe
to the national fuel crisis several years ago;
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—if "ary othar anenities" lAiich the Sscratary any apadfy
ahould include reczeational facilities. It ahould be
pointed out that delays may not have a material effect
upon tie buyer's use and enjoyment of his property, e.g.,
ocnstruction of an outdoor awimning pool at a midMestem
or northeastern project scheduled for oonpletion by Novem-
ber 1 but not ooapletBd until Oeoenisr 31 (also, the
Secretary's discretion of what constitutes "any other
aaenities" ahould be restricted to t h os e declarations in
the Property Report, with a grace period, relating to the
size and oost of the inprovenent, available to the devel-
oper); and
— again, developers oould find it difficult to obtain pco-
ject developgnent Loans %d.th such a provision available to
prospective buyers.
Instead, Mr. Chairman, the ocmncn laa remedy for dnmaqes applicable to failure
to oonplete perfotmanoe en a timely basis would seem to be a more just and
reasonable remedy.
Our Association readily accepts and supports the need for reasonable regu-
lation where it is shown to be required. However, we feel that this bill amounts
to a "shotgwi" approach to regulation and is not the desired solution. The prob-
lem developer can be regulated and eliminated without the total industry — and
ultimately the consuner — bearing the costs. Ihe federal lar can be made to
do %iiat it was intended to do, equip the buyer %^th the facts needed to enable
him to make a rational purchase.
The Actainistration's Proposed "Anendtaents to the Interstate
Land Sales Full Disclosmre Act"
The Adninistration's proposals — Section 421, Title IV of H.R. 11265 —
would amend the HSFD/Act in a minber of %«iy8, %<ith the apparent intent of
alleviating some of the problems we have addressed, %«hile at the same time
strengthening the Act to provide greater protection for real estate buyers by
increasing the regulation of land sales practices. However, under seme of its
provisions, these proposals vrould liJcely not produce the desired results and
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would do oonsidaEabla hacm to developors — indsid parhflfw fcrdxig any of thai
out of buBinass altogether. I Mculd like to ouuubuL an ssveral of the HUD-
Gndorsed propceels*
HUD*8 pcopoBals would raise the thxeataold of jurisdiction under the Act fn»
50 lots to "100 or more lots." ftiile KDk would sinport this proposal, we axe
not at all oertain it would in fact lessen an£R*s ragulatocy hold oi snail,
mostly "intrastate" developers. So long as OILSR continues to interpret the tam
"ocnrnon pronoticnal plan" as they have in the past (described in Ebdiibit A) , lots
vfill be aggregated by the agency as a maans of bringing nBwllfir developers undsr
the purview of the Act. Hius, this a na ito e nt at beet would only serve to dalay
the time when oertain developers were brought under OUSR's regulation. If this
amencknent were ooipled %d.th the requirenent that "oonnon pconotional plan" be
defined as follows, perhaps it oould pros^ wodcable: "the offering for sale or
lease of subdivided land, inoorporating the use of the following ooanan elaoents
at the same time: (a) oonnon sales staff; (b) and oonnon ownerflhip; (c) and oon-
mon advertising or subdivision identity or oontiguity."
Uhder the Adninistraticn proposaQs, oourt-ordered sales of lots %iiould no
longer be given a blanket exenpticn. Viiile flDk might be inclined to support
this change, it may well create a "oonflicts of laws" problem so far as bankruptcy
p roceedings are oonoemad. On the other hand, \nder the existing uJUBtiliciiy a
develcper who files for banknptcy oould, throu^ a trustee, sell property %d.th-
out a HUD registration. If so, financially successful developers are then put in
a disadvantageous position. Me are aware that there have been abuses of this
exenpticn, and we view the proposed change as constructive. However, \m would
urge langu2ige to require OII^R to accept registraticn of such a subdivision, or
othezwise authorize court-crdered sales ytuere it can be shown that not only czod-
itor but biiyer interests are protected.
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Section 421(e) VDald have tte effect of eliminating aai|)iLetely the eo-
cellBd "free and clear of liene" eaoBBpticn in the Act. Thie exemption, idilch
we view as fcxnded in logic and equity, was intended by Oongzees to provide an
eaoEMSptiai frcm regulation for developers %iho hawe title to the land and sell
lots which are free and clear of all liens, encwiairaDceB and a d v erse claims
to buyers %iho inspect perecnally the offering before purchasing. an£R has
never favored this men^im and rarely grants it. Nevertheless, its repeal
would not be in k ee p i ng %^th the purposes of the Act and the Ocngress' inten-
ticns in enacting it. In short, this pcqposal would serve to permit QII£R to .
eospmd further its jurisdiction over developers never intended to be co v e r ed
in the first place. PILA opposes such an amendknent.
One of the major provisions of the AdBdnistratlcn's proposed amendnents
would give all purchasers and lessees an uncxnditional 14-day res c ission period
from the date of the oonsumation of tiie sales transaction. Apparently the
purpose of this provision is the same as that intended inder the extended
buyer rescission period called for in H.R. 12574. Our objections to that
bill's rescission period would apply also to HUD's proposed 14-day period.
Moreover, even a 14-day rescission period would not track %fith moet state re-
quirements, since the majority of states have periods of less than 14 days..
Another provision p roposed by the Administration vould delete the statu-
tory reference to a maximun filing fee of $1,000. In addition, there would be
specific authorization granted for OILSR to charge fees from developers who
make exenption requests. MLA %tfould not oppose swich an amendnent, if the agency
can demonstrate a real need to lift the $1,000 maximiQ fee — paving the %«iy
for higher registration fees — and charge for exenption requests.
SS-716 o • 78 - 19
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Ttm section of tiie Act relating to oaop e r ati on with tkie stota (abc. 1409) .
would be a oBnded by theae pcoposale to provide that ttia Sscrstary of BDD my
aooept state filings as a sdostitute for the fadoral filings. But, if the
Secretary has not aooepted a state*s filing reguiraneRts, then the fedaral
Property Report would "be used in lieu of any state disclosure d o a ns mt de-
livered to purchasers.** Aside frcra %iiiat migfat teoome very serious oonatita-
tional pcoblcns here, such an a t U apt by OII£R bo taeoinjL state reqjuizsHBnts
is sure to be opposed by state regulatory agencies. Ebr wcant^le, Califomia
has a niinber of substantive land sales reguiranents which, if not net, prohibit
the sale of subdivided land. If such reguironents are already in plaoe and
being enforced at the state Level, why should the federal agency (HUD) hecue
authority to preanpt. then? Diis p ro p o oo d amendknent rtiould not be adopted.
A niinber of other provisions in the HOD bill are identical or slnrilar
to anendtaents proposed in H.R. 12574. Since I have already adrtituBBed thai ear-
lier in ny testimony, I %fill not repeat these oomnents here.
In sunnary, we feel that in general the AdDdnistration proposals reoose
mended by HUD amomt to added substantive regulation of our industry. If
adopted, they would pile unnecessary burden upon developers already struggling
to oonply vdth nyriad federal and state laws.
Section 715 of S. 3084, "Interstate Land Sales Full Disclosure Jtaendtaa nU of 1978"
Mr. Chaiznan, MIA was founded in 1969 as a direct result of the en aclm e nL
by Congress of the Interstate land Sales Full Disclosure Act in 1968. At the
time, the Association's founders were concerned that the new law would plaoe
enannous regulatory power in the hands of the federal goverment (in this case,
a new agency at HUD called OILSR) to the detriment of hundreds of ocnpetent.
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honest land dBvelqpers, both large and oaall. Nothing in the nearly ten years
ainoe has eased that oonoem.
In our opinion, GUSR has eaqp a nded its regulabocy authority otver ae9Bents
of the real estate develoEnent industry which ii#ere newer intended b^ Congress
to be regulated. He would point out also that there have been nany changes
in our industry — eepeciedly tha recreational part of it. This is sis^y not
the same industry that it was in the late 1960's and early 1970*8. Reports by
public interest groups and the press have tended to focus on practices fay high
volune lot aalea ooiiianies. Many of these oGncanies and most of the objection-
able practices are rapidly disappearing.
Mr. Chainnan, the n^FD/Act does need to be anended, and as you know the
Senate has acted to do so by including such anencknents in legislation (S. 3084)
passed on July 20. Permit me now to oonment briefly on the major provisions
of the Senate-pessed ODenteents, Section 715 of S. 3084.
The sale or lease of oondaniniims lould be exenpted specifically from
the Act. We do not believe Oongress intended that oondominiimB (or land on
which a oondoroiniiin is oontracted to be built %d.thin two years) should be regu-
lated under this statute, just as land en which is located a residential, com-
mercial or industrial building is exonptad. Because they are not eioenpted in
the Act, 0I1£R can and has threatened to assert jurisdiction over condaniniiin
develcjpers.
In addition, the Senate bill specifically exonpts ccomercial or industrial
develofment property, even if such property is located in a municipality with-
out zoning authority. Although the Act was amended in 1974 to provide for such
an exenption, OILSR apparently refuses to grant such eooenptions in oomnnunities
which do not have zoning powers. This amendnent Mould remedy that inequity.
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S. 3084 vDuld pcovite for an intragtate CNoqptlon for ttm dev^Iopar ydio
sells less than five (5) lots or five (5) percent of YdM total lots (lAiiGfaBW
la greater) in one calendar yaar to out-of-state purchaaera, pvoiddad that
the developer givee clear title to the pro pe tty and the buyer waiaaa an op^aita
inapectixai . Although the five percent rule is nov in the regulatory SMaptionB,
it is unworlcable, especially for the email developer. Hi ePBwple ia the devel-
oper %iho sells nine lots, only one of %iAiich is to an out- o f-state fai^Br. Ihe
five perce nt rule does not exen^ this baaically intrastate developer — OHfiR
considers him in violation %ath 11 perce n t of hie aales being nade out-of-state.
The addition of the five lot limit makes the intrastate eweaption a realistic
and workable one.
Sales to purchasers residing td.tiiin a lOO-ndle radiua (an easy on e d y <
rcundtrip drive) of the property site, again subject to clear title and on-site
inspection , viould be exenpted by the bill. This SQlves the problaBi fSaoad by
the developer operating on the boundary between several statea, aixfti as here in
the Washington, D.C. , area. Miile he may otherwise be eoceRf>t frcai the Act's
purview, OILSR can and does hold that such a developer is selling on an "inter-
state" basis, and is therefore subject to federal regulation.
under the Senate measure, a new proviaion %«ould be added bo define the
term "sale or leaae" to mean oocuring at the time a oontractual relationship is
created between the developer and the purchaser. Sec.l402A5 U9C 1701 (11) would
be amended to read: "'ssde or lease' means the entering into of a legally bind-
ing agreement by a purchaser to buy or lease a lot in a aubdivisiOD. His dats
of sale or lease shall be the tine a oontractual relationship is cre at ed batwean
the developer and the purchaser;". In its latest p ro r oe u d revision of the zagulat:
OII^R served notice that it considered the"sale" to continue from the date of the
signing of the contract by the buyer until the contract is paid in full or a deed
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has been dalivorad to ttia buyer, whichefver oons later. As stated earlier,
the practical effect of such a def initlcn by QHSR would be to extend ttm statute
of lindtatiflns by allnwinj it to run the entire length of the contract period,
vfith a concep t of a "cantinuing aale," and for up to three years beyond the end
of the contract. OII£R has indicated that it needs this provisicn to "clarify
the Agency's position** viith regard to policy and practice in one type of liti-
gation — the proeecuticn of fraud cases. However, such a definition would im-
poee the "continuing sale** upon the entire Act, thereby extending the statute
of limitations. Our cese eearch reveals that the definition in S. 3064 follows
the prevailing opinion of the Courts. Nine of 11 oeses we unoo^^ered disagree
with the agency's oonoept of a '*cQntinuing sale." Gnly two cases, in our opinion,
could possibly be cited to suqpport OIIfiR's propose d definition of "eale" —
and even they are aonewhat questionable.
Still a not h er problem energes in this area. As I indicated earlier, a
large segnent of the real estate develcpnent industry relies upon being able to
finance awineicial "peper" (i.e., notes and installment contracts) resulting from
sales. But due to the increased and prolonged expoeure that would result if the
"sale" period (and the statute of limitations) is extended, financial institu-
tions are unlikely to be %d.lling to provide such financing to the developer.
Moreover, such a situation would discriminate against the cash purchaser . While
he has the traditional and accepted two-year statute of limitations, the install-
ment buyer would enjoy on extended period. Ihe definition contained in S. 3064
is a realistic and f2dr aoluticn to the problem.
The Senate bill vrould add new language to the Act to clarify the tenos
"liens," "encvntsrances" and "eKtverae claims" so that it is clear that they do
not refer to U.S. land patents ani similar federal grants or reeervations oonmon
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to moBt land in tha westecn ttiited States — an qiriaaion which COXSR hM uMd to
dafaat clains by devslopers for exenption inder Sec. 1710.11 of the Act. D iq u a ef
for exaiptinn under this section are rarely gr an ted by onssu The foUcMing re-
strictions, OGSBDn to land %#est of the Mississippi River, are ooneidsBsd "llsne#"
"enofltarances" or "advesse claims" by OUSR: unspecified eacpLoEation rig^hts,
mineral rights, %«itar rights, railroad ea s eme nts (specific) and unspecified rail-
road "wondering" easements. Nmiy of these are not even oonsldeced by title in-
surers to be liens, encmfarances and adverse claims.
Finally, because of contentions that the mnendDents %«Guld not only eocennpt
developers — under certain drcunstanoes — from the registration raqjuizsHmats
of the Act but wcxild also exeiDpt these same developers from the anti-fraud pco-
visions of the Pet, language %iBs added to the bill to assure that the anti-fraud
provisions vould in fact apply to those developers eBoenfited under S. 3064. It
vms never the intent of our Association or of any of the bill*s q:ai saK 's «nd
si^sporters to exen^ such developers from the Act's fraud pcovisions.
In conclusion, I vant to reiterate the American Land Oewelofannt Aseociatiop's
conviction that consumers should and nust be protected from fraudulsnt, inesprn
sihle real estate developers — the primary goal of the interstate Land Sales
Full Discl o su r e Act of 1968. By endorsing the interstate land sales pcovisions
of S. 3084, this Suiaoonmittee could take an important step tOMard assuring rnnwn
sible regulation of our industry by clarifying Ocngress' intentions as to item
and hoifir the law is to be applied. We uumieiid Section 715 of S. 3064 to you.
Thaaok you, Mr. Chairman, for allowing us this opportunity to app e a r befiOKe
you today. Ms %<ould be pleased to answer any questions the Suboaenitbee may hew.
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EXHIBIT A
BACKGROIND and EXPUMA3I0N of the II^SFD ACT
Title XIV of the Housing and Urban Development Act of 1968 is the
"Interstate Land Sales Full Disclosure Act.** As Public Law 90-448, it took
effect on April 28, 1969, following seme five years of on-again, off-again
Oongpressional hearings and insucoessful attenpts to enact legislation. The
purpose of the Act was to protect the oonsuner from deceptive and fraudulent
land sales prskctioes in interstate oomneroe . It is a full disclosure law that
aims to provide the potaitial buyer all the pertinent infomation needed to
make an informed, rational purchase of real estate.
The Office of Interstate Land Sales Registration (OII£R) is the agency
within HUD delegated the responsibility for administration of the Act. Ihe
duties of this office include receiving from developers Statements of Record
and other sipportive materiad, responding to consumer inquiries, inM3Stigat:ing
consiiier conplaints, field inspecting of propertd.es and informing the public
of certain ri^ts granted them under the Act. llie office is not e39>ected to
pass judgement on possible future appreciation, the fair market vzdue of, or
the general qualit:y of real estate.
The Act requires the developer or (his) agent, v*iose prospective siiDdi vision
meets certain criteria (e^lcdned below) , to file with 0II5R a "Statement of
Record" about the siixiLvision before any lots are to be offered for sale or
lease. The Statement of Record contains such information as a financial
statement of the develcapment oorpany; a copy of the corporate charter; copies of
deeds and mortgages; any conditions set down in local ordinances and regulations;
the availability of or proposed plans fiar installation of facilities (i.e. schools,
churches, hospitals), basic services (i.e. water, sewage disposal, roads),
utilities (i.e. electricit:y , gas) and recreational amenities (i.e. swinming pools,
tiennis courts, golf courses, hUcing trails, etc.); and any necessary supporting
documents such as sketch plans, plats and area maps. The developer or (his)
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agent is also requixad to pcepaxe a "Pzopexty RepGrt" to be gLven to pco^paetlvs
biyers. Aie Prop er ty Itep ort oontalnB infozmatiion drawn fzcn tiie Statsnant
of Raoord that will be helpful and infioxnative to the persGn coRbeeplating
the puzchaae, including such infamation as the dlntannft to neadOy orwmitiee;
existence of an/ nortgagies or liens on the pi x yeiLy ; the availabilityr location
and oosts of present and proposed facilities, servioes, utilities and
anenities; soil and foundation conditions; and the present muter of dwellingB
occqpied.
Gbvered under the Act are all subdivisions "divided or proposed to be
divided into fifty (50) or more lots, %ihether oontiguous or not, for the
purpose of sale or lease as part of a ocnraon pronotional plan.. .." Thus,
an individual or axpany which awns 50 or more lots whether located in cne
contiguouB plot or scattered throixrhout a county or oooities nay be 8ii>jact
to the Act, depending !:(X]n cne's interpretation of the tern "caoRDn pcomotional
plan.** Uhder OII^R's interpretation — which has oontribubad to bringing many
aroedler subdivisions inder the Act's registration requLmmants — lots axe
presvned to be sold \nder a cGmnon proRDtion2d plan if the following criteria
exist: a "thread** of oonmon ownership; cannon ad\«rtising or pronoticn; ooBHon
name or identity; connon sales agents; cannon sales offices or facilitiesi ooBHon
sales inventory; etc. The statute itself only describes a oomaon prosotional
plan for land %«here the land is "contiguous or known, dssi^uitBd, or adwsrtised
as a connon unit or by a ccnnon name . . . . "
Certain exenptions from full registration are provided in the statute and
in the regulations prcnulgated by OII£R. Ihe statutory exen|>tiionB, with but
one excepticn, require no formed %#ritten determination and, most significantly,
exanpt the following types of subdivisions from the Act:
— subdivisiors consisting of less than 50 lots;
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^«MLvisiam oamistixig of lots, all of idiich ate fiv«
aczes or more in size;
— the sale of lots on %#hich there is a oonpleted building
or a ooRtractual cbligatlcn on the part of the ds^loper
to ocnplete a building ifithin two years fron the date of
salei
— the sale of lots to persons engaged in the oonstruction
of residential, aisnercial or Industrial buildings;
""lots aoned for uuiiuBrcial or industrial develofinent/
provided oertain criteria are net; and
— the sale of siisdiviBion lots lAiich are free and clear of
all liens, encwfarances and adverse claims, provided each
purchaser inspects personally each lot E»:ior to signing
the oontract. This latter exenption requires a favorable
detemdnEition by OII£R, howe^^r, before it is available
to developers.
In addition, there axe four regulatDry exenptions, one of which
requires the issusnoe of an "BBBR|>tion Order" by OEZfiR. Ihe exBqpticns for
%Aiich no action is required by the developer or onSR are:
— lots sold for less than $100 including closing costs;
— lots leased for a term not exoeeding five years; and
— the sale of less than 50 lots (which are also not more than
five percent of the develcper's total lots) when the remainder
(95 percent) of the siisdivision is otherwise <
The fourth regulatory exenption requires that a subdivision meet several criteria,
inclixling: less tlian 300 lots; location entirely within one state and offered
entirely or almost entirely within the state where the siisdivision is located;
all advertiBinj and promotion confined to the state; and no more than five
percent of the sales in any one year made to nonresidents of the state. In
order to obtain this exenption, however, the developer must first provide OII£R
with certain facts, including basic information about the ownership and size of
the siixdvision and ary other similar filings with federal or state authorities;
a statement identifying the lots to be exenpted and the reasons for the request;
a description of the pranotional methods to be used and whether an/ principals
of the developer have interests in other subdivisions; and finally, siftmission
of a filing fee of $100.
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Even thouc^ no specific deterndxiaticn by onfiR is xequixed en the ether
exenpticnB, thB developer may obtain an "Esoenption Advisocy CDpinion," pccvidad
he subidts a ncniefundable $100 fee, a et a teroant of facts and lof whenby
the developer believes himself exsaapt, and certain basic adtadnistzative
infosnation.
Finally, the Act prohibits develcpers froni using "any means or instztmnts
of transportation or ocnnunication in interstate oomiBZoe, or of tiie mails. .."
to sell or lease lots without oonplying with the registration provisione of
the Act, or to defraud purchasers.
ACMirgglW^TICN of the ACT by OIIfiR
When the Act and regulations thereinder first took effect in 1969, €he
prooess vias relatively sinple and filings %«eze often prooeeeed and made
effective in a matter of days. But the regulations have been revised sevBral
times since then and have beoane increasingly technical — each revision
requiring more extensive and detailed disclosures, and in scse oases Goeplete
refiling with OII^R. Itie most significant revision to the regulations beoane
effective on Deoenber 1, 1973, and OII^R is again revising the regulations to
beooroe effective probably sometime this year or early in 1979. These nm
revisions, first proposed a year and a half ago in January of 1977, were finaUy
reissued for a seocnd ooromen L period on June 1 of this year. Ihe latest prop os e d
regulaticns covered 46 pages in the Federal Register — almost a oonpLets zevision.
A copy of ALOA's oral statement on July 17 at the first of three pi*>lic
hearings on the proposals is attached as E^diibit B. Itie Associatian %#ill w^tmit
to dLSR more detailed %m.tten oonments before the August 31 deadline, and we
%d.ll be happy to provide the Subocmnittee with a copy of that statenent when
it is oonpleted.
As the regulations now stand, it takes 60 to 90 days for an ei^ert in the
registration procedure to prooess a oopplete filing through QU^SR. For the
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dev«Ic3[>ar tiio, for fiMndal rawnm or othBKwlae, drafts and prooMMS his am
xegistxaticn, the t ».ooB M pcdaably idll take nine nasths to a year. But until
tiie dewalopar is ^ ' ant e d an effective date on the ragistxatlon, he cannot sell
a single lotr tiiile he still has to oope with oonsidarabls cngoing ■ qp a n saa.
Briefly, the folloMing steps are neoassazy to the 0II8R zegistzatian
(1) The aastntJaga of Urn infoanatian neoeeeazy to prapare the State-
msnt of Raoocd and Property Report required by Urn Act anA iapLeawiting regule-
ticn. Ihis involvee providing Urn an awora to maarous quastions and Urn ooapila-
tion of hMdrads of pagae of foxaed docinents, including: audited anA owrtlfiefl
financial stateoBnts for the developer and any other entities involved; ooaidsK
legal title doa n entation, including title policiee and legal opinionsi anginsar
ing dooanentation; letters fron looal anA atata govermantal bodies regarding
the installation of various utilitieei etc. InfooBatian and docuantation re-
quived in nany cases is not clearly aet out or eaq>lained in the regulations,
ao that the average person unfoniliar with the agency and ita requizcaoRts
%«ould not know ithat to include.
(2) Preparaticn of the doaaaentatiGn in the fonaat required by the
agency. This includaa the fGonal drafting of the narrative, the form and
subBtanoe of which can be vital to obtaining filing appro^sd.
(3) Sutndtting and prooeesing the registration doonents through
on^R itself. This includaa negotiations over the structure of the narrative,
the included doconentaticn and the language of the apecific disclosure. Much
of the OILSR review is based en internal agency policy and individual exeBdnar
diacretion — with the result that nany of the filing requireoBnts are unwritten.
(4) Negotiating %«ith the agency over additional docmentation and
changes in disclosure language and fonnat. This can take aeveral months of going
back and forth between the developer and the agency and produce much paperwork.
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It is astiMted by 0II8R itself that lass than £ivs (5) paennt of wll tiXtaqB
clear the agency en original sutasLsaion.
Onoe a rogistraticn is effective, hoMBver, the pEOoass does not and there.
on^R requires that amenteBRts be medb to the filing within 15 dayu of a "tetaar-
ial change" in the status of the subdivisicn. 0II8R has neRwr issued guidalinss
en %dhat oonstitutea a "material change" and adtadnistrative law decisions on the
subject show a wide range of disclnsures onnsiderad to be "wtsrlal.* Ftr esasK
pie, OILSR has maintained that the foUowing itaas were arterial and reguized
that filings be s u spended for failure to disrinsp than: a change in Urn assistant
aecretary of the developer'a oocp orat io n y a five peroant (5%) iirireasn in the
OQSt of bottled gasi and a $5,000 danage suit against the developMRt ujnaiy
%«iich had a net worth in eoooess of $30 million. One fairly reoant oass had Ollfit
and a developer diaputing over whether a p ro p o se d riding atahle ahoold be di»-
cloeed as a "recreaticnal facility* or as a "nuisance." Gn the other hHid,
undoubtedly OII£R can cite acme serious def idancies in disclosures — but it
seems fair to say that minor deficiencies which have been considered amterial
by On^R have been at least equal to the major ones.
fiiat may be a genuine dif f erenoe of opinion bet ween 0IL8R and the developer
en the materiality of a diacloeure can result in lengthy and costly adainistre-
tive proceedings. Many of the developer'a reoocda may be suft}poanaad, as may
the developer himeelf . He may be required to come to Nashington to defend hiae
self or else make the requested changes irithout regard to their amrit. If he
oppoeee OTLSR dictates, he risks having the registration a u apendad — which has
the effect of stopping all sales at the developer's subdivision until the — il
mants are made. If the developer decides to defend himself through the adaini-
strative hearing process, it can be nearly three (3) months before his case ia
heard by the HLD Adninistrative Law Judge, and up to 24 months before a final
de c isio n is r ender e d. This means that after the developer haa undergone the
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adtadiiiatzirt±«B pcooadlansv blM filing My atiU te murirtarl and 1» mUI stiU
hawe to amend it. In the ■amtiBe, no wHbb Bay te mndb tntil tfaa a — nfled filing
is again mate effective.
Cn zeviBKing aont 19 Adniniatrative Lav oaees involving OZI£R, we find that
the length of tine involved from the date of onfiR first notifying Urn dswelqper
of alleged vioLaticns to Urn date of Urn final decisicn ranges fron 30 daiys
(in one case only) to about 20 mnths, %«ith the average for the 19 oeses re v ifl w ed
being about five and a half nontfas. However, this tine period does not include
the tine the developer's filing nay be s u spended after the decision is r wdered
and the tine it talces th& developer to prepare and sutnit the disclosures re-
quired as a result of the decision,
Ttae Deoaber 31, 1973 regulation revisione by dLSR required that all filings
effective prior to that date nust be brought into ooBplianoe with the new rules
at the tine an^ other anendnent %ies neoeesary. For eocanple, if the developer
needed to amend his registraticn to ahow that a p ropoe e d golf oourse idould not
be ccapleted vntil a year later than originally plamedr he %iould be required
to anend his entire filing. The latest picjtxa sed OII£R regulation revisions con-
tain a similar provision. In the case of both the 1973 rules and the forthooming
revisicns, the foneat and ^laracteristics of the registration were and probably
%dll be changed radically, making even thoee familiar %d.th the prooees releam
the entire procedure through trial and error.
OILSR, however, is not the only agency with which the developer must be
involved. If he %fiahes to sell in more thai one state, he faces poesi b le regis-
tration in most or all states where he %iiahee to market his subdivision. Aooord-
ing to a 1976 survey (updated through June of this year) by the Land Developnent
Institute, Ltd. — a oopy of which is attached as Exhibit C — 45 of the 50 states
have some kind of registration requirement for developers offering or eelling
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land to residents of a givn state «lwn the land offired mm not Inwffl wUhin
the boKdezs o£ that state. State ragistzatian zequizcaeRts range frcM tte sul^
ndssion of basic informaticn about the subdivisicn, to ragistzations eqnillinfj
or surpassing tte scope of the federal registzatlon. 2h additlGn, iw—tniB
states have substantive regulatory reqpiirasRts, such as the pasting of bonds
to assure conpleticn of project i nttt c w e m ents. And in several states, oofc-of-
state land is considered a "security" and the dsvelaper met mdsrgo a fbll-
soale securities registration in order to sell it.
Gnly about ten of the states %«ith registration raqpiiroBBRts will aooipt as
a natter of course the entire OUSR filing (Statenent of Raoocd and Pzoparty
Report) in lieu of their own registration. As many as 15 additional states
nay accept part of the OILSR filing, nay aooept it for one developer but not
for another viithin their discretion, nay accept tte HUD Property n e p o tt but re-
quire a separate "RBgistraticn Statenent" neeting certain state requizcnsRts,
and other coBobinations. On tte other hand, although such states as Califnmia,
Flxaridar Illinois, Michigan, Mimeeota, New Haopahire and New Yock have regis-
tration requlreDBnts that either neet or eNoeed tte standards set by OUSR,
tte federal regulations p rce e nt ly provide that only one state filing -* CSlifor*
nia's — is aoceptable as neeting GU£R requireoBnts. And this casie about with
reject to California only after OILSR, on Deua i Lex 5, 1975, l e w e iLa e d a dscisifln
nade a year earlier in %ihich tte agency said it idould no longer aooept any filing
made %d.th and accepted by m^ state. A nore detailed flMplanation of tte situa-
tion in California is provided fay Mr. Sid M. Karah, preeident of Dart Itosoils
and president of tte Western Developers Council, an association of Califooila
real estate developers and land developmnt related oqipanies, in a letter earlier
this year to tte Senate Select Ocmnittee on Staiall Business. Mr. Karah*s letter
is attached as B}diibit D.
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But what are the ooets tnvQlved to the developer of all this regulation?
ften all is said and done, we estinate the developer probably will have qpent
$25,000 to $100,000 on the registraticn procedure, including legal, aooounting
and engineering expensee, staff tine and other ndsoellaneous expenses. That is,
if he can afford a registration attorney > which mny snail developers feel they
caimot. If he does the work hineelf , ithat he eaves in attorney's feee he will
more than likely loee in time qpent on the registration.
Attorneys tell us that tteir fees for registration for a snail developer
camot be substantially less than for a large developer because the basic re-
quirements for registration are the eame. Thus, the registraticn cost, on a
per lot basis, is much higher for snail developers than for large developers.
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OFFICE OF INTERSTATE LAND SALES REGISTRATION (OILSR, THB AGENCY)
STATEMENT OF THE
AMERICAN LAND DEVELOPMENT ASSOCIATI(»f (ALDA)
PROPOSED REGULATIONS POLICY HBARIIK3
JULY 17, 1978
OPENING REMARKS !
I am William B. Ingersoll^ General Counsel for
the American Land Development Association (ALDA, THE ASSOCIA-
TION). Accompanying me today is George G. Potts, Cirector
of Public Affairs for the Association. He appreciate this
opportunity to testify on behalf of the Assocation concerning
the OILSR*s proposed rules for registration of interstate
land sales, as they appear in Part V of the Federal Register
of June 1, 1978.
The American Land Development Association (ALDA)
represents leading national and international companies lihich
develop recreational, resort, and residential real estate.
Our members develop homes, condominiums, planned unit develop-
ments, destination resorts, new and retirement communities,
tinesbarin? facilities, mobile home parks, recreational
vehicle parks and campgrounds. I should also point out
that some of ALDA's member companies are lending institutions
which provide financing for the industry or are actively
engaged in developing properties of their own. You will
undoubtedly receive testimony from many of our members in the
course of these public hearings and by written statements
during the comment period.
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Sine* our tiae is liait«d, «m int«nd only to
generally focus on a few areas of the proposed Regulations
and followup this testiaony with more conprehensive written
COBSMntS.
I. Redefinition of "Sale" is "Ultra Vires "
ALDA believes OILSR's redefinition of the term
"Sale" as now proposed is without legitiaate legal basis.
Uhen the redefinition of "Sale" was first published in the
January 31, 1977 Federal Register, the stated rationale was
for the purpose of extending the statute of limitations in
fraud cases, based on %ihat OILSR termed a "theory" of an
ongoing sale. Extending the statute of limitations so as to
remove from an alleged perpeur^tor of fraud the benefit of
his %n:ongdoing is a commpn judicial jremedY to be iisposed When
circumstances of fraud warrant its use.
. However, OILSR has not limited the redefinition to
sales involving fraud only, but it has, in a most extraordinary
fashion, expanded its "theory" to apply generally, thereby
expanding the statute of limitations in every transaction.
We believe this to be an arbitrary departure from judicial
policy and one not supported by the legislative history of
the Act. AIi)A previously addressed this issue in its
written comments to the proposed regulations dated April 30,
1977.
In its newly proposed regulations, OILSR states
no supportive judicial precedent under its o%m Act and it has
no support in its o%m legislative history for the esqpanded
definition of sale. Nevertheless, in attempting to support
33-716 O - 78 - 20
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its position, OILSR asserts for the first tine that its posi-
tion is supported by cases under federal securities laws.
ALDA would be pleased to have the citations for these cases,
even though they are admittedly not based upon the Act itself,
so that they may be reviewed by all interested parties.
Particularly, it would be edifying to learn in what respects
OILSR considers these security cases as precedent for the
redefinition of **Sale**. lie believe, in fact, that OILSR
may be erroneously dependent on cases and precedents based
upon another statute administered by another federal agency,
wholly without applicability to OILSR* s subject area.
In summary, ALDA strongly opposes the proposed
redefinition of "Sale" as unconsciencable, arbitrary, and
without legal precedent.
II. 24 CFR 1710.11 Extinction ;
We think the proposed alteration of Section 1710.11
eliminating the 120 day rule to deliver deeds is an unfortunate
example of agency overkill without adequate factual substantia-
tion. OILSR finds a potential danger to purchasers because
sellers may encumber lots after the exemption is currently
granted and the contract to purchase is signed. This is the
first time that the Association has become aware that the
OILSR 's current policy has generated problems of the type they
refer to at all. OILSR has not shown statistically or other-
wise that the benefits of its proposed rule will outweigh the
harm to legitimate developers, especially small developers.
This statutory exemption has been basically untouched since
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the statute was first implemented. Nowhere has the Congress
stated or even suggested that this exemption was being
improperly used or adj&inistered. We would request that the
agency carefully reconsider its proposed regulations regarding
the crippling of this exemption to the point of practical
extinction.
Nevertheless, AIi)A applauds the agency decision to
limit the annual filing requirement associated with this
exemption and finds this new proposal both protective from
the purchasers viewpoint and workable by developers.
III. "Scattered Lot" Exemption (I7I0,I3j^b}(7j is step in the
jp-i gb t _d i r e ct ion ■
The Association commends the OILSR for the effort
expended in review of its existing regulations and policy
concerning exemptions from the Act. We feel that the proposed
new "scattered lot" exemption in Section 1710.13(b)(7) is
a step in the right direction to solving one of the developers'
and agency's most perplexing problems of coping with the con-
cept of a "common pirQinotional plan", especially as it relates
to the small (scattered site) developer. We feel that there
are still problems which will require further explanation by
the agency regarding this exemption and we intend to point
these out in our written comments.
IV. New "Limited Offering" Exemptions are Unduly Complicated i
We find the new exemptions in Sections 1710.14 and
1710.15 of the proposed regulations as unduly complicated,
confusing, and restrictive. In light of the fact that these
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proposals will rsplacs ths sxisting "liaitsd offering"
tion, which is currently the easiest and most popular exsaptioa
used by the small developer, we feel that these proposals should
be broadened and sinplified.
For example, ALDA believes the intention in Section
1710.14 to limit the exemption to 150 lots is arbitrary and
unnecessary. As with the current Section 1710.14(a)(2),
the limitation should be at least 300 lots. The 300 lot
limitation was previously believed by OILSR to be fully
protective of consumer interests and we are not aware of any
problems which should further limit the availability of this
exemption.
A. 14~day rescission period is outside of statutory
authority . As to the 14-day cooling off period, ALDA is
imaware of any statutory provision which grants OILSR the
authority to provide for any rescission period not specifi-
cally granted by Congress. 15 U.S.C. 1702(b), the only provi-
sion granting OILSR authority to provide for exemptions, states
that such a determination shall be based on two elements and
two elements only:
a. "The small amount involved, or
b. The limited character of the public offering."
OILSR, in stating its rationale for the 14-day rescission
period, as **time necessary for a purchaser to determine whether
the lot can be used for the purpose for which it is being
acquired** establishes for the record that the rescission
period is not proposed, even remotely, for either of the two
permissible purposes. Furthermore, it is inconsistent with
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thm entire vchMie of exmpting certain subdivisions for the
expressed statutory purposes and siaultaneously imposing an
arbitrary, and probably illegal, 14-day rescission period.
V. New Filing Foraat — Good idea to simplify language, but
cost to coBply not commensurate with proven benefits to
purchasers .
As to the new registration sections, including the
new format and requirements for the Property Report and State-
ment of Record, ALDA commends the efforts of the agency to
simplify disclosure because we share a common believe that
consumers should be able to understand disclosures to the
greatest possible extent.
While we concede that the new narrative disclosure
format could be somewhat more understandable , we continue to
seriously question the agency taking this course of action
without first measuring the extraordinary costs associated with
and the economic impact of requiring complete re-registration
of all filings, at a cost of many millions of dollars to
the industry- as a whole, weighed against the ultimate benefit
to consumers. Simply stated, the OILSR has yet to produce
any valid empirical evidence to support a rewriting of the
registration requirements.
A. Elimination of Financial Statements a Good Idea .
Quite frankly, we feel that the most beneficial proposal in
the new disclosure format is the elimination of complicated
financial statements from the Property Report. We feel that
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this simple proposal will do more to make tbm Property B^port
readable and understandable to the consumer than all the other
changes in format requirements.
B. Cost Sheet Too Complex and Subject to Abuse .
Furthermore, we must protest against the use of a "cost sheet"
as being unworkable from the developers* perspective and
misleading to consumers.
C. "Red Warning" Provisions are Simplistic and
Directly Contradictory to the Proposition of
Cutting Down on Printing Costs .
We must also protest the new proposals of boilerplate multiple
red letter warnings to appear in the Property Report. We
feel that numerous warnings throughout the Property Report
will remove the intended emphasis to the consumer and will
increase substantially the printing costs of the document,
thereby more than offsetting the printing cost reduction
realized by the one color cover page which OILSR realistically
cited as justification for such a change.
VI. Conclusion; ALDA Favors Real Simplification .
This concludes our oral statement regarding the
major concerns of the Association with the proposed regulations.
We compliment the agency for having implemented many of our
suggestions in these proposals. The Association will submit
to the OILSR more detailed comments in writing prior to the
August 31, 1978 deadline as extended. Thank you again for
allowing us this opportunity to express the Assocation's
views on the proposed rules and regulations. With an under-
taking as important as this, we would suggest and pray that
the final draft involve a much closer participation by the
industry which will be most immediately impacted.
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EXHIBITC
IRBMBaCMI IMD CeVELOBBCr ASSOCIMTION
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KEY TO ABBKgVIATIOtil i C~Provlslens apply to cendoMlnlwHi Daela.-- DlscUlMri
Dis. — Discretionary; pi--f«« footnota listad by statai L— Proviaiona apply to
•ubdivldad landi OXLCll— Office of Zntaratata Land ialaa Kofiatration, aaaa raqulrmaanta
aai OOS— Out-of-statat P/R— Patfaral Property Raporti Prehb.— Prohibited 1 T— Proviaiona
apply to tiaa aharin^. .«„^ . AI — /^diticnal InfocitBticsn
~*^ *'*-"'^'~"' required.
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KEY TO ABBKgviATIOtiS t C— rrovlalons apply to eendoMiiilwHi Oaela.— Olaelalawt
Dis.--Diacr«tionaryi r^'-9— footnote listod by atatoi L — ProvlalwM apply t«
aubdividotf landi OILSR— Offiea of Intaratata Land Salo« »•« la trot Ion. mm m««1v
aai oos--Out-of-atat«i r/K— PoMral Froporty Haporti Prehb.— Pt«iaklt««t T»Pff«vUiMC
apply to tiM .barln,. ..^^ -c- ...„«« Aj - MdiUcml InfoOMtKl)
requizvd
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trrtKEflCE-COHPJ^ItJSOH CHART
roomoTM
(ty atat* or proviso* )
^llfomi* fllin^o for sitvo •ubdlvlaion* My bo *po«M« throofh* to
OXLSIl/mo previdod eortola roqulroaonto aro aat.
^Tbo loMl •tottt* of tiao ahorlnf anlto luidor tho Otocfio toevrltlo* Act !•
untfotonilnod at this tiMot howovor, eortoin typos of offorinfs asy bs
^sMoii sttthoritiss hsv* not snforesd eoaplsincs with foe. 4M*f R.ll.t
Annual PspartI
'Ail aspscta ot ^^roantional plana ars carsfuily ■onitorsd pursusat to
tsc. 4l4-5(al(13) H.R.S.
^Oirrontly, Wo.
^•oe. 372A of tha Zllinoia Land Salsa Act haa boon intsrprotstf (ss of this
writing) to sasopt condoaiiniuai and tiaw sharing units «fhich srs stsnd-
inq and coavlsts or aa to «fhlch thsrs is a ls«ai oblifstien on tho part
of t)M asllar to construct a buildinq within two ysars fron dots of
diapoaition.
^rroviaion appiicabl* only to offsrinqs which sro also oubjset to tho
rsgistrstien roqvirsawnts of ths Xntsrststo Lsnd tslss Pvll Diselositro
Act 15 U.f.C. 1701 St 22^.
2yss, unlsss ths proMtion la apscifically dssignsd to rssch ths Leoisians
■arkst.
^Ths statua of tiaw sharing is not yst dstsrvinsd undsr ths Nsins toevritios
Act.
* New IJM cr ragulJitiorM qavmming Ivd mOm mmetmA during 1977.
•* New laws or requlations governing land sales enacted so far in 1978.
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*lm; tiM te«»lep«r can adirvrtiM in national poblieationa, tat mif •mhm
LunaiMMiiil toy Naina raaidanta voald ba in violation of tlw toooritiaa
Act unlaaa tlia davalopar ia ragiatarad.
^ MRXCO
^lla«iatration ia alac raquirad for eondeainivM and tiaa ahriaf if ttmf aia
daaaad aacuritiaa.
^Ne, if tha of faring ia a aaeurity.
^llaaiatration oay ba raquirad for eondooini«M and tiaa ahariaf if tiMy ara
hald to ba aacoritiaa. Ona "rifht-to-oaa* tioa-ahara of faring haa baaa
ha Id to ba a aaeurity in OklahOM. '
Iforaai annual raporta ara not raquirad. but OM f2.MS previdaa that fllinf
ioforaation for aubdiviaiona wat ba kapt currant, gacuritiaa rofia-
trationa auat ba ra na wad aaeh yaar.
2fai«a to Oragon raaidanta raaulting froo advartiaaaanta in national publi-
eationa would ba in violation of tha law if tha davalopar ia not
ragiatarad.
PcmifYLVMilA ^ .
iDavalopara ara allowad to ragiatar only an invantory of lota, unita or
intaraata which thay can actually aall during an ll-aMnth pariod.
^fubdividad land and condooiniuMa locatad within Tannaaaaa oay ba raquirad
to ragiatar if tha of faring, takan aa a whola, involvaa tha of far or
•ala of a aaeurity.
^If condooiniuMa or ti»a aharing involva aaeurity intaraata, thoy oay ba
raquirad to ragiatar with tha Taxaa Sacuritiaa Cn i i aaion.
^ondoMiniwua would ba raquirad to ragiatar if tha offaring ia an "invaat-
■ant contract* aaeurity.
^iaa-aharad condooiniuiaa ara raquirad to ba ragiatarad.
^Uxketemdned at this tine
^Developers registered with OILSR or HUD nust sukinit a oopy of their HUD filing
as part of the Virginia registration.
ksondeminiiJiB are required to register unless the buildings are alzBady oQnstxuctad
or there is a contractual obligation on the part of the aeller to OGnstxuct with-
in two years. Tine shauring offerings may be required to register under the
Securities Act if they are held to be securities.
2 Ttiis type of advertising may not result in any part of a sale taking place
in the state of Washington, including negotiations.
CRNMft
CKEARIO
CXirrently, tiire sharing offerings are not permitted in the pcovinoe.
TEXAS
VASHINCTTGN.
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RgpsiiiiiCE coNPARzsoii ouunr
OOBSTXOHS MID ZNSTIIOCTXOIIS
Liatad balow ar* tiM qusstlons which tmv subnlttad to th« stat*
•aanclM in th« Onitad st^ta* «n4 C»n*d« which hav* juried iction or petontial
juriadiction ovar tha ««:* ot 4ubdlvid*d land, condominium and tiwa aharing.
A briaf axplanatlon of hew Anvwri hiv* b»n aat forth In tha Raforanca-
Conparlaon Chart on pagaa 5-7 follows aach quaatlon whara naeaaaary.
1. la thara a ragiatratlon raquiranant for tha of faring or aala of tha
following, if loeatad
Within tha Stata ~
Outaida tha Stata
Titia 6h*riitq (T^
CHART: If th*r« i« * raqiitPAtlen raqulr«n«nt coLunn 1 will ihov
"I," for subdividBd l«nd ^C far condomlntuniB ^ and *T' for tlPia
aharing, a« applicibV* 1 th«ra ia no auch raquiranant for any
of thaaa, tha column will show "No."
2. Mut Buiwbar «r lota, units or intarasts trigger registration raquiramanta
for subdivided I'nd ^ cofidoniiniuins (•)__ ^p tima aharing (>) 7
CHAttTi column 2 will slkov tht fwlnlmum numbgr af lota, unita
ar interasts for which ragiatrfttion is rsquirad «nd, aa naeaaaary,
tha nujnbac for each typa of offering ^L< C. T> - HOTEt Sosia
atates have different nusibers for in-atate and out-of-atata
projecta.
3. Are on-aite inapactiona required before an effective regiatration can be
granted for subdivided land , condosiiniuMa , ti»e aharing
7
CHART ; Column 3 will show "Yes", "Ho" or "Dis." (Discretionary).
4. Must annus 1 reports ht filed for regietered subdivided land »
condoniaiufni » time sharing ?
CKAflTi Column 4 will show "Yes", "Ho", "Dis," or the periodic
occurrence of reports (e.g. every 6 months, 2 yeara, etc.).
5. Is there a reecission period for purchaaere under the governing atatuta
or reguletions for subdivided land « condominiuma » time
sharing ? (If there is eny rescission period, whether conditional
or unconditional, responae should be~TE8.)
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i. MMt adyrtitiif iiaf riala b« approvtd or rm^immi prior to tiMir «m im
tiM »^^ gpg laMiTJaoJ i«iid ooti^eiiiiiii— tlao ilr-'--
7 (Too, No, Dia.)
7. Con • dovolopor iioil advortiooKonto into tho ototo tttm ootoido tiM
without rofi«trotioo~7ne ooapony roprooontotivo it proooot io tiM ototolt
I. Can o dovolopor odvortioo in notioool oobliootioiw (i.o. wai Jtroot Jwmt"
nol, Tioo ) wittoot rofiatrotioo in yo«r •tSlo7
/-Tyis /"Tnt mm nhtt oxscuoMn
'-^ '^ <yo« w/ Docio.)
f . Can • dovolopor oliooo <«oeh •• oaing • MMt lino) odvortiOMWito into tiM
•toto froM ootaido tlio atato vithoot rogiatration (no Bowpinf roproooatotivo
ia proaont in tha atata)?
10. Do you prohibit or lioit tho offoring of gifta, prisoo, vooatioo oorti-
f icataa or otkor aioilar incontivos to proapoctivo pvrohaooro?
/"7»rohibit /"Tygs /"7i to
2^iadt J^VW 27*10
II. Will you aceapt a cartified copy of a davalopar'a affaetivo OXLfll/IIID
Statoaont of Rooord and Property Roport aa a aubatituto far tlM ototo *•
aubdiviaion rogistration roquirooonta?
/TTES rj^ /"TblSCRCTIOIIARY /T^ROPCTTy RBTOKT OMLy(P/E)
12. Can tha davolopor auboit an affoctiva Bxaaiption Advioory Opiaioo ia
by OZLSR/HUD in liou of a full and eoaiplata atata aubdiviaion rogiotratioat
^tt& iZ^ ^^ISCRETXOHARY
13. Can a "raaarvation", "deposit", "option* or sioilar *indioation of
intaraat* agraaoant bo uaad prior to porfoeting a rogiotratioA in yo«r ototo
if auch agraoMnt providaa both that purehaaara nay withdraw freai tho ogroo-
oont at any tioa without penalty and that all funda roooivod — "^ ^^
pent are placed in an independent truat or oeerow oooowtt?
^VeS {ywO ^^ISCRETiaURY
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EXHIBIT P
750 Welch Koid, Suite 300
Palo Alto, (A. 94304 (415) 329-1048
WESTEfM DEVELOPERS COUNOL l»
United States Senate
Select Committee on Small Business
Russell Senate Office Building
Room 424
Washington, D. C« 20510
RE: OILSR Rules and Regulations
Gentlemen:
The following comments are submitted on behalf of Western
Developers Council, an association of California land developers
and land development related companies dedicated to responsibility
in land development, and on behalf of its members and non^member
business entities, both large and small, engaged in the develop-
ment of land within California.
In 1969, when the Interstate Land Sales Full Disclosure
Act became effective, the question posed to the real estate
industry was "Can we afford to not protect the vacant lot
purchaser from fraud and misrepresentation perpetrated by
the irresponsible land developer?". Today, the question is
"Can we afford all this protection?".
In California, we have watched the law expand to preempt
State rights and to impose its filing requirements on small
developers never originally contemplated to be under the purview
of the Act for what seems to be the pure joy of expansion and
imposition.
Effective January 1, 1975, despite the protestations of
the State of California Department of Real Estate, this association,
and the real estate industry. Section 1710.26 of Part 1710, Title
24, was amended to provide that no initial filings filed with
and accepted by any State would be accepted as meeting the require-
ments of OILSR. Previously, materials filed with and accepted by
California, both for initial filings and amendments and consoli-
dations, had been acceptable to OILSR. This amendment was adopted
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750 Welch Ro.id, Suit* 300
Palo Alto, (A. 94304 (415) 329-1048 ^^
WESTEfM DEVELOPERS COUNCIL I l Of w i i ww e er . ju if e m ■o o wm h w toi c o wr t m i i » H i ut m i ^%
Page Two
notwithstanding the fact that the substantive requirements of
the California Department of Real Estate for issuance of a
California Subdivision Public Report far exceeded the full
disclosure requirements of OILSR in providing protection of
the lot purchaser. Only after major concessions were made
by the California DRE in the format and content of its Public
Reports were initial filings made with California reinstated,
on December 5, 1975, as federally acceptable.
As part of its concessions, California agreed that all
Public Reports for subdivisions which were required to be
filed with OILSR, whether initial filings or amendments would
be in the new format and contain the disclosures required by
OILSR. However, due to a lack of consistency among OiLSR
examiners as to what constitutes an acceptable disclosure in a
California Public Report, and a lack of cooperation between
OILSR and the State, the developer has on many occasions been
faced with nitpicking of disclosures, rejection of Public Reports
for minor deficiencies in disclosures, resultant delays excessive
documentation, and added costs involved in satisfying OILSR
directly or by re-2Uiiendment of the State Public Report.
At tiroes it would seem that the success or failure of a
developer is dependent upon the whim of the OILSR examiner.
As a case on point, a material amendment was recently submitted
to OTLSH after acceptance by the California DRE. As review of
the material was not completed until the 30-day examination
period had nearly expired, the examiner sent out a Notice of
Suspension requesting additional information, rather than sulking
such request by telephone as he had initially agreed to do.
An explanation and additional documentation were sent to the
examiner only to be met by further repeated delay in the review
process even though the material submitted would have required
not more than one hour of review time.
What do these delays, rejections and requests for additional
documents mean to the small developer? They mean escalating
holding costs, added legal, accounting and consultant fees, loss
of sales personnel, loss of potential sales and in many cases
the cost of refiling with the DRE which includes both paysMnt
of additional filing fees and the costs inherent in reprocessing.
It is not unusual for these costs to be in the tens of thousands
of dollars. Now, due to a recent OILSR policy decision, the
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750 Italeh Rond, Suit* 300
Palo Alto, CA. 94304 (415) 329-1048
WESTBW DEVELOPERS COUNCIL liw f IW S i mt r . iU ll l t» MLWiW I U. UUJ^. WH4 ff T q>»y.llH ^jj^
Page Three
developer also faces the added frustration of being unable to
even obtain a status report by telephone.
hs to the matter of the imposition of filing requirements
on small developers, during the past year OILSR has had an
investigative task force inspecting projects throughout
California. Now the results of that investigation are being
experienced as numerous developers of small projects are
receiving notices that they are subject to the jurisdiction
of OILSR. Who are these developers over whom OILSR has chosen
to exercise jurisdiction? Among them are the following:
a. A small developer who developed a subdivision of
20 lots, all of which were sold out 2 to 3 years ago, and
who has now developed another subdivision of 40 lots. OILSR
contends there is a common promotional plan to sell 50 or
more lots.
b. A small developer who presently has 30 lots all
of which are over 5 acres in size and therefore exempt
from registration. The OILSR investigation disclosed
that in the developer's previous subdivision, located
approximately 20 miles from the present subdivision, and
also consisting of approximately 30 lots all of which
were supposedly 5 acres or more in size and all of which
were sold out about 3 years ago, 2 lots were fractionally
under 5 acres.
c. At least 5 developers of small subdivisions within
city limits, on the basis of over 50 lots, when the developers
would not agree to sell not more than 20% of the lots as
vacant lots.
What does it cost a small developer to file with OILSR?
Depending upon how much of the work the developer does, it may
cost from $10,000 to $50,000 per filing. This includes account-
ing costs that a small developer would not otherwise incur, such
as costs for audited statements and budget projections, engineer-
ing and legal fees, title costs, and the innumerable costs incurred
in assembling the necessary information.
In the final analysis, who suffers and who benefits from
the all-encompassing protection of OILSR? The developer of
course suffers. But so does the public - in the cost of the
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314
750 Utleh Road, Suite 300
Palo Alto, (.A. 94304 (415) 329-1048
WESTBM DEVELOPERS COUNCIL uu/ tf iw Bimt l . SUl l t m WLMWt i iu. tauf . W iw t t W I < t
Page Pour
property which must be increased to cover the costs inposed on
the developer. Who benefits? That is less easily an s w e red »
and perhaps can only be answered by cost effectiveness studies.
There comes a point in tine where we reach what econosdsts
call the point of diminishing return. I believe we have reached
that point and exceeded it by far in the matter of 0IL8R regula-
tion.
Sincerely,
^/Jc
S. M. KARSH
President
skKjC-am
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315
Box 1006
Ulw iMbdU. Cdilomk
July 25. 1978
Rules Docket Clerk
Office of the Secretary of HUO
Room 5216
451 - 7th St. . S.M.
Washington, D. C. 20410
Dear Sir:
Since 1964 we have developed and almost completely sold 517 lots; there
are no partners or stockholders involved in any of our activities. We
paid cash for all Improvenients and we bonded ourselves to the county and
state to assure completion.
All advertising snd promotional means were confined to the State of
California. The 4 or 5 lots we did sell to California non-residents were
visitors from other states vUUIf^^ frfehds and/or relatives and thay
wsre given a complete vliual tour of the property. In fact lOOt of all
buyers see the property before buying.
There were several ways In which our tracts could have been exempted, two
of which are as follows:
1. Exemption because we had less than 300 lots, but because of
some additional land I had which I might possibly develop.
Mr. McDowell, Acting Dir. of OILSR,'Ttnes he definitely would
not exempt.
2, Statutory' exemption - If land Is free and clear, which ours was,
but portions of the mineral rights are owned by the Federal
Government, HUD will automatically deny It on these grounds.
We offere<] to have HUO come and Inspec t the tracts and go ov«r out hooks
If they wnted to. but under no clrcumitance* would t^ey consider tn
eicci^ptlon even though It might appear that we are reputable developers.
We have sol<l all lots at a reasonable price and all have appreciated
from 25X to 75X and no more than a 10S comnlsslon has ever been paid to
any realtor.
We were notified, after all arguments were presented, that they
DENIED each of our 3 tracts.
We feel that small developers, such as we are, who do not highly
advertise, do not pay high sales comnlsslons, do not sell to out-of-
state residents but only to people who actually see the property,
should be exempt and should not come under the Act.
Sincerely.
. SOUTHLAKE ESTATES
Mb. Joughin, Owner.
33-718 O - 78 - 21
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316
Mr. AuCoiN. Thank you, Mr. Belin. I appreciate your cooperation.
Mr. Roberts, you are serving as vice chairman of the legislative com-
mittee of the National Association of Realtors, and are accompanied
by Al Abrahams.
Do you intend to provide testimony, as well as Mr. Abrahams t
Mr. Roberts. No, I will be providing testimony, Mr. Chairman.
Mr. AuCoix. I welcome you to the subcommittee and look forward
to your testimony.
STATEHENT OF DAVID D. BOBEBTS, VICE CHAIBHAN, BEALTOBS
LEGISLATIVE COMMITTEE, NATIONAL ASSOCIATION OF BEAL-
TOBS, ACCOMPANIED B7 ALBEBT E. ABBAHAMS, STAFF VICE
PBESIDENT
Mr. Roberts. I will be brief. I have deleted a considerable propor-
tion of my prepared remarks, in the interests of time.
My name is David D. Roberts. I am a I'ealtor in Mobile, Ala., and
vice chairman of the Realtors Legislative Committee of the National
Association of Realtors.
Accompanying me today is Albert E. Abrahams, staff vice president
of the government affairs office of our association.
Real estate brokerage, appraisal, management and other services
have historically been provided by small enterprises. The 1974 Bureau
of Census report on county business patterns shows that 91 percent of
real estate establishments have less than 9 persons, and 80 percent have
less than 4 persons. Moreover, the best estimates available to the in-
dustry indicate that less than 20 percent of the business is concentrated
in the 9 percent of the industry having more than 9 persons.
Our own figures show that nearly 80 percent of the National Asso-
ciation of Realtors is truly made up of small businessmen that are in-
volved in numerous and varied activities, one of which is land
development.
We are opposed to the burdensome and complicated rules and ref-
lations promulgated by OILSR which make interstate land sales regis-
tration extremely difficult, expensive, time-consuming, and virtually
impossible without costly legal, engineering, geological, and account-
ing help.
Furthermore, we are opposed to the manner in which OILSR has ex-
tended the act to cover purely intrastate developments and the small,
local land developer coverage never intended by Congress.
The National Association of Realtors has testified several times this
year before both Houses of Congress on how the administration of the
act by OILSR adversely effects both the land sales industry and con-
sumers alike — and especially consumers.
This association strongly endorses Senator Nelson's amendments
to the act, now section 715 of Senate-passed S. 3084, as a means of
focusing OILSR's finite resources on the true interstate con artist,
and as a means of limiting OILSR's assumed jurisdiction over intra-
state and locally promoted subdivisions — those subdivisions never
contemplated by Congress to be regulated.
OILSR has also testified on this matter this year, and stated before
the Senate Small Business Committee, that, quote: "We also have
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looked to the legislative history of the act for ^idance in jurisdic-
tional questions" in reflating intrastate subdivision sales.
The National Association of Realtors has also researched the com-
mittee reports, the conference report, the floor debate, and the act
itself, and finds no justification to support OILSR's regulatory in-
trusion into the sale of intrastate or locally promoted land sales
transactions.
For the most part, the proposed regulations continue to ignore the
fact tlwtt intrastate and locally promoted subdivisions were never
intended by Congress to fall within the purview of the act.
Section 715 of Senate bill 3084, the Nelson provisions of the Senate-
passed version of the 1978 Housing and Community Development
Act amendments, would let OILSR know just what Con^^ in-
tended with resi^ct to intrastate sales when the act was originally
enacted.
Section 715 would require OILSR to administer the act as it was
originally envisioned by Congress by codifying exemptions from
registration imder the act for activities substantially conducted
intrastate.
Specifically, the Nelson amendments would exempt developers who
sell substantially all their lots to purchasers residing in the State
where the land is located. A developer may sell up to the greater of
five lots or 5 percent of lots sold during a calendar year to out-of -State
purchasers and still retain the exemption if the following conditions
are met :
First, the lot is free and clear of all encumbrances and liens;
second, the purchaser has personally inspected the lot; and third, the
seller submits himself to the jurisdiction of the courts of the pur-
chaser's home State.
The second exemption applies to the sale of lots to persons residing
within 100 miles of the lots being purchased, but who happen to
reside in another State.
It simply gives the opportunity to the developer who lives in the
environs of one or more additional States to use a normal market
area in the same way that a developer selling lots in a strictly intra-
state setting would have.
In order to qualify under the 100-mile exemption, the developer
must also meet the three conditions set out above and, in addition,
must file a statement with HUD affirming that the conditions have
been met
Mr. Chairman, let me say that the Nelson provisions in S. 3084 do
not attempt to rewrite or significantly amend the Interstate Land
Sales Full Disclosure Act, as does the Minish bill H.K 12574.
We have brought here today a brief comparison of the two bills
that has already been distributed to subcommittee members and you
will note from an examination of this comparison that there are very,
very few, if any, conflicts between what the provisions are in the
Nelson bill and the thrust of the Nelson bill, as opposed to the thrust
of the Minish bill.
The Nelson provisions carry out the basic intent of the law that
was enacted in 1968, and no more. .These provisions are simple, and
self-executing, and yet at the same time they provide the consumer
with all of the protections against fraud now found in the act.
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Let me state further that this association has no objection to re-
writing the act in order to get at the con artists who are fleecing the
American public. However, the small, honest developer needs relief
now, and that is why we urge this subcommittee to accept section 716
of S. 3084 in conference.
The Nelson provisions do nothing to detract from OILSR^s fraud
jurisdiction over anyone engaging in fraudulent or deceptive land
sales practices, be they interstate or intrastate.
Under the current administration of the act, OILSR views itself
as the "approver" of all subdivision development in this country.
OILSR views itself as the "protector" of every potential lot pur-
chaser in the United States.
While that is admirable, it is an impossible feat. And by attempting
the impossible, OILSR is doing very little to protect the consumer
most vulnerable to interstate land sales fraud.
The administration has requested additional enfo rcemen t powers
for OILSR; however, this association contends that HUD now has
adequate enforcement authority to prevent and prosecute fraud in
interstate land sales transactions. But HUD's authority has not been
used to prosecute violators, because OILSR has been too preoccupied
regulating those never intended to be regulated.
Under the current act, HUD is given powers to investi|2[ate, enjoin,
and prosecute any violations of the act. In addition, section 1404(2)
contains one of the broadest fraud provisions found in the United
States Code.
Even more striking, when analyzing the question of whether HUD's
record in this area is due to inadequate powers or inadequate admin-
istration, is that under the act, HUD has exactly the same enforce-
ment powers as the Securities and Exchange Commission has under
the Securities Act of 1988.
The Commission, usin^ the same powers as HUD, has frequently
prosecuted sale of stock in violation of the registration procedures,
or in a fraudulent or misleading manner; has, under the courts' equity
jurisdiction, asked for receivers for companies perpetrating a nuud
on its shareholders; and obtained disgorgment of fraudulenUy
^ined profits for investors and in oases of particularly abusive oon-
auct; and has helped the Department of Ju^ice to criminally punish
perpetrators.
Again, this has been done with the same tools HUD currently has,
the same access into the courts, and the same investigatory and subpena
powers.
I personally heard the testimony of a group of consumers before
the Subcommittee on Greneral Oversight and Renegotiation on April 11,
1978, on how they were victims of alled^ed fraudulent land sales in
the Pocono Mountain area of Pennsylvania. We are very sympathetic
to their grievances, as our membership is to any fraud victim.
It is our understanding that those consumers were involved in sub-
divisions which were registered with OILSR. That being the case, we
ask: Why did not OII-/SR do something about such a fraud-prone
development ^rea to verify completion of prcmiised facilities? And
why did not OILSR utilize its existing enforcement authority to pros-
ecute those violators ?
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319
This association, again, supports prosecution of all land sales con
artists to the fuUest extent authorized by the law.
And incidentally, Mr. Chairman, before I conclude — ^let me make
this additional statement, which is not in our prepared statement.
Even though it is not in our prepared statement, we want to go on
record as being in full support oi the amendment offered by my Senator
from Alabama, Senator Sparkman, exempting developments which are
already regulated by local government agencies.
Again, we appreciate this opportunity to express our views on this
important matter, and that concludes my testimony.
I Text resumes on p. 437.]
[Mr. Roberts' prepared statement, on behalf of the National Associa-
tion of Realtors, appears with the following additional material : A
comparison of Nelson provisions of S. 3084 with Minish proposals of
H.R. 12574 ; a statement of Albert E. Abrahams, staff vice president.
Government Affairs Department, before Senate Committee on Bank-
ing, Housing and Urban Affairs, May 26, 1978; and a statement of
Mr. Roberts before House Committee on Banking, Finance and Urban
Affairs, April 11, 1978, with attached correspondence.]
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320
m
NATIONAL ASSOCIATION OF REALTORS
Tom Grant Jr. H. Jackson Ponttus
idani EmmuIm Vloa PiMidOTi
Alboft E. Abrahams, 8M Vios PiMidOTi
REALTOR Govw»mant AfWrs
92S 15lh SIraM. WasNnglon. O.C. 20006
Talaphona 202 637 6800
STATBKEMT OF
DAVID D. ROBERTS
VICE CHAIRHAM OF THE REALTOKS* LEGISLATIVE OOIMITTEE
NATIONAL ASSOCIATION OF REALTORS*
Before the
House Coondttee on Benking, Finance and Urban Affairs
Subcooalttee on Housing and Conaunlty Developaent
HEARINGS ON THE INTERSTATE LAND SALES
FULL DISCLOSURE ACT AND LEGISLATIVE
PROPOSALS TO AMEND THE ACT
August 2, 1978
The NATIONAL ASSOCIATION OF REALTORS* Is co^>rlsed of sore then
1,712 local boards of REALTORS* located In every state of the Union, the
District of ColM^ia and Puerto Rico. Coabined aeabership of these boards
is in excess of 600,000 persons actively engaged in sales, brokerage, ■enagMent,
counseling, and appraisal of residential, coaaercial, industrial, recreational
and fam real estate. The Association has the largest aeaibership of any
association in the U.S. concerned with all facets of the real estate industry.
Principal. officers include: Toa Grant, Jr., Preaident, Tulsa, Oklahoaa;
Donald I. Hovde, First Vice President, Madison, Visconsin; and H. Jackson
Pontius, Executive Vice President. Headquarters of the Association are
at 430 North Michigan Avenue, Chicago, Illinois 60611. The Vashington
office is located at 925 Fifteenth Street, N.V., Uashington, D.C. 20005.
Telephone 202/637-6800.
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My aaae is David D. Roberts of Mobile, AlebaM. I aa a BEALIOB*
and the Vice Chairnan of the REALTORS^ Legislative Coomittee of the
NATIONAL ASSOCIATION OF REALTORS*. Accoiq>anyiiig ae today is Albert
E. Abrahams, Staff Vice President of the Government Affairs Department
of our Association.
The NATIONAL ASSOCIATION OF REALTORS* is pleased that you have called
this hearing to receive testimony on the Interstate Land Sales Full
Disclosure Act (ILSFDA) , the actions of the Department of Housing and Urban
Development, Of f ice of Interstate Land Sales Registration (OILSR) ,
in JidmiD is taring that Act, and legislative proposals to amend the Act.
The NATIONAL ASSOCIATION OF REALTORS* is comprised of 50 state
Associations, and more than 1,712 local boards of REALTORS* located
in every state of the Union, the District of Columbia, and Puerto Rico.
Combined membership of these boards is in excess of 600,000 persons actively
engaged in sales, brokerage, management, counseling, and appraisal of
residential, commercial, industrial, recreational, and farm real
estate. The activities of the Association's membership involve all
aspects of the real estate industry, such as mortgage banking, home
building, conmercial and residential real estate development, including
development, construction and sales of condominiums. The Association haa
the largest membership of any association in the United States concerned
with all facets of the real estate industry.
Real estate brokerage, appraisal, management and other services
have historically been provided by small enterprises. The 197A Bureau of
Census report on County Business Patterns shows that 91Z of real estate
establishments have less than nine persons and 80Z have less than four.
Moreover, the best estimates available to the industry indicate that
less than 20% of the business is concentrated in the 9X of the Industry
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having aore tlm 9 persons. Our own figuros sliow that nearly 801 of
tha MATIOMAL ASSOCIATION OF RSALTORS« la truly aada up of omII bualDasSMn
that ara involved In nuneroua and varied actlvltiea, one of which la
land developaent.
This Association generally supported enactaant of the aiaple
dladosure requireaents of the Interstate Land Sales Full Disclosure
Act to protect consuaers froa fraudulent and deceptive Interstate land
aales tranaactiona, especially Intaratate sales where purchasers had no
opportunity to inspect or exaalne the land prior to purchaalng and no way
of knowing whether the developer waa financially reaponslble for fulfilling
coaaltaents proposed with respect to developing the land.
We are, however, opposed to the burdensoae and co^>llcated rules
and regulations proaulgated by OILSR which aake Interstate land aales
registration extreaely difficult, expensive, tlae consualng and virtually
iapossible without costly legal, engineering, geological and accounting
help. Further, we are opposed to the aanner in which OILSR haa extended
the Act to cover purely intra-state developaents and the saall local land
developer, coverage never intended by Congress.
The NATIONAL ASSOCIATION OF REALTORS* haa test if led several tlaea
this year before both Houses of Congress on how the adalnistratlon of the
ILSFDA by OILSR adversely effects both the land sales industry and
consumers alike. This Association strongly endorses Senator Nelson's
aaendaents to the Act, now Section 715 of Senate-passed S. 3084, as
a aeans of focusing OILSR* s finite resources on the true Interstate coo-
artist And •« a Mans of liaiting OILSR' s aasuaed Jurisdiction over
intra-state and locally proaoted subdivisions — those subdivisions
never conteaplated by Congress to be regulated.
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OILSR has also tastlfUd on this asttsr this yosr and statad bafora
tha Sanata Saall Buainaaa CoHilttaa that "Wa also have lookad to tha
legislative history of tha Act for guidance in Jurisdictional quaatlona*'
in regulating Intranstate aubdlvlslon salaa. We have reaearchad the
CoHilttee reports, tha Conference Report, the floor debate and tha Act
itaalf and find no Juitiflcatioa to support OILSR*s regulatory intrualon
into the aala of intranstate or locally promoted land aalaa tranaactions.
On June 1, 1978 OILSR publiahad in tha Federal Register revised
rules and regulations to ImpleMnt tha ILSFDA. Before publication OILSR
proniaed aimplification of the registration process and a reduction
of the paperwork burdens now laposed by OILSR on those seeking to conply
with the Act. That is sinply not the case with the proposed regulation.
While it appeara that the revised rules and regulationa are better organized
in format and readibility, overall there is little re4l»ction of the oneroua
disclosure requirements and paperwork burdena in the proposed regulations. It
appears that the cost of compliance has not been reduced to any meaningful
extent. For example, just the simple proposed provision to require additional
red-ink consumer warnings throughout the property report alone would add
administrative headaches and additional cost to the already harrassed
developer and without any additional meaningful protection for the consumer.
For the moat part, the proposed regulationa continue to ignore the
fact that intranstate and locally promoted aubdivisions were never
intended by Congress to fall within the purview of the Act. To illustrate
how OILSR continues to ignore the law, the proposed regulations would
require a 14 day purchaser' a right to revocation aa a condition for
two of OILSR' s proposed regulatory exemptions. This Association seriously
questions under what authority OILSR is acting since Section 1404(b) of the
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Statute provides for a 3 day revocation period. OILSR is sMsre of this
statutory requirenent and, in fact, as a part of the Adadnistratioa^s 1978
Housing and Conmunity Development legislative package, has requested
a statutory increase to a 14 day recission period. By regulation OILSR
is again attempting to legislate by administrative fiat, just es it has
in its assumed Jurisdiction over intranstate land transactions. Congress
must take action to rein OILSR* s runaway administrative authority.
Section 715 of S. 308A, the Nelson provisions* -of the
Senate passed version of the 1978 Housing and Conmunity Development Act
amendments would let OILSR know Just what Congress intended with respect
to intranstate land sales when the Act was originally enacted. Section 715
would require OILSR to administer the ILSFDA as it was originally envisioned by
Congress by codifying exemptions from registration under the ILSFDA
for activities substantially conducted intranstate. Specifically, the
Nelson amendments would exempt developers who sell substantially all
their lots to purchasers residing in the state vhere the land ia located.
A developer may sell up to the greater of 5 lots or 5Z.of lots sold
during a calendar year to out of state purchasers and still retain this
exemption if the following conditions are met:
(1) The lot is free and clear of all encumbrances and liens,
(2) The purchaser has personally inspected the lot, and
(3) The seller submits himself to the Jurisdiction of the
courts of the purchaser's home state.
The second exemption applies to the sale of lots to persons residing
within 100 miles of the lots being purchased but who happen to reside in
another state. It simply gives the opportunity to the developer who
lives in the environs of one or more additional states to use a normal
product area in the same way that a developer selling lots in a strictly
intra-state setting would have. In order to qualify under the 100 mile
exemption, the developer must also meet the three conditions
set out above and, in addition, must file a statement with HUD affirming
that the conditions have been met.
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325
Mr. Chairman, let mm say that tha Halsoo provialona in S. 3084 do not atteaq>t
to re-write or significantly aaend the Interstate Land Sales Full Disclosure
Act, as do the Minish bill, H.R. 12574, and the Administration request
contained in H.R. 11265. The Nelson provisions carry out the basic intent
of the lav as it vas enacted in 1968 and no more. These provisions are
simple and self -executing and yet at the same time they provide the consumer
with all of the protection against fraud now found in the ILSFDA. The
Nelson provisions do not require a battery of lawyers to administer nor do
they require volumes of regulations to put them into effect.
I might Just add parenthetically that perhaps one of the reasons there
is objection to the Nelson amendments is that they are simple; simplicity
does not seem to be readily understood in this overconplex world in vrhich
we live.
The Nelson provisions give the smaller developer a chance to remain in
existence while retaining OILSR Jurisdiction over that developer. As
Just one example, there have been any number of criticism made of the 100
mile radius exemption. For years. Federal Savings and Loan Associations
have been prohibited by law from making loans more than 100 miles from the
S&L's main office. As far as we are able to determine this self-executing
statutory requirement on S&L's, has never posed any great difficulty
for the Home Loan Bank Board in carrying out its regulatory authority
over those institutions.
Let me state further, this Association has no objection to re-writing the
ILSFDA in order to get at the minority of those con-artist that are fleecing
the American public. However, the small honest developer needs relief
now and that is why we urge this Committee to accept Section 715 of S. 3084
in conference.
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328
Pennsylvania. Uc arc very syapathatlc to their Kti evmcee as omt
■eabershlp la to any fraud vlctla. It la our onderstandlag tliat
thoae conauMara vera Involved In aubdlvialona which were regiatered
with OILSR. That being the ceae, we eak vhy did not 0IL8R do
aoaathlng about such a fraud prone developaent area to verify
coapletlon of proalaed fadlltlea and vhy did not OILS! otllise
Its existing enforceaent authority to proaecute thoee violatorat
Aa I have already auggeated, OILSR takea the attitude that if
It reglatera all subdivision developaant In the United Statea,
fraudulent land aalea practlcea will be ellalnated. 8o«aver» ea
ahown by the Pocooo Mountain caae, regiatratloa with HDD In aad
of Itaelf doea not prevent coasunera fros loalng their laveataaata.
In fact. In caaea auch aa thla, only quick and coovlaclng
proaecutloa of fraud can hope to atop or at leaat m< »«<■<*• counmttT
loaaea. Viewed In thla- perspective, the lelaon ■■■■tif lian do not
deprive the conauBer of any of the atroog fraud protectiooa provided
by the law today. It la not the fault of the law that proaecutloo
failed: the failure caae froa the Inability of the hvreaocrata to
exerdae their power end carry through with the proaecwtioe.
Only through the cooadcntloua cnforccaeat of the Act* a civil
and crislnal fraud provlalona can frandulcnt aad deceptive lead
sales practices be eradicated. OILSK now has adequate eaforcaamt
powers and it la tlae that those pcwers be effectively utilised.
This Asacclatlon supp«?rts prosecution of all Land aalea
coo-art lets to the fullest extent autborlxed by Law.
As stated, this Assoc iat ice teat if led tefore on the ILSfttA and
the acticos c>f the ST? Office of Interstate Land Sales leglscntioo
la a±aiaist«riag the J^t. 1 wwtli like to cffer for the record thia
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m
NATIONAL ASSOCIATION OF REALTORS
Tom Qrwt. Jr. H. Jwhson P cnBMt
•idsni EMGuCtfc Vim PimMim
ABMrt €. Abrahamt. Siif VIM PiMidwi
REALTOR 92S iSlh SliMt, WfetNnglon. O.C. 20006
T«lipho(w202 837 6800
STATBHEMT OF
ALBERT E. ABIAHAMS
STAFF VICE PRBSIDEIIT
GOVERlMBirr AFFAIRS DEFAR1MEMT
NATIOMAL ASSOCIATION OF REALTORS*
B«for« th«
Senate Coialttee on Banking, Houalng and Urb«n Affalra
OVERSIGHT HEARINGS OH INTERSTATE LAND SALES
May 26, 1978
The NATIONAL ASSOCIATION OF REALTORS* la co^rlacd of aora than 1,712 local
boarda of REALTORS* located In every State of the Union, the Dlatrlct of Coluabia and
Puerto Rico. Conblned Beaberahlp of theae boarda la In exceaa of 600,000 persons
actively engaged In aalea, brokerage, ■anageaent, counaellng, and appraisal of
residential, coaBercial, Induatrlal, recreational and fern real aetata. The Association
haa the largeat Beaberahlp of any aaaociatlon in the U.S. concerned with all faceta
of the real eatate Induatry. Principal officera Include: Ton Grent, Jr., President
Tulsa, Oklahoma; Donald I. Bovde, Flrat Vice Preaident, Nadlaon, Ulaconain; and
H. Jackson Pontlua, Executive Vice Preaident. Headquartera of the Association are at
430 North Michigan Avenue, Chicago, Illlnola 60611. The Washington office is located
at 925 15th Street, N.V., Waahlngton, D.C. 20005. Telephone 202/637-6800.
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Hj iMM is Albert B. AbralMM «ad I «■ Staff Vice PrMidmt of BATIOHAL A8S0CIATIGM
OP RBALTOtS, CCTvri— nt Affairs Dapartant. AccoHpaajlng m today la Dudley L. 0*Maal,Jr.,
of the staff of tha Co vma ant Affairs OapartaMit of our Association.
Tha HATIOMAL ASSOCIATIGM OF RBALTORM la coaprlaad of SO Stata AaaocUtlona, and
■ore than 1,712 local boarda of RBALTORM located In every State of the Onion, the
Dlatrlct of Coluabla and Puerto Rico. Coeblned nenbershlp of theae boarda la nearly
600,000 peraona actively engaged In aalea, brokerage, tsanagaaant, counaellng, and
appralaal of realdentlal, coaBsrclal, Industrial, recreational, and fern real aetata.
The actlvltlea of the Aaaoclatlon'a asaberehlp Involve ell aapecta of the raal
eatate Induatry, such aa nortgage banking, hoaa building, coaBsrclal and realdentlal
real estate developaent , Including developaent, conatructlon and aalea of condoalnluaa.
The Aasoclatlon haa the largeat asabershlp of any aaaoclatlon In the United Statea
concerned with all facets of the rsal eatate Induatry.
While I do not wlah to leave the lapreaalon that every asaber of our Aaaoclatlon
la Involved In land developaant, nany REALTORS* are Involved In aelllng hoaMltea In
their own cosaunltlea and Statea, and are deeply concerned ebout the Interatate Lend
Salea F^ll Dlaclosure Act (IL8PDA) and the edalnlatratlon of that Act by the Office
of Interstate Land Salea Reglatratlon (OILSR) .
The HATIOMAL ASSOCIATION OP REALTORS* would like to take thla opportunity to
conpllaent this Cossd-ttee for including the provisions of S. 2716 In S. 3084, the
Housing snd Coammlty Developaant Act Aaendnants of 1978.
Tou have struck a rsallstlc blow against assuaed adalnlatratlve authority,
regulations, paperwork and bureaucratic red-tape which aerloualy lapede and fruatrate
the saall buslnessnan.
It la not Just a President of the United States, Mr. Chalman, who nay uaurp
authority not expressly granted hla by the Constitution and by atatute. The Pederal
bureaucrat has done his own fair share of that, sway froa the llaellght of public
attention, burrowing deep in the lapcnetrable Pederal Reglatcr.
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Hmm fnMtratloMsrc »$gnmfd cvm worm iiImb maall liiiliiii—i mn >rmi|Pir vater
• h»mwj IMsral haod not by Controssienal lat«at, hat by nlAtiirtly i«>rH1i< ■ialBliiriltw
lAtti>T«utlMi* of th« Um. CoBgroM, M wtll M FTMidoDt CsTtsr, 1« OS tM r«G«vi
with tho oxprcoood dooirc to lift this Fodorol yoko fros tho mall \nMiiM9mmm la
portlcttUr. By lacludlag tho provision of tho Moloon bill la S. 9064, this Coandttoo
of foro tho Coagrooo tho opportimlty to troaolato nordo lato octloo. Warn aoay othor
tlaoo hovo you doao thot this yoor, vlth • chaaco to aoko yovr actioa rWlly otlekT
Wa ap^oclato this oddltlonsl opportualty to proooat tootlaoay oa tho ZLSTIMk oai
Soaator MoUoa's bill, S. 2716, ovoa thoogh It la ovr hopo that thia hasrlag
vlll not boeoM s woapon fsshloood to rcjoct at a lator tlas irtMt tho OosBittaa baa
alroady doao In ouch oa ovomholalat aad poaltlvo faahloa.
ma aaad for roglstratloa aad laforaatloa on proapaeUva lataratato land aalaa
traaaactlooo aaa justlflad whoa tho Act croatlag OZLSR paaaad la 19M. It oppllaa todoy
aa nail. Tho orlglaal atatato appllad to tho lagally oaprotaetad raaidaat of om atata
1*0, far rMovad froa tha acaaa of a pro ap o c tl^o load pvrchaaa, aaa aapcotaecad by tha
laws of hia or bar ova stata. Maqr of tha lota ianvalvad «bm raoraatlaaal aad niiii
la eharactor, thoo addlag to tha petaatlal hardship for tha paraoa la daafsr of baiat
dafravdad. Accordiagly, tho lAIKMAL AggOCUnOH GV UALXOBta s a pportad tha erigiaal
purpoooo of tho 19M Act. Ho coatlauo to do so.
As our vltaaoooa havo told tho Booss of lapraaoatatlTos, aa aro villiat to coaaidar
holpful changss that doal with roal fraud In Intarststo trsaaactloaa.
iut without say llaitatlon on HDD's llaitloss horlsoaa, no offaetlwa oaforcoaaat
eaa caault today abort of sa sray of oaforcoasat officials waarlag fadaral badysa aad
saakiag to protact avary tlay trsaaactioa la tho SO otato^ thara la aad eaa ba ao
offactivo asana of oaforclag tho aoro coaplos aad difficult latarotata caaaa.
HDD's rasourcos today caaaot haadlo tho hard-tn aonsgs latarstata fraad caaaa.
HDD could do hotter if thoy Just Uft tho latr»*atata fiald to tte atatac.
Tho HATKXAL ASgOCIATIGM Of RBALTOKM addrassad thaaa aattars la dataU aad la
dopth whoa wa sppasrod boforc this fnaalttas In coaaactloa with tho ROD sathorisatioa
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UMXmUtlam for f!Ueal 1979 m Mtfch U. 1978. Ili MspMCfeUy x«f«r tte OoMdttM
CO our vrlttoa otacoMOt oad oddoada oubalccod ot thot tlm.
Tho IUID4 which to odBliilotorod hy tho BOD Of f leo of latorototo Uad Siaoo
loglocrotioo (OlUt) «M lalclally oaaetod la 1968 to protaet cooouanra froa fraad-
uloat aad dacaptivc lataratata laad aalaa traaaactloaa.
Tha aala objactivaa of cha Act warat
1. To protaet cooaoaara purchaolng laad axclualiraly la lataratata coaaarea
hy raqairlng that aach porchaaar ba provldad vlth a dlaeloaora atataaaat ratndlag
tha paoparty; aad
2. To allow cooauMra who aay hava lagal clalao agalaat out of atata davalopara to
•aa tha davalopar la tha coaauaara'a raaldaat atata.
Coagraaa racopilsad that thaaa two coacama vara aot ralavoat la puraly latra-atata
aalaa of lota aad accordingly graotad BOD authority to axaapt thoaa aalaa which
wara llaJrad la aatura.
Addltloaally. tha aala or laaaa of raal aatata lAlch la fraa aad claar of all
aacuabraacaa aad which tha purchaaar or hla or har apouaa aada a paraoaal oa-^lta
laapactlon of tha proparty to ba purehaaad la corraatly axaapt froa tha Act* a
raglatratlon raqulroMnta. It waa ballarad by tha draftara of tha Act that tha on-alte
laapactloa aad tha fraa and claar title wara aofficlaat la provldiag adaquata laforaatlon
aad protactlon for tha buyer.
Theae aseaptlona ware to pemlt nail davelopara aalllag lota to their local
dlaatele to be unlapedad by aubataatlve dlacloaura requlranenta- either becauae their
offering waa of a Halted nature or bacauaa needed Inforaatloa could be dlacemed
through peraonal on-alte Inapactlona. In eaaance, thaaa exaaptlona ware to allow
local aalaa oparatlona, thoae never Intended to be regulated, to fall outalda tha
raglatratlon and reporting Jurladlctlon of OILSR.
In the 10 yeara aince enactaant, however, there haa been little. If aay, Congreaaional
review or overaight of the Act or of the adainiatration of tha Act by OILSK until thla
year. During that period, OILSX haa by Ita own perceived authority extended the Act to
cover all land aalea, Intra-atate tranaactlona aa well aa inter atate . In fact, OILSK
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Appears to ▼!«« its role as a Federal licenaing bvrea« for all lead davelofamt. Ikim
aaeuMOd Jurisdiction goes far beyond the Intent of Congrasa and aevaralj aai advaraaly
effects those snail land developers never Intended to be coverad hy the Act. Ihaaa aaall
developers are slaply being forced out of business, or they are holding thair lota
off Che aarket, or they are narketlng their lota to honsbulldera only to avoid this
regulatory labyrinth. Such actions adversely affect the conauaer by deriving kia
Che right of choice or by driving up the coat of lota without any valna being a d ded.
After hearings and careful consideration earlier thla year of OlLSl'a actiona
Senator Nelson. Chalrnan of the Select Cossd-ttee on Snail Buainaaa, on March 10
Introduced a bill, S.2716, to anend the ILSFDA.
Generally, the Nelson bill would require OILSl to adniniatar the ILSPDA aa it waa
originally Intended by Congreaa by codifying eze^>tiona fron regiatration under tha
ILSFDA for activities aufaatnatially conducted Intra-atata. Specifically, tha Malaoo
ansndnents would exenpt developers who sell onba tan tiaUy all their lota to pnrch a aa r a
residing in the state where the land ia located. A developer nay sell up to tha graatar
of 5 lots or 5Z of lots sold during a calendar year to out^f^tata purchaaara and
still retsln this exenption if tha following conditions are net:
(1) The lot is free and dear of all ancuaibrancM end liana,
(2) The purchaacr haa peraonally inapactad the lot, and
(3) The seller subnlts hinself to the Jurisdiction of the courts of tha
purchaser's hone state.
The second exeaption appllea to the sale of lota to paraona raaidiag within 100
nilss of the lots being purchased but who happen to raalde in another atata.
It siaply givaa tha opportunity to the developer who livea in tha anvlrooa of am
of nor a additional statea to uae a nomal product area in tha aaaa way that a d«v«lop«r
selling lots In a strictly Intra-state setting would have. Are there protacCiona for tha
coosunsr in this exenption under the terns of the Helson saendnent •• adoptad hj
your CoiMlttee? Tou bet I The sane safeguarda without the red-tape. For, in order to
qualify under the 100 nile exeaption, the developer nuat alao aaet tha three conditiona
set out above and, in addition, nust file a stateaent with HUD affiralng that tha conditiona
have been net.
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Th« Itolsoo i— ad— nf would also provld* technical chaag«fl In th« Act In ordar
to bring aora raaaonablanaaa Into OILSK's rulaa, ragulatlona and Intarpratationa of
tha Act. For axaapla, tha aaandaanta would (1) aaka it daar that condoniniuna ara
not undar tha Act; (2) naka It daar tha tax«a "liana**, "ancunbrancaa** , and "advaraa
claiaa** do not rafar to tha U.S. Patanta or othar aiailar Federal granta or raaanrationa
which ara ainilar in affect to govarnaant'a right of aainant doaain; (3) direct OILSK
to conduct its proceedinga in coaplianca with tha Adminiatrativa Frocedurea Act; and
(4) define tha terwa "aala or leaaa** aa occurring at tha tine whan a contractual
relationahip ia created between tha developer and purchaaar, thua clearing up an area
where OILSR haa been free to uae whatever interpretation it haa found noat favorable
to ita continuing ragulationa of land aalea.
In addition, a technical aMndaant which ia aupported by the HATIOMAL ASSOCIATIOM
OF REALTORS* waa added by Senator Tower during CoHd.ttae conaideration of the Malaon
In 1974, the Act waa aaandad to exempt induatrial and coivarcial land. OILSR,
however, refuaea to parait the exeaptiona unlaaa tha land in queation ia apecifically
sonad for induatrial or coaaarcial developaent. Conaequently, any coaaarcial or
induatrial developaent property in a aunicipelity without soning authority would be
unable to qualify for thia exeaption. During Coaaittee conaideration of tha Nelaon
■aendaenta, the Tower aaandaant waa accepted to correct thia inequity.
Several aiaconceptiona have ariaen with reapect to the Malaon proviaiona. I
would like now to eddreaa thoaa aiaconceptiona in an effort to aet the record atraight.
It haa been contended that tha Melaon aaandaenta will not only exeapt local
developera, under certain conditiona, froa the regiatration requireaente of tha Act,
but, will alao exeapt thoaa developera froa the anti-fraud proviaiona of the Act.
Thia waa never the intent of Senator Melaon and thia Coaaittee in edopting
tha Melaon aaandaenta aada it clear in tha aaending language that the anti-
fraud nroviaion of the Act would apply to the Melacn exeaption.
It haa alao been contended that the Nelaon exeaptiona will create aiaunder a tending
and confuaion and will cauae adainiatrative headachea with reapect to coaputing the 100
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■lie r«dittt «seiq>tloa. The ■•Ison •xnptioM ar* siapU aai Mlf-«Meaelac aai Mvctn
only the Isaac aaount of adalnlatratlva ovcrviov. Tbaa« •xaaptlofts will not raviira
• fmm of lawjrors to interpret statutory daflaltlona mmi l angua ta iiliich la aaay caaaa
laads to Intarprctationa of aa Act oppoalta fro* that lataodad by Coagraaa. It
allalnataa tha naad for adalaiatratlva rulas and retulatlona to InplaMnt tha axaaptlana.
Tha davalopar and tha purchaser by ualag "a string snd a asp** can datacalna irtMthar
tha sxaaptloa la applicable. If tha exeaptlon la applicable, the davalcpar fUaa with
HDD advising the aale has been nsde under the ftMaptlon. And, If the davalepar falla to
conform with any of the requlrcaents of the exaaptlon he la aubjact to civil aa wall m
criminal penalties under the Act and action aay be brought either by the purchaaar, lOD,
or both.
Tha Nelson saendaents, becsuse they are siaple and salf-iapleaantlag, have baaa
described as rsising s nuaber of substsntial concama and problaaa la adalalatarlag tha
Act. Thla argument ignorea the fact that it waa never the Intent of Coagraaa that
sasll land developers wars to bs covered by the Act; yet, OlLgR refnaaa to racogpilaa
that Intent. The Nelson eaendaent now seeks to codify the exaaptloaa providad la tba
original Act so those natters ere not left to adalnlatratlva laterpatatloa, ralaa aai
regulations but aay be diacemed by an average dtlsan without raaortiat to laayaro aai
accountants.
Let ae ststs sgsln, that the Nelson saendaents ere plainly wrlttoa and aalf-
executing in order to accoapllah two valuable alaa: (1) to allow thoaa aavar lataadad
to be covered by ILSFDA to fall outside of OILgl's Jurisdiction and (2) to raaota tha
bureaucratic burden of exceasivs paperwork, coats, and deleys froate backa of
aaall buainaaaaan. The Nelaon exeaptlooa apply only to thaaa aaall haalaaaaBaa.
never intended to be regulated and not to tha typically larger lataratata davaloyara
relying on ** interstate comaerce" to proaote their subdivisions.
Considering that 53Z of all subdlvlsloas fUing with OILgK in tha laat two yaara
ware subdivisions of 100 lots or less end thet these subdlvlalona, la OZLgR'a oaa
words, "...are frsquentlT proaoted locally and are aeldoa charactarlsad by high
pressure ssles, giaaicks, aass msil solicitatiooa and **IIATS'* line oparafeloaa. thna
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iMrrantlat 1m« f«d«r«l iwrolvwMt («aphuls addad)**. it apTMrs to a* that OZLSR i»
clMTly dcvlaclng fro* Its CoBtrMsienally ■■nitifd priority of protoctlag coooianro
fro* docoptlvo and f r o tt dul o nt latorotato laad mIoo tronooeciono. IB fact, OZLSR
haa tastlf lad that "glvan tba typical eharactarlatlca of tha proaotloo of sMllar
aubdlTlslons and tha fact that tha nuAar of coaouMra Imrolvad la llaltad, urn hallava
that staff tlas could ha aora af fleloatly uaad In raglacarlag and aaeurlng eoapllaaca
with tha Act by largar auhdlTlalooa".
Uhlla OILSK racopilsaa that tha proaotlon of anallar local aiAdlvlaloaa ara
aaldon charactarlsad hy thoaa aalaa tachBlqoaa «hlch originally proaptad tha ILSFD Act
end that tha nui^ar of conaunars Involvad in snallar aubdlvlslona la llaltad, that office
coatlouaa to preoccupy Itaalf vlth the regulation of theae snallar subdivisions st tha
coat of alloirliig conaunars to be continued to be fleeced by thoaa fraudulent Interststs
land sales operators ubo the Act vaa Intended to regulate.
Because the Act has never bean applied aa a flrat priority to «aad out fraudulent
and deceptive lateratate land aales tranaactlona, thla Aaaoclatlon aaea no aarlt In OILSt'a
poaltlon that stronger enforcenent poiiera are naaded to aacure eonpllance under the Act
for large Intaratate land salea oparatlona.
Itotvlthataadlng, tha RATIQiUL AStOCIATIGM OP RBALTOIS* would Ilka to naka the
following obaenratlona reletlve to tha Adalnlatratlon*a ILSFDA anendnanta contained In
Title IV of 8. 2637.
Section 421 would redefine a aubdlvlslon coning within tha punrlaw of ths Act —
land which la divided or propoaad to be divided Into 100 or nore lota, rather than 50
In preaent law.
Ue wlah to naka It abaolutely clear that thla Aaaoclatlon aupports steps to renove
snail local "Intra-atate** land developnenta fron OILSl*s Jurisdiction. This anandaant
could be helpful In achieving that aln. However, In tha abaence of the Melaon saendnent
and ao long aa OILS! i.uaas tha so-called "coaaon proaotlonal plan". I.e., any fom of
coBBon ownerahlp, advertising. Inventory, financing, aalea agent or aalaa offlcea, to
aggregate lots In purely Intra-stete sltuatlona aa a aeana of bringing aaall aubdlvlslons
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uadar ths Act, thia aMndMnc would only dmlMj thm timm la uhlcii MibdlvlaioM mn >rmi|Pir
under eh* Act. I ••«»• you chat aoat aaall d«valop«rfl ifork out of om offictt* possibly
thoir hoaa, «ad theroforc aro novor out of OILSE'o roach. If stops aso takon to wtmnn
puroly intra-otatc ■ubdlviaiooa fro* OILSR*s juriadlctloo without tha futuro thraat of
having tboaa subdlvl«ion« aggragatad by OILSl haaad on a aat of aala-orlontod i, n— rwtl itiaa
which a HMll davalopar will alwaya aaploy, than tha pro p oaod ■■■ndint could ho aoot
banafldal, as It would paxmit OILSR to concontrata its actions on tho lart* latacatata
land davelopaants which was tha intsndad focus of tha Act.
Saction 421(c) propoaod to axaapt lots la a subdiviaion in which all lota ara 40
acraa or aore in aixe.
This Aaaociation in pravioua teatlaony oppoaad auch an saandaant aa it appoarad that
OILSR waa attaapting to astand ita juriadlctloo over thoaa navar Intsndad to ba covsrad.
Howavar, with the acceptance of the Helaon proviaiona and upon review of our asaberahlp
we Bm» no objection to such sn saendaent if such sn increaaa will aore adequately protect
the conauaer froa deceptive interstate land salea techni<iuea proaotlag the aale of lart*
tracts of land of queationable value in rsaote aountain and deaert arena.
Section 421(e) requeats that the ea-aita axaaptlea aadar Ste.l403U) (10) •£ Che ict
be repealed. Thia exeaptlon waa alaed at oaall Intra-atata or local iataratata davalopers
who sail lots to purchasers who have an opportunity to inapect paraonally tha offering to
judge for theaaelvea the character end quality of the land before purchaalag. OUMt
haa never favored thla statutory exeaptlon and haa lasued rulea aai regulatloaa survoaadlag
it that are so coaplex and vague that it la virtually lapoaalble to obtala the eaaaptloa.
The repeal of Sec. 1403(s)(10) would be directly contrsry to the purpose of the Act aai
would aerve to extend OILSR* s philosophy of regulating all local land deva&opera rather
then the large interstate land salee operation aa intended by the Act.
Section 421(g) propoaes to aaend the current 91,000 ceiling on the aaoant of faa
a developer auat pay the Secretary at the tlae of filing a atateaent of record or any
aaandasnf^thereto. The revision would elialnate the $1,000 celling.
This saendaent Ignores the cost the developer and conauaer now are paying bacaaae
of OILSR' s over-lntcrpretstlon of a siaple interstate lend sales disclosure act. If
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onSR «ool4 focus Its AtCsatlM m frmidttlMt sad dscspclvs latsrststs sslsf , opsn smisil
saalnistrstlvs costs would not bs asc ss ss r y.
Bsfors coMODtlat <» ths sddltloosl saforesMUt poiisrs souglbt by 0IL8K. I
would like io rcltcrstc two bsslc polldss of our Associstloat
(1) dsvslopsrs who sncst* ^ trmtd or othsrwlss dssl la loss thsn sn hoasst
Mimsr with coasuMrs should bs prosscutsd to ths full sztsat of ths Isv; sod
(2) HUD should hsvs sdsqusts IsflsUtlvs suthorlty to prsvsat sad prosseuts frsud.
HoMSTsr. la saslyslag ths prsssnt Act sad ths propossd s a sii d a s n t, s crucial qusstioa
Dseds to bs soswsrsd, — has BOD fsilsd to do sa sffsctivs job ia this
sres bscsuss it has oo suthority to prosseuts violators or has this rssult coas about
du« to HDD's iosfficisacy ia usiag ths tools it has slrssdy bssa graatsd by Coagrsss?
It is our bslisf that it is ths Isttsr csss.
Undsr the currsot Act, HUD is givsa powsrs to iavsstigats, sajola and prosseuts
say violstioos of ILSfDA. Ia additioi^ Ssctioo 1404(2) coatains oas of ths brosdsst
frsud provisioos found. ia ths Uaitad Statss Csda. Thua, lOD eurrsatly possassss
broad authority aot ooly to prosseuts dsvslopsrs irtao do aot coaply vith ths rsgistrstioa
provisions of ths Act but slso to prosseuts those irtao psrpstrits frsud on ths consuasr.
Uhst is Bors striking in saalysing ths qusstion of uhsthsr HDD's record in this
area is due to insdecjuats poifsrs or inadsqusts sdadntstrsclont is thst uadsr ths ILSFDA,
HUD has exsctly ths ssas enforcsasnt powers as the Securities snd Bxchsnge CoHd.ssion
has under the Securities Act of 1933. As this Coaaittss is particularly awsre, as
a result of its overaight rsspoasibility ovsr ths Coaaission, the SEC has done an
efficient Job in enforcing a law which was ths aodsl for ths ILSFDA. Ths Conaission,
using the ssas powers as HUD, hss frsqusntly prosscutsd sale of stock in violstlon
of the registration procedures or in s fraudulent or aislssding asnnsr; has, under
the courts' equity jurisdiction, ssksd for rsceivers for coapanies psrpstrating a
fraud on its shareholder and obtained disgorg^Mut of frsudulently gsined profits
for investors and In cases of particularly abuaive conduct, snd hss hslpsd ths Depsrtaent
of Justice to crlainslly punish perpetrators. Again, thia has been done with the
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•^m tpolB HOD curriitly h— . thm — « ace— Into ttm courf ^ fl
md mibpomiM powrg. Ua bell«v« that this Is s furtlMr ludleatioa of ths fact ttmt
OILSl hss not boon hsaporod by llttlo mmi rostrictod CoagroosloMl atthority la cha
•nforcMMot ares, but by its InablUty to oao tha potoat sad ada^oata toola slraadj
In Its hands.
In light of this bsckfroond, wa find it particularly aorriaoaa that ■» im i
to establish sn sntirc nav buraaucracy to isvaatitata, haar mmi J«d«i vialatiaaa la
an adainiatrativc forua. Utadar BUD's proposals an antira adalaiatraUva lav aatauih
would ba aatabliahad to haar aattars which BDD currsntly haa tha poaar to Uciaita
bafora a Diatrict Court. Particularly with tha powars of lav and aqaltj in tha haada
of a U.S. Diatrict Court Judga, wa saa no sdvantaga in alloving ■» to aatahllah a aav
fraaawork for diacharging ita raaponsibilitias. lis halianra that with tha aaaeCMac of
tha Malaon aaandaant, HUD will hava aora aanpowar to proaacuta fraad parpatcatora sad
wa baliava that prosacution can ba carried out ada^aataly aad fairly throagli tha Govrta.
In the tntacaat of protecting coaamsrs, howavar, wa haliava it aaj ha
ap propr l ata to give the Secretary soas authority to isaua caaaa aad daalat ordara if
all the following conditiona are aet:
(1) The developer has sngsged in Tiolatioaa of tha Act aad thara la a rahttiarlal
likelihood of future violation;
(2) There ia a substsntisl l i k eli hood thet the davalopar aay diaaipata tha
aassts of tha property ownera and
(3) There ia a aubstantial likelihood, in the ehaeace of each aa ordar. tha
ri^ts of the property ownera will ba irreparably haraad.
Such authority should ba for a aingla period, not eaceading thraa rslaadsr dsja, to
allow HUD tins to aeek injunctive relief before a Diatrict Court. If Wm ia «Mhla
to prevail upon the court that en injunction ahould ha Itfssd, tha aaaaa aad jdatat ordar
would ba dlaaolved.
Uhile the HATIOMAL ASSOCIATIOM Of tEALTOIS* oupport atroag aeactiona aad paaaltiaa
on fraudulent interstate land aalaa oparatora, we atrongly oppos e tha iapoaitioa of
penaltiea by an appointed official which deny a citisan acceaa to thair livallheod hafora
that cltisen haa been afforded the conatitutionally guaranteed benafite of due procaas.
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Ha support the Aduinistratlons propoMl to tiglitaB «p tha Act**
anti-fraud provlaiona by spadflcally prohibiting oaiaaiona of oatarial facta within tha
Proparty Baport. Wa find thia proviaion atrictly in kaaping with tha intant of tha Act.
Uhila thia Aaaociation doaa not objact to tha propoaad incraaaaa ralating to tha
daaaga awarda, and civil panaltiaa, wa balieva that OILS! now haa auffidant authority
to prohibit intaratata land frauda without atrongar panaltlaa. Aa wa hmv aald,
we balieva that the Office of Interatate Land Salaa Bagiatration haa niadiractad
Congraaaional prioritiea in applying tha Act, thua diluting tha Act 'a intandad ij^Mct
upon the true interatata land aalaa con artiat. If 0IL8R adainlatara tha Act within tha
original intant of Congraaa for a raaaonabla period of tiaa and than if tha Act doaa
not provide the neceaaary toola to halt intaratata land frauda, let OXLOL than coaa
before Congreaa to explain their inabilitlaa and auggaatad raMdiaa.
Again, we appreciate thia opportunity to azpraaa our viawa on thaaa aettara.
33-716 O - 78 - 23
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m
NATIONAL ASSOCIATION OF REALTORS
Tom Grant. Jr. K Jadaon Porttm
Absrt €. ittrahMW^ SMf Mas AmMM
'^tALI \Jn 09K fnn, atrm^ Uto^^M^w), O.C.
Tel^ihon* 202 837 6800
STATEMENT OF
DAVID D. ROBERTS
VICE CHAIRMAN OF THE REALTORS* LEGISLATIVE OOMMITTBB
NATIONAL ASSOCIATION OF REALTORS*
B«fore the
House Conmittee on Banking, Currency end Housing
SubcoMiittee on Oversight end Renegotietion
Oversight hearings on
the Interstete Lend Seles
Full Disclosure Act
April 11, 1978
The NATIONAL ASSOCIATION OF REALTORS* is co^rised of aorc then 1,712 local
boerds of REALTORS* locsted in every stete of the Union, rhe Dlntrlrr of foliMbis end
Puerto Rico. Coabined aeabership of these boerds is nesrly 600,000 persons
sctively engeged in seles, brokersge, aanegcaent, counseling, and eppreisei of
residentiel, coaeerciel, industriel, rccrestionel end fera reel cstetc. The Association
hes the lergest aeabership of eny essocietion in the U.S. concerned with all facets of
the real estate industry. Princiapl officers include: Toa Grent, Jr., President,
Tulss, Oklehoae; Doneld I. Hovde. First Vice President, Medison, Wisconsin; and H.
Jackson Pontius, Executive Vice President. Hcedquarters of the Aasocietion are at
430 North Michigsn Avenue, Chicego, Illinois 60611. The Weshington office is located
at 925 Fifteenth Street, N.W., Veahington, D.C. 20005. Telephone 202/637-6800.
I •!» M mmmmm
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Hy BMM is David D. lob«rts froa Hobila, Alabawi. I am m UALTOM and ths
Vica-Chainan of tha RIALT018« Lagislativa OoMittaa of tha MATICMUL ASSOCIATION OF
IEALTOftS«. Accoiipanyiiic aa today ara Albart I. AbrahaM, Staff Vica Praaidant, and
Dudlay L. O'Maal, Jr., Diractor, Ugislativa Liaiaoa of tha staff of tha Govanusant Affairs
Dapartaant of our Association.
The NATIOHAL ASSOCIATIOM OF UALTOftS* is co^>risad of 50 State Associations,
and Bore than 1,712 local boards of REALTORS* located in every state of tha Union,
the District of Coluabia, and Puerto Rico. Coabined aead>ership of these boarda is
nearly 600, OOd .persons actively engaged in aales, brokerage, aanageaent, counaeling,
and appraisal of realdential, coaaercial, induatrial, recreational, and fara real aetata.
The activities of the Aaaociation's aead>erahip involve all aapacts of the real aetata
industry, such as aortgage banking, hoae building, coaaercial and residential real
estate developaent, including developaent, construction and aales of condoainiuaa.
The Association has the largaat aead>ership of any association in the United States
concerned with all facets of the real aetata industry.
While I do not wish to leave the iapression that every aead>er of our Aaaociation
is involved in land developaent, aany REALTORS* are involved in selling hoaesites in
their ovn coasunlties and States* and are deeply concerned about the Interatate Land
Sales Full Disclosure Act (ILSFDA) and the edainia tret ion of that Act by the Office
of Interstate Land Sales Registration (OILSR).
He appreciate the opportunity to appear before this Subcoaaittee today to give
the REALTORS* side of the story.
We have any nuaber of concema to raise vith the Subcoaaittee regsrding tha
adainistration of the ILSFDA by OILSR. Firat I vill preaant our concema vhich are
based on inforaation %re have received f roa our aeiibera who have had firathaad experi-
ence with OILSR* I vill then offer for the Subcoaaittee' s considaration a nuaber of
reconaendatlons with respect to laprovlng the law and OILSR operations.
In addition to the exanples I vill discuss in ay stateaent, I vould like to subalt
for the record several cases ve have received from our aeabers that are typical of the
nuaerous other complaints ve have in our files.
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At tlM ootMt, I With to Mka it clmax that tte MnflHAL AtMCXAXIflil OT nftlXOf*
■upportod •nactMut of tbo alaplo dloeloauxa go^iilfinf of tte tofwtf Lwd talas
fttll Diaeloouro Act of 1968 to protoct eoasuaon froa ftwidiil«it and daeapciva
iataratata land aalaa tranaactloaa, aapacially iataratata aalaa alwra t
purchaaara had no opporttmity to inapact or axaaiaa tha land prior to ]
no vay of knowint whathar tha davalopar waa financially raapoo^ibla for fulfiUlBt
coatltaanta propoaed vith raapact to davalopinc tha land.
Wa hava not altarad our poaitlon. Tha 1978 Stataaant of Policy of tha MtltmiiL
A880CIATI0II OF UALT0K89 cootinuaa to aupport tha purpoaa for which tha Iataratata Laod
Salaa I\ill Diadoaura Act waa initially anactad.
Wa agraa thoroughly* with Congraaaional cooplaiata •— with you, Hr. Chairaan,
■e^era of thia Coaaittaa and othara — that tha Act ia m^ af factiwa and ia ant
providing tha protaction to conauaara oritinally intandad by tha Ooograaa. lawap apar a
continua to carry artidaa about land davalopaant flaaciat oparatioaa, and wnaiiaparrlnt
conauaara continue to find thay ara tha victiaa of fraudwlant and dacaptiwa iataratata
land aalaa oparationa.
Why ia tha Act inaffactiva, and lAy ia it not providiat tha daa irad protactioa
tn tha cnnauaarT
Tha RATIONAL ASSOCIAIIOM OF UALTOIM along with a growing auabar of awdiiri of
Congrass baliava tha Of fica of Iataratata Land Salaa lagiatration ia ao hnay aad
praoccupiad with ragulating thoaa whoa tha Act navar intaodad to covar that OZLSft ia
aiaply unabla to focus on, effactivaly ragulata or waad out thoaa involvad ia dacaptiwa
and fraudulant intaratata land aalaa oparationa.
During tha tan yaara ainca anactaant, thara haa baan littla» if aay . fiwuraaainaal
review or oversight of the Act or the adainiatration of tha Act by tha Offlea of Iatar-
atata Land Sales Regie t rat ion . Ihiriag thia period, 0IL81 haa coaplataly
Ignored Congressional intent and haa interpreted the Act to aaadata Fadaral "llraaaing**
of all land developaent, be it interatate or intra-atata developaant, and ragardlaaa of
the sice of the developaent .
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For ■■■iili, mibdlTlaloiu coasistlsg of 50 lota or Iom aro oxoapt froa tbo Act.
T«,t, uador OILSR rules, regulatioos and Intarpratatlon, aubdivisioiia coatainlng lass
than 50 lota aarkatcd aolalT within the bordara of tha State in which the aubdiviaion
is located are brought under the Act.
We seriously aak under what authority ia OILSR acting? How ia this office in HUD
allowed to ignore Congressional intent end continually pereitted to function literally
aa if it %rere accountable only to ita own will? We have propounded tha sane questions
to HUD end OILSR officiala nany tiaaa. We have responded on nuaerous occasions
to ever-changing rulaa and reguletions questioning OILSR* s authority to bring purely
intra-state land aalea tranaactiooa under the Act. Tina and again, we have been told
if %re desired change, we nuat aeek legialatlon froa Congress. We are told that OILSR
viewa ita aandate under the Act to regulate land aalea to be all induaive,
and that OILSR will not be aatiaf ietf until every land aeveiopaant in thia
country ia under the juriadiction of that office.
Thus, while OILSR writes and re-writes its rules and regulationa to bring all land
developaent under ita control — ita rules and regulationa now fill aeveral voluaes and
are ao coaplicated even practicing lawyers find it extreaely difficult to satisfy OILSR* s
deaends — local land developers are literally being forced out of buaineaa, and
conauaara find little protection under the Act.
Recently Congress saw fit to aaend end, in fact, repeal soas of the proviaiona of the
Real Eatate Settleaent Procedures Act (RESPA) becauae that Act did not aerve the conauaer
as it waa originally hoped by the Congreaa. Careful review and exaaination of the
Interstate Land Sales Full Diadosure Act will alao prove it is not serving the consuaer
as it waa originally intended. Aa one exaaple, OILSR' s adainiatratioa of ILSFDA has
increaaed the coat of land for the conauaar. Local developer a have no choice when
confronted with OILSR 'a unrealistic rules and regulationa, except either to hold their
land off the aarket or to increeae the price of offered lota to offaet the exceaaive
costs of coaplylng with OILSR' s deaends. Certainly these ections do not help the consuaer.
The Congressional Coaaitteea originating ILSFDA atruggled with the
legislation several years before it waa finally enacted into law by Congreaa. The
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BtMtummf of clw origlaal mfotmmm, tbm iMsrlaca, Cte Oi^frf liurf , oai i
floor doteCM Mtrroopdlng cho lcsl«latlo«, m wall m Cte Act itasif • clacrly i
tbo Act «M lifted to OAly thoM load dovolopMiit oyrtto— ttec <
Mtero porwmo living in states distant froa tte aitoa of Cte land vara lafl— rad Co aate
tbair porchasos bacaoaa of fraud«aaat and dacaptlvc aalaa tactica or practleaa. Ite
fraaars of tha lagislatlon vary carafolly provldad iiipMiwa ao ttec laad dawalofasac
aalaa coafiood to tha booodariaa of oaa Stota woold not bo anilsr tte Act.
Ona of tha aoat disturbing aapacta of OILSt'a ragalotioo of pwraly iaCaraCaCa aiib->
division davalopaaac is tha intarpratatlon givaa to a "r ii— na proaai^iattal plaa". Oaca a
cnaaon proaotional plan ia daterainad to axlat tetnaaa aaparata aabdlviaioaa, by raaaaa
of a thread of coaaon ownarahip, advartiaing or idantity, offlea or facUiClaa, i a aa at a al aa,
ate, all lots within tha aaparata aobdiviaiona aggragatad, i<ithar prawloaaly nipt ar aat
and will be conaidered •& one subdivision. Thna tte locol "iaCra-aCata" davalopar ia
autoaatically brought under OILSt'a juriadiction. Vor tte iataracaCa aalaa apa rac io a ckia
definition aay be reaaooable to trigger full diacloaora. B oa e v a r, whoa tte dafialciaa
is sppliad to the aaall businaasaaa, offering lota to purely intra-acata i
doing buainaaa froa one office, pertepa located in hla hoaa, thla dafiaCiioa 1
unreaaonable atandard.
By various rulea, ragulatiooa and interpratationa by OILSt cte vary lead <
ao carefully and painatakingly exeaptad by tte fraaara of tte lagialatlea are aov balac
brought under the Act. Let ua exaatne uliy.
That Act specifically providea ttet aubdiviaiona coaaiating of laaa ttea SO Iocs era
exeapt froa tte Act 'a regiatration and exeaptlon raqoiraasnta.
But tate tte aaall CeorgU RIALTOM ttet haa a total of 60 loca ia cteaa dlffanac
subdivisiona, pertepa 10 ailea aaparatad froa ona aaotter with oaa aubdivlaioa plaaaad for
inexpenaive priced houaea, the aecond planaad for aore expenaive hooaaa, and tte third
for recreational or vacation aites. In fact, tte aubdiviaiona have ao ralatioaalKLp to
one another. Thia RBALTOW is required to file with OILSt for an axaapcloa aadar Cte
Act regardless to whoa te sells tte lots — in-state or out of state par^Maara — » be-
cause by aggregating the lota the tEALTOt tea for sale the total noiter or lota
exceeds the 50 lot subdivialon exeapt by the Act.
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TalM tlM mscoasla UALTOM that has two or thtmm wmall Mbdivlaiooa, aoM of which
cxcaod 50 lots, and who has acvar sold to a parchasar ootsida tha Stata of Hiacoaala.
In fact, wa ara advlaad ha haa aold no aora than S lota ootalda tha county In which hla
subdlvlalons are situated. He uses the telephone and the nails In hla day to day
buslnaas oparatlona. Thla REALTORi la In violation of the Act and he la raqulrad to
file with OILSR for en asaaptlon.
Now take the Alabaaa UALTOMi who la daveloplnc recreational altaa on a lake In
his State soae 50 alles froa his hoaa town, and who alao la developing a aubdlvlalon
of residential lots In hla hoaa town. Thla la a ooa aan operation and tha RBALTOM
uaea the saaa office and the saaa local nawapapar advartlaaaent to offer lota for aale
In hla subdivisions. Ha has never tried to narkat lota outalda hla hoaa Stata; yet
he Is required by OILSH to file for an axasiptlon becauae ha la daaaed to uaa a "coHaon
proaotlonal plan" to sell lots In hla two davalopaanta.
Now take the Maryland developer that haa 75 lota In a subdivision, of which ha haa
used 70 lots to build hoaas. The rsBalnlng 5 vacant lota ara offered for aale. Lota
In a subdivision on which houses are coaatruetad or eontractad to be coaatrvcted wltiiln
2 years are exeapt under the law. Thla developer, how e v e r, la required to fUa for an
axeaptlon on the 5 lota becauae the total OMsbar of lota In tha sobdlvlalan axeaada the
50 lota exeapt by law.
These exaaplea, of courae, beg the question of *\fhy ao aueh eoneera If the UALTOW
Is required to file for an exeaptlonT*' First, there Is concern becauae Congreaa did not
Intend any of those subdivisions to be covered by the Act end aacond, let ua explore
filing for that axeaptlon.
Most local land davelopera are not aware they ara covered by the lateratata Land
Sales Full Dlacloaure Act. They arc takaa by aurprlaa whan an 0IL81 official appears
and advlaes then they aay be In violation of a Federal law and could be subjected to
ClvU as well as Crlalnal penalties. Local developers are aatouadad whan advised to
stop selling lots until they have filed for the exeaptlon. Others who hear by the "grape
vine" they aay be covered by the Act and who naka Inquiries of OiLSt shout their status
are equally astounded when they arc advised they auat caaac aalea oparatlona until an
excwptlon from OILSR has been granted.
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Obc« tte co^lle«t«d and co^1«k fUlat fltarts* tte nAURMi to UtmnHy t— iitii
with foxM, _pap«r work and rnlaa and ratttUtiooa tha Imymma •imfly eamwt wateratand. If
ba trlaa to fight tlM **a7ataB**, ha to aabpoa aa ad to appaar to Haaktogtaa with all hto
fUaa.
lartot nm tha gartlt of fUtog for tha ■■aayrion, tha local dawalopar to ttaa
told he Miat sand ractoloa lattars to all thoaa porchaatog lota wtohto tha prwrtooa two
yaars agraaiag to huy hack any lot pwrchaaad withto that ttoa.
I do not hava ttoa to daacrlha tha uttar eonfaaloa th aaa ravtotoa lattara eaaaad to
pttrchaaara. Brtoflji; aoaa porchaaara hallawa tha titla of tha p c op a r ty to cloudad and aaak
raetoton. If thaahaa haan a turn down to land walua to tha araa. raelatooa ara anaghr
In fact, ona davalopar waa forcad to buy hack aavaral tota to a ai&bdiwtotoa 4artot ■■
aconoato aluap to hia araa, only to aall tha tota at a totar data for aoia thaa tha prtoa
of tba origtoal sale. That, howavar. waa an aacapttoa of tha rala bac—aa BMra thaa oftaa
tha awai ■ULTQgp to atoply forcad toto haakruptcy. for ha caanot carry aaf f totoat capital
to buy back tots oo irtdch ractoloa to daandad. tod all too f r a g aaa t ly local iMMlira aia
raluctaat to axtand tha awdl UAUOli furthar cradlt whao thay haar ha to "to Cfwhto"
with tha radaral law.
Lat «a aaaaaa tha UALTOW ohtatoa hto asaaptloa, anccaaafoUy aarltata hto tota and
eontimiaa to davalop laaa than SO lot aubdiwtoiona ona or two at tba tiaa ffwraaftar.
Ivaatiaally, ha aalla 300 tota. Tha tot raquiraa fall ragtotratloa for aaMiwtoloaa
to mMc%Mm of 300 lota. 0IL81 haa awggaatad to our Gaorgto IIALTOM that idiaa ht raachaa
300 tota ha will ba ra^otoad to f Ua for fall ragtotratloa Inrladlag all tba lota ha baa
aold ragardlaas of tha asaaptiona ha haa alraady baan graatad. Oar IHinHJ aow foaattoaa
idMthar aoch aa oadartaklag to worth coatiaolag to tha toad davatopaaat buatoaaa*
I hava pototad out apadfto ■■aaplaa of how OILSa axtaada Ita broad totarpvatotlva powac
to bring poraly totra-stata toad davalopaaat oadar ita Juriadictlon. Tha crltarto waad by
OILSt to iawoka Juriadtotion to: (1) aggregation to ascaad tha 30 lot otatatory asaBptloa»(2)
applying rniiiii dafinitions of intaratata facilitiaa~tha usa of tha tal a p h oa a , local aaai
papers and the aalla — to purely totra-state traasactiona to order to iawoka totaratata Jor-
isdlction (tot M add parenthetically that if applied natloawida la the naaa aaaaar. a v a rylh a
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ami Pop" boalatM in tkU camtxj couXd b* 0abi«ec to latontato Ion), and O) tho "i iihiiii
proMtiooAl plaa". which mim^^y ■«»• ooporato mabdUtmiooB wlU b« ooootod m om if
thore is a throod of co—nn oimorship. ad^Pttrtisinc or ld«atity» offico or facility, iar
Yontory, etc.
In tha casca cited OILSR, under ita interprotatioo, could hare aaaigaad any one
of the three criteria aentionod to bring agr exaaple caaaa withia ita Juriadictioa.
That ia the onlqueneaa of being able to function aa the proaaeutor, the Jury and
the trial Judge.
Let ae nov give you aoaa exaaplea of the probleae a land developer facea vhen
seeking interstate registration.
COMPLICATKD UGISnATIOW MQOIMBQagrS
Vhen ooa contacts OILSR requaatiag the nacaaaary foraa to file for interstate
registration one receives an inch high stack of papera containing:
• Soae 95 pagea of published rules and regulations.
• An ll-'psga reprint of ILSPDA.
• A 27-pege Stateaent of Record for OILSR* s file, vhich requires soae 42 addandua
eshibits, and
• A 14-paga Notice of Diadalaer idiich auat be duplicated and one copy givaa to each
prospective buyer.
Rxperts are needed to coaprehend the coaplcxities of OILSR* a rulaa and regulationa
end to file the appropriate foraa. OILSR providea no layaen'a handbook or description
of iaportant iteae to aasist in filing and few buaineseaen are capable of filing for
registration without the profeaaional asaiatance of an attorney. And few attomeya ere
capable of properly filing without indapth knowledge of OILSR procedures. Not only is
sa attorney necessary but also in nuaarous caaas sagineers, geologists and accountants
are needed to eoaplete the so-called **8tateaent of Record". And why are these experts
neadcdT The Stateaent of Record deaands, aaong aeny other things:
• A deacription ot soil deposits on every lot within the developaent|
• Detail specifications of water distribution systeae, including costs snd
depth of well drilling, and types of puaps to be usedj
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•l«elMt«4 eo«t and scImAiIm off eoBtlotioa off •toeerUal ItM iMtalUtiM;
*IselMeod costs aad sehodolos of coaplotioo for ■■won lisM or —tUmtmi
costs of septic toidtB aad drsiaffloldo;
'Dsscripcieo of ■unlclpol ssrrieos, coersotioaol aad co^na faellltios.
shopping fseilltios, otc, sod
•A dotsllsd snd foil flMocUl statoMot of tho applieont or applleoats»
Aa sppllcoat Is also roqoirod to filo with tha StatOMot of Bacord 42 lattora or
eoploa of atataoants or roperta. ror axaapla. Joat fovr of tha adiaad— Itaaa locUida
— lat aa latarjaet hara that I vao axaaplaa of oaly 4 of 42 addaadua itaaa ra^lrad
boeaaaa tlaa sl^ly doaa not paiait aa to Hat all 42 Itaaa:
1. All aagloaarlBg roporta or hydrologlcal avrvaya iadlcatlat tha ooaveo «d
quality of vatar;
2. A haalth offlcUl'a aaaljala of tho dialcal ^aallty aad hoctoriolotieal
paroty of tha aatar;
3. A local govaraiag body* a atatamat colatlva to aaiatoaaaca of tha toad
ayataa la tha davalopaaat; aad
4. A local haalth aothorlty'a atataaaat that oach aad ovary lot ia cIm o^^
divUloa haa haoa taatad aad a p proiyod for tho iaatallatlaa of aa oa-aito ■twaga
dl a poaal ayataa.
Vhila thaaa foor aad tha raaaialat 3t atataaaata aay ba aaooaaaiy Cor tell dia*
alooara for tho larga Utaratata oparatlaa, thaaa papofoosfc ro^airaBaata lapaaa awiiitu
diffiealtiaa aad aoaaroaa coapllaaca prohlaaa vpoa tha aaall daralapara.
Aa I have ahoim, tha Uferaatioa ro^irad ia tha turaaaat of tooord ia off a
vory coaplaa aad taehalcal aatnra. aad yo^ caa irooy of it all ia that OIUB la^iao,
'*aalaaa otbanriaa notad, aoch ^oaatioaa ia tha Property loport aaat ba aaaaaiad ia a
abort aarratlva atataaaat... •« aad '^all atataaaata aado...aBat ba U pUia aoaeiao
laagaaga that an uninfovaad porchaacr caa uadorataad bat aaat diadoaa all portiaaat
facta."
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Nnqr tt«c« aad/vr local tvvaniat W<iM haw Um and eo4M irtiidi Mqvira land
tov«lop«r« to filo aoeh of tte •mm UfOMotlon vo^rad hf OIUl at tha local aa4/or
ttaco loval. OILSl, hooovor, vataaoa to aeeapc oach local filiafa. aacayt la
California, whara aceo^ndaticM hava baan raaehad with OILS! to aceapt llaitad
ttata filiafa. Thna tha proapactiva iafearatata land dovalopar ia aaMlad not only with
tha hardaa of Aiplicata ffiUnta, hot alao ha ia fraMaatly aahjactad to doplicata
iMfactioaa— <1) by local or ttata aathoritiaa aaiat a«a aat of ataadarda, aad (2) hy
Onn vaiag aa antlraly diffaraat aat of ataadarda. tach doplicatiaa ia aaaacaaaarily
tlaa caaoiBiBt aa^ coatly.
TDg AW) OOtT
Tha tiaa caoaoaad aad coat iac a rrad to coaply with OIUl nilaa aad ragnlatioaa
eaa ha iooitaoaa mmi caa drive ap tha prieo of land ai«rtfieaatly fdr cIm aaaawMr.
Itporta frca oar Makora iawalvad ia laad dovalafaaat iadieata that to fila for a aiivla
anaptioa fraa OILfl eaa coat aa aach aa $1000 aad aay m aaaai ap to SO aaahnwra ia
praparatlaa. Ia fact, airtiri rafort that by aakiat «■ apylicaciaa for aa aamptloa
aad hariat that asMptiaa ap fc w ad ia aa way aaawraa ttet oaa will aat Utar ba aoapallad
to filo fdr a fall ragiotratiaa oa tkm vary aaM a^hdivUioa aovarad by tht asaaptioa.
r^U onn ragiatvatiaa eaa coat aa aaah •• $20,000 aad aay m aiaai ISO aiahmira ia
praparatiaa. Tha aajor portioa of tbaaa cooto ara tapra a a a tad ia attavaoy faaa. If
tha filiat af a oiapla asMptiaa ia ceapUtad withaat ateiaiatrativa dolayo, tha
applicaat aay aapact OILSl apptwwal withia 2 aoatlMt applicatiaa fdr fall ragiatcatiaa
withoat dif ficalty aay taha Croa 4 to t aaa th a to obtaU approval.
It appaara to b« tha rola rathar thaa tht aaeaptioa far Oim to aaad tha
applicaata **d«fieiaacy naticaa" iadlcatiat that tha applicaata paparwarfc ia iaaecurata
•ad iacoaplete. Oftea tha Itiaa rafarrad to by Oim ara of a aiaoc aafeara aad ara aot
aaterial to'Th* prospactlvc purchaaara* daciaioa to buy; ia other words, tho proverbial
erossiag of "t's** aad dottiag **i*«". Ia additioa, Oim fra^aaatly challaagaa coat
eatiaatea provided la the Property laport. For esaaple, laat year Oim advised
ooe REALTOi^ that a OILSl **aottrce*' had obtaiaad a differeat eatlaate thaa was coataiaad
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In the Property Report on the coet of exteadlag lieter IIumi tram the •evaat Co Cte
hoaeslte. The aeaber's eetlaete vae obteiaed froa the District wetar andiorlty.
OILSR's Inforaetion ceae froa en unldentlfleble "eource." Bventvelly* OIIJR adalttad
Its error, but while elaleeely questioning the sstlaete, hoatslt— were beioc held off
the aerket and the cost of the delay eventually had to be borne by the consuaer.
Another exaaple cited was a filing In which the applicant eatlited the eeet to
run electric power Into a project at $175,000. 01L8R inspectors esciasted the eoot
at $180,000. When it was dUcovered the aeiiber's eetlaete was obtalaed froa tlM local
utility coapany which propoaed to Install the lines, 0IL8R sgaln adaittad error.
We fall to see in these exaaplee and aany others like thea how the consuaer is
being protected.
The reaalnder of eny etateaent will addrcae leglslstion pending before €oatrass
that deals with the Interstste Land Sales Full Disclosure Act, i.e., S. 2716, to aaoad
the Interstste Land Sales Pull Disclosure Act; B.R. 10999, the Interstate Uad tales
Refora Act; end H.R. 11265, Bousing snd Coaanalty Developasat Act of 1978."
Senstor Geylord Nelson of Wisconsin, Chalraan of the Seaate Select CoHd.teea
on Saall Bualness, has been concerned ebout the lapaet Federel rales » regalatloas sad yepar
work have upon aaall buslneeeaen for eeverel yeere. Tha Select CoHd.ttee kae baea ataiylas
end holding hearings on that general aubject aatter for ebout 3 yaero. Oariag tha
course of the etudy end the hearings, the eubject of tbe Interstate Uad Salaa ftaU
Disclosure Act end tbe actions of ths Office of Interetate Load Sales lagiottatiaa
were soaetlaee discueeed by witnesees. Tha teetlaoay of those witassses c— s e d fsaitor
Meleon to bccoae keenly concerned about ILSPDA and OILSR and la Jaauary 197t, tha talact
Coaaittee held hearinga on that apecific subject asttar. After Cba'CaatiMa]r i r iiw « i i hf
offlciala of HUD/OILSR end othere, Senetor Neleon becaas '*coBwiaced corractiwa lagialatiwa
action is laperative" in thie erea.
Subsequently, on Kerch 10, Senator Nelson introduced S. 2716, to sMad ths lataratace
Land Sales Pull Disclosure Act, which to date, haa. baea co-eponsorad by 10 additloaal
Senators (Spsrkaan, Mclntyre, Tower, Gem, Morgan, Crsaston, trooke, Beskell, lelas sad
ey was invested back in development* Lots sold were free
and clear and were sold only after on-site inspection* Was told by
Attorney we were exempt from HUD and didn't need to file with thma*
Jxily, 1974. one of the owners with Attorney flew to Washington and
met with Mr* John McDowell and Mr* Sol Mosher. Department of HUD.
concerning registration* Reason: We wanted to develop an adjoining
tract* He were advised to register the original subdivision with a
few remaining lots to sell, then apply for an attachment for the new
development*
In all cases we were assured there was no problem to file — that an
attorney wasn't really needed* This proved untrue as we will show
you* It is impossible to accomplish registration without at Attorney
and a C*P*A*
We were fortunate that we had an Attorney who gave us a firm bid to
prepare the HUD Report* He lost quite a simi of money for actual time
involved* His comment was that hdLs fee should have been by the pound
on paperwork*
We have found and will try to pass on to you the hopeless feeling we
had in dealing not only with HUD. but once they had o\xr nmne .we were
the target of other agencies in that department along with Missouri
Clean Water Commission* — ^-
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k letter r«:«lv«d by Nlsaoorl CImb llafc«r CoHBlMloa March 5» 1975i
confffif! A paragr^ that, I quote: "^ks tlw MlsaourL CImb Vater
CooBlsslon Is considering revising the reguletions to eLlainate
certain sdBinlstretlve problsaw Including tlw deletion of Sectioa
2.06, the developer could del'ej further development until the
CooMlssion has aede Its decision''^ unquote. August 1, 197S« ve
finally received a letter of eaocaption.
Although your request Is for HUD I want to iaipress on you that the
Clean Water Coanlsslon Is equally iaiposslble to coaply with. Ifo
have been since 1975 trying to get our new addition approved and
as of this date we- have paid ah engineer $1. 417.66 and etiU hove no
•approval Just- RED TAPE.
If and when \m have final approval from HUD and Clean Hater CaamL9mioa
our costs in lots will put us out of the oMrket* It could easily be
13,000.00 per lot. Since aost developers Ignore both agencies they
can sell ntuch cheaper. To date they have not been repriaMnded.
Shoiold you like a file on Clean Hater Coanlsslon we can pcovlde it*
I hope to iaipress the financial impmttT the HUD IregMlatlons has had
on us. In 1974 when we filed we had approxiaMtely IIS* 000.00 plxxs
another $20,000.00 (borrowed) on our new addition and the start of
a golf course for the area. The Red Tape of the two agencies has
caused us to have to borrow aoney ^o fulfill our obTlgatlons to lot
owners, and we have no incooM or sales because of their intervention
and delays.
Attached is a condensed Attorney's Log and C.P Jl. involvment.
It is very difficult to relay the problems, anxieties, end reverses
we have experienced with the agencies. In all cases "in d^aX ing with
Govemnent Agencies we are Jixlgcd guilty until we prove i nn ocence^
This is the reverse of our Constitution.
Even though the majority feel they ace subjected to harassment and
dictatorship rule by these agencies. It U impossible to fight thos
or even quest ton them as they take It to court. They have all the
time and monoy needed to fight it. Private citizens don't hove it.
My overall largest objection is having lived in this area and been
in business \or twenty-three years vLth sizeable holdings — Charter
member of Llc<>s, original founder of Board for our Church, e»-Seout
Master and currently on local & mrea Council, President for «<»»^ years
of our local School Board, and ouny more civic endeavors — yet I get
treated like a fly-by nlg^it crook.
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Not only has our financial sacurity baan Jaopardizad but it has
causad butdans on anginaars, construction finns, suppliars, buildars,
and raal astata £irms«
Sour Politicians would talk with individuals sxich as us I'm sura
thay would anact lagislation to put vary rastrictiva controls on all
agancias* Otharwisa thay hava thair own dictatorships controllad
by paopla who wara navar alactad to raprasant us.
You will notica our initial contact was in July, 1974, and our £inal
approval was Daccmbar, 1975. During this tlaa wa had no incoma from
this projact*
If you naad backup matarial or parsonal tastimony, wa will ba glad to
cooparata* X would sand copias of tha actual fila but it is too larga
for Parcel Post*
I an anclosing ona of our property reports for your inspection and
you can easily see the problems we've encountered in preparing this
document* Would you buy a lot here after reading this report?
Best of luck on your presentation to Congress and HUD*
Sincerely,
R* H* CONMELL REALTOR
R* H. Connell, GRI
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.ATTACHMENT #1
C.P.A.
HUD
8/02/74 - Contacted C.P.A* requesting audited statements £roei
1972 to date as per HUD request
2/07/75 - Request £or more ixi£ozmation
2/12/75 - Request for more information
3/05/75 - Request for more information
3/24/75 - Request for more infozmatlon
3/27/75 - Request for more information *
4/04/75 - Received Audit Reports, from C.P.A. thru I/0I/7S
11/26/75 - Received 6 month AudiC Reports from C.P .A.
•5/06/76 - . Requested Aiidit Report thru 3/31/76
6/11/76 - Received Audit Report thru 3/31/76
A\2dited Reports required each six months for. additional «3q;>«nse«
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ATEACIMEMT #2
Correspond«nc« from Attom«y (taken froa Attorney's file)
Jisly, 1974 - Personal aeetlng in Washington, D.C. ifith Sol Kosher
& John McDovelL l^y one owner & A.ttomey
Aug, 1974 - Letter frm Attorney &o Cf Jk,
10/24/74 - Letter co HUD advlilng preparation o£ report
11/20/74 - Letter from Attorney to owners, need Infotinatlon
12/12/74 - Letter fr<vi Attorney to Elcctrl^c Com{>any requesting
verL£icatLAn that they supply pov«r to Bubdlvl.»ion
I2A2/74 "- Letter frna Attorney to Telephone Company requeatlng
verLficatLon that they supply telephone service to
suMiviaion
12/16/74 - Received letter £rom Telephone Coopany
12/19/74 - Personal nesting. Attorney yi Ovnefft
2/04/75 - Letter to Kissouri Clean tfater Coonission with
application for exaoption
2/08/75 - Clean Water Conraisiion latter & application
March, 75 - Received rejection froa dlean Water Coonission on
exemption
3/12/75 - Letter froa Attorney to HUD requesting OILSR*s
current R & R
3/26/75 - Letter from Attorney to Clean Water Coonission, appeal
rejection
3/28/75 - Letter, State to file Corporation papers •
4/01/75 - Letter from Attorney to U.$* Geological Survey requesting
Topo Maps aa per OILSR
4/04/75 - Letter from C.PJl. with 12/31/74 Audit Reports
4/07/75 - Letter, Clean W«ter Cooalaalon verifying exempt status
4/30/75 - Letter co Water Quality Control concerning Registration
with Clean Water CODsnlBsion
6/18/75 - Letter to KUD along with Affidavit requested concerning
Clean Water Commission
8/01/75 - Letter from Clean Water Coonission verifying application
8/13/75 - Letter from Attorney to Mr. Winkler, HUD, protesting
technicalities. Confirmed he couldn't contact Mr. ■ .
Winkler by phone.
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AIXACnOMT #2
P«g» 2
1/n /77 - Letter from Kr« Sogers r«£errlag sales aate before
registration, requesting list (ssae list as provided
vlth HDD filing)
3/09/77 - Letter to Kr. Sogers with list — protest on tiae
delay of tuo years
3A0/77 - Letter to Mr. Sogers concerning OILSK #04214-29-204
with list.
3A9/77 - 2nd request on lUt 9^ affidavit
zn^m - Bequested affidavit sent
Ull^tn - Received letter daaandlng infdnution on OXLSE
' 04214^29-204 (wehav* return receipt in fUe dated
^IV^m signed by Mr. Thooas)
Uf\tt77 - Letter to'Mr. Sogers verifying we have receipt
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j^riiycHMEiiT mi^
Expenses Incurred eo eQaipIeCe HOD £lllng.
Attorney Fees
Piling Pees
1st Xe-sutelsslon
12,000.00
330.00
100.00
2nd Re-suteisslon
100.00
3rd Xe-subBlsslon
100.00
Printing HUD Reports
Trip to Veshington
CPJl. Pees
MO. Division o£ Health
231.29
300.00
2,137.73
36.00
Engineering for Clean Hater
Coamission
1,417.60
Legal Notices
Owner Expense
27.00
Total Expenses
19, 319.62
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JaCOBSON CplpVITT
r JKWBESgt V ^tS77
Land DevelopeIC^PS^altors
•070 0UINCC.SUITCI • TCLVMONC AHCA 90l*««3aS77 • OM-IAJ*^. P>. O.MRm«a • IIQIWI f . T l lli mW >
. _ . —October?, 1977
Mr. Albert E. Abrahams
Staff Vice President
National Association of Realtors
92S 15th Street- N.W.
Washington, D.C. 20005
Dear Mr. Abrahams:
The Interstate Land Sales Full Dlsclosxire Act Is seriously deficient in that there
Is no automatic exemption for developers who develop property In metropolitan areas
where full control of these developments is. exacted by the metropolitan authorities.
The law is very poorly written In that It does not make any dlstlnetioa between the
sun belt and the highly controlled developments around the cities.
From talking to the people who have filed for exemption or complete registration,
we understand that It Is a real ordeal Involving six month's time, and many thousands
of dollars and fees for the many planners and lawyers required to carry out this
procedure . The result Is that the consumer pays a higher cost for the developed lot
than he should have to pay, and one effect of the law is that the developers are afiraid
to sell to any Individuals and sell only to builders. Because of this, individuals are
forced to pay a profit to the builders who become middle-men In this transaction.
The effect of this law Is hurtful. The number of people who may be protected firoai
Irresponsible, promoUonal developers Is small compared to the millions of hone buyers
who are penalized by having to pay an extra price for their lots whsn all this could be
remedied by a thoughtfully drawn amendment to the Interstate Land Sales Pull Disclosure
Act.
If we can help in any way, give us a call.
_ Lloyd Lpvftt *
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JjigFowlCTRealty
A-^-irM REA1.TORS
435 WEST BJZAfieTH STPEET
BROWNSVrLLE TEXAS 7B5Z0
Ta£PHO€; AC5tZ'&46-Z415
Octob«r 20, 1977.
Mr. AI Abrahams
Staff Vice Prasidaac
National Association of Raaltors
925 15th Streat
Washington, D^ C. 20005
Dear Al:
I have bean requested to sand you soma inforaatlon on ay
encounter with O.I.L.S.R. I was attacked by thea In August
of 1976. At the tlaa, I was at ay Sunver hosa In Vlseonsln
and was forced to return to BrovnsvtLl* Texas iBBedlataly
because a registered letter had arrived which indicated
that ve would be forced to cease selling lots in our Rio
del Sol Subdivisions iBaediataly.
In the Subdivieion, ve were selling lots to individuals;
all lots were approved by V.A. , and most had been approved
by F.R.A. Our aarketlng plan was purely local in scope.
With small projec-ts such as this. It would be aconoaic sui-
cide to run large ads in national aadia or to buy television
shows to attract an interstate aarkat.
The letter I received from Mr. H. VilliaB Rogers, Director
of Land Salee Enforcement Division, stated that because there
was a possibility of a highway sign being seen by out of
state people; because we had, in aoae Instances, used the
telephone in the conduct of our butioats b«cau<« our local
newspaper inadvertently gets carried acroie atacie lines and
several other highly intelligent rcaeone, ue war* told to
ceaae selling lots to individuals or be crialnally prosecuted.
In the project, we sell aost of our lots to builders. This
one, however, has 2 alias of water front. These water front
lots generelly sell to individuals rather than builders, as
they are. In aost cases, too expensive for speculative build-
ing.
The inside lots, of which ^here are many, were sold almost
entirely to builders. I had, however. Just Invested approxi-
■ately $200,000.00 in extending streets and utilities to 50
newly created water-front lots and was preparing thea for
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sal«s CO individuals. Th« eeas« and dasisc ordar. oC eo«raa«
sroppad OS in our tTaeks; hovavar. it did not scof tlia Im-
tarasc aacar on that $200,000.00 in its tracks. It is still
running and I still cannot sail lots to Individuals.
Whan I cut short ay vacation in 1976 and hurriad back to
Browns villa to consult with ay Ipcal attornay, ha inCorBad
■a that tha Land Ragistration Foras ware so coaplicatad and
•o vagua in soaa of thair quastions, that ha fait wa would
be in bactar hands if va hirad a specialist who knew tha
kind of- answers the registration people deaanded.
I therefore contacted Mr. Ron Feferaan, an Attorney from
Corpus Christ! , Texas and he filled out tha form according
to tha approved O.I.L.S.R. raquiraaents. Tha cost for having
this one fora filled out was $1,500.00. Fefarvan felt that
we could qualify for a 300 lot exeaption in another project
and told aa in a letter dated Septeaber 16, 1976 that tha
legel cost to obtain a 300 lot exeaption for this other sab-
division would aaount to $2,500.00.
This project, as I above stated, was conceived for purely
local consumption. It is located within 2 ailes of the Pert
of Brownsville and is directed aarket-wise at welders, ship
fitters, aachinists, shriapers, and other people who work
at tha Port.
I have six co-owners in the Rio del Sol Subdivision. It took
weeks to contact, all of these owners and audit thair holdings
in other projects.
We were then required to subait a list of all sales in tha
project with the naaas and addresses of each purchaser and
note any out of town purchasers that happened to stumble in.
(stuable in is precisely the phrase applicable here because
Brownsville has a large tourist population in tha Winter, soma
of whoa visited our site and purchased lots for futare retire-
aent hoaes)* This, of course, is not possible now becansa wa
are prohibited froa selling then and tha people have to boy
A house and a lot in order to aake an investaent. This greatly
inhibits our growth and their ability to tie down a lot at
today's prices for a home site in the future.
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As w« progressed in our nsgotlstlons with th« 0.r*L.8;E.«
Bo'rs sad ao'rs rsqus'sts"cAa« in for Addclonal Inforastion.
Each of thsss rsqussts had a vsry short tlss deadlins. In
•ach cass, it was naeassary for us Co stop all other sctl-
vlcy to prspara the volualnous data required by thea in
the short asount of tiae. As I recall* ve were forced to
sake lengthy applications for extensions of tise in alnost
every instance.
On January 25* 1977, ve were able to coaplete our list of
sales and the necessary affidavits vith thes. On February
11, ve received an offer of Settlement which stated in effect
that ve would not be permitted to sell lots to individuals;
but could sell to builders. We were also asked to send
letters of recision to each of the individual purchasers of
lots in the project.
On March 11, 1977 » we received the original Acceptance
Settlement Agreement, one of- the requirements of which was
that in 90 days we were to send the Office of Interstate
Land Sales Registration a list of all the persons seeking
recision, the dollar amount of claim, and the terms under
which the payment would be made. Fortunately, our project
is carefully planned and honestly merchandised and no owners
applied for a recision.
I was subsequently asked to prepare the same kind of stuff
for each of three other projects; however, I have been sit-
ting on my hands since then and have not been attacked by
O.I.L.S.R. with regard to the others. We have, however,
avoided selling lots to individuals in any of the projects.
This, of course, slows down development and creates a pres-
sing financial burden on us and all developers.
The fact that the owner cannot purchase a lot directly and
build his home himself, or have a packaged or pre-f abrieated
home, has created a hardship to a lot of lower income people
who would like to buy lots in our lower priced subdivisions.
As the lots must be .purchased and built upon speculatively
by builders, these prospective purchasers are also denied
freedom of design and other amenities to home ownership
that I think are important to them.
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In By opiaion» th« Office of Inters tAC« Land Seles Eegls-
tratlon mey have a place in regulating the super-Ierge
developers who sarket thousands of lots on a national or
regloAal scale.
The people In the .O.I.L.S.R. have nlt-plcked the lev to
a point that It Is penalizing the public In ''overkill'*.
I, as a developer, can deliver a such better-planned and
econoBlcally prljced subdivision If I work In units of 100-
200 acres (300-6^00 Lots) than If I am forced to develop
less than 50 lots at a tlee and CANNOT OWN ANY OTHER DE-
VELOPABLE LAND WITHOUT BEING FORCED INTO A LENGTHT, COSTLY
REGISTRATION PROCESS.
I was also very annoyed when sy attorney Informed ■« that
O.I.L.S.R. demands a fee for . answering requests for inform-
ation while it is re.qulring xeams of information from me
at my expense.
Yours very truly,
FOWLER REALTY, INC.
Robert E. Fowler, Director
National Association of Realtors
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€nnsctM of t^e tUnfteb fttaten
AoiiKe oC iacprcftntatfliei
■b4foBtai» 3B*C 20919
August 17, 1977 ^\
Mr. Alb«rt Abrahams
National Association
of Raaltors
925 ISth Strsat, N.tf.
Washington, D.C. 20005
Daar Mr. Abrahams:
I talked vlth Attorney Bill Heikle by telephone this
afternoon since he was not available yesterday following
n^ discussion with you.
I reviewed with Bill your statement that you would insert
his "Statement" with your testimony to both the House
and Senate Committees. He agreed with this procedure and
I, therefore, enclose copy of his prepared statement.
Please keep Congressman Guyer's office informed on this
matter so that we may be of maxl m\im assistance to our
constituent.
Yours very truly.
Mar^ e7
ifin'^E. Monroe
Administrative Assistant
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Mb artt « developer in an Ohio city %4wre %#• develop sub-divisiflDS, eoe
«t A tine, and then the lots in the sub^division are sold for zesidntiel
purposes priitexlly. sinoe the Zhter-State Land Sales Act %«s passed, ne
have developed several sub-divisions, sane of %4iich have beat onpyletely
sold and sens of which are partly sold.
T4a received an initial demand to register our sub-divisions, sinoe
the sub-divisions in total m ocee d sd the nunter under the zntsr-0tete Und
Sales Act, for an exonption, or that %#e should oease to sell lots or tlat .
Me vould be sued in Federal Oourt. Each and every dBoand included a thEeet
to onqpel al l of our reoocds to be brought to Vta^tington for e heecing#
under the si±pocna power.
Ma corapleted one lengthy, questionnaire. Than %«e reoaived a iscoiri
questionnaire, most of the questions on ths ssoond being sisdlar to ths
questions on the first. Ha %#ere given ten-day dead lines in which to
oonplete and return the questionnaires, with the usual threat. * Any requssts
for clarification as to what was dsnanded, was mat with about a aiif MmSf
delay in answer, and with donands for more infonnation rather thai darifioa-
tion. The tine limitations %#ere unreal, incliitod holidays whn no one at
HUD was wocking, but the developer wes eaqpe c t ed to do so, and local offiboss
were eacpec t ed to remain open dturing holidays.
He sold most of the lots to individual oontractors, who financed and
constructed residences one at a tine, and than sold ths residanoes to indi-
viduals. A few lots wars sold to individuals who financed their own hones.
HUD demanded that %#e find out, after the fact, when each houae was actually
ooi^leteda by the contractor, even though the relevancy of this infoopatian
was doubtful at best. When %#e received the HUD danand initially, we had less
than 20 lots unsold. All of the lots %isra occupied by $25,000.00 and up
residences owned by local citizens, %«ith financing for their hemes obtained
through mortgages from the FHA and local banlcs and building and loans, all
without any real pcoblens.
After about a year of struggle, HUD deteimined that %#e would not heve
any fiarther action taken against us, if future sales were %iithin one of the
exemptions in the law, such as the exen^ption for sales to contractors.
Now, %#e are taiable to sell you a lot, not even if you went the extra
space of a vacant lot next door to your new heme. Ha are unwilling to spend
the money necessary to do a ocmplate registration %dth HUD, as this would add
to the cost of every lot.
Query: What does any of this have to do with fraudulent inter- sta te
land sales, which have oontinued? Ha think HUD wents to regulate evary sub-
division in the Uhited States of Anerica, whether needed or not, at the home-
cMners added expense. This makes no sense at all, except in tenas of additional.,
bureaucacy to be maintained %iithout regard to purpose at the taxpayer's <
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Ma mrm wwUling to furtha: idontify outmIvw, as «« bmlimm HOD, in
its oNn vay, %fiU sursly rtttaOiattt. itaahingtan should te cwloadaA tdtii
dsimlopsni subpoenaed i»ith alt'Chair reoccda for HUD haarings, fcGm our
point of visur anyiMy.
Wa hova boen threatanad with lawsuits from angry custanars %to insist
that thay %«nt to hay a lot from us, but «« ara forced to tell than that
HUD is protecting than and since wa don't viant to register and stand that
extra esqpense, they just can't buy a lot from us directly* Clearly, the
Inter-State Land Sales Act, including its regulations, needs substantial
revision to allow orderly developnont orresidential areas, under local
and state planning and zoning ordinances building codes. Federal intrusion
into this process sin^y adds to the cost, without maaningAa pro t ect ion to
the hcinacMner*
33-716 O - 78 - 25
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IIIIIBHam®s^Il<!;^
!• 1977
iObnrt I. AlinhiM
Vi« Pn«id«At, O a» mi— a t Affikin
lUtioiul Aflsoeimtiaa of Btaltors
925 15th Strifft, IW ^- *
ViuhliV(toa, DC 20009
Dmt Hr. AbnOuHMX
I rva4 u vticla ia th* Ratiooal Tnn and Land Brolwn — filnr «lwn
baarlBsa vlll b« cantjuetid r«cardia( HOD'S OILBB. Z hep* anitlilm
eaa b« dona to allaTUta th* hawint and dioMtaroiM •ff««t it tea
bad on oa.
ClUford BivhQp aad ^mU havo a mall corperatioa of diTiaLoa of
prop«rt7. V« doTolopod avvoral projoeta aiaeo 1968. Va taava pat ia
roada to eit7 aad atata ataadarda ate. -
la IST'^ M raevlTvd a Itttcr tnm TSJU mt^tin% h v«r* vAdnr «*>«• and
daaiat trvm atUing mtyf aar* propertlM In Spring UJte Estaivs^ our
anb-diTiaioB. nil* d«Tclop««At hw-i 4tcr BO lot* tvtngiDf fiT* Bcr^i
•aoh. Wa bad fillrd mt ■ oln* pt^e public rtport with th* rv^l eatati
dlTlaioB. , It MB «ppnm| ^fj- th* 0»gan K*a1 Xlatats DepM-twDt^ Chla
all took plAc« in l^TTl. Vb*B V4 nuind tb« ecu* and d«al«t, vt
triod to tvpl^ia to HTO tb«t a public prop^rt/ wport had b«^ filad
with tha Statt of Oregon aad e1««ii t* each provpvctlve Wfvr. ' fiat
^^*r gtid ■• ^«T-* at ill uoiiflr their Juriadlcttoo •nd w* bad to rila
a prop«rt7 iitate»«nt and a public report, Vt «tartad ta Jlupjat of 19r?4>i
Wa cot tha report fiUed out after flwr 100 hour* of ti»s #p*nt disfiac
up dataila a« the vub-dirialon vaa approved three Tear* prlQr and va
h»d to trwce liackvarla to f»t tha LAfornatlon. Ve r*caiv*d m. Iatt*r
ha«J( froH HITO **kin|f for BOrt InforHtloQ wd telling ua to oand HOO*00
^flth tYtrj latEtr or the^ *ould not accept it, Thej vould not a^ mil
the qufttiona at out* hut one or two at a tUm and v« aftiltd a chack
*ach tlBa. thla want on for 3 j^ara* Va couldn't aell may lota ^vriaf
thla pgriod and «« aent thH over 1^^^00.00 and a»de mweroua phdoa
ealla ta Waahlngton D*C* It Hcaed tw*T7 tiiee we tAlk«d to thta «q.
tha phone everrthins vu Ji»t fine. Then %n'i receive a letter ftroa
thao aahln^ for lafonation which thaj had had for aoatha.
Ia Fabraary we reeeltad a letter atatlnc eventhlng vaa OK aad aa
eoold aall. In March we r*c»ived a letter ■»yin^ they aaadad thraa
eopiaa of the rinal Report {which the; h*d In their offica), bat
^T oouldn^t copy th*a* reporta vlthout ne aaodlng tbaa I2.9> for the
copy. W* aant the tZ.y); th*j aaat tha eopiaa, aa aignad thM aad
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lli§§iBHH8,®atnfty
•MIASrrAOnCaCVO. AiAANV.OHMON
r t t i ir at d thai t« HOD im AprU. V« pgiiwii thia mm •vtrythlag. V«
hMTd aothiac fitter from tbmm vatil a»pt— b w iiIma tli^r wvttt and
Mi4 tli^r did not IMTC tto siciMd eopi«« ia tteir offUa. V« know
thmj r«eaiv«d thm ia April mm «• bava « aicaad rafiatarad lattar
raeaipt. Alaa, thaj rntdj bava 90 daja ta aaaiiar yaar riat laipunilaaot
aad thia had baas MMli leagar than 30^ da^rs*-
IhU idMla thiac baa baas tba bifiaat waniimaary hirraiMnai I
bava tmr aaaa. Zt baa broka tba a at pa t atiaa aad aatbias «aa aaid
ia tha liO paga rapart ta HDD tbat «aa nat atatad ia tba aiaa paga
atata rapart.- Wa'va triad ta aaU tba ragiaul afflaa ia Saattla
far balp bat tbaj aaa't glrm jam aaj awwwra aa tbaj dan't kaaw ahata
Saiag aa ia WbabLigtoa DC.
If aaj Avtbar fbata aaa aaadad, ^laaaa gat ia taaeb witb aa aa tbia
ia aaraly a briaf atataaaet mm ta ahat baa bappaaad.
^iaearaly, . .
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382
.r-.
p. O. SOX 410
Occobsr 26» 1977
Mr. Thonas Kraolk
Krsnlk R««lCors
60S **A" Scr««C
Aachorag«, Alaska 99S01
Daar Tom:
Tha follovlng InforBacion ralataa to eha aaouac of tlaa aad monmy
c^«nd«dt i« veil aa problama incurrad, wich HUD regulAtloQs aa
TtlACcd Co OILSR requiramenc«. Tranaae waa first contacted by •
HUD vlch ragard Co thair ragulatlona in 1975, 6 7eara after •aaet-
oaa of a lav vlch which va vara unfamiliar. Having baan oor
brakftT for soma Ci1ai«, you ara familiar vich Cha fact that Traaaac
haa navar angagad in intaratata^ aalaa.
It haa baan, and continuaa to ba, our faaling that tha OILSK 4a-
partmant of mX) U outaide of ita boutida In raquirlng filing from
our company. The fol loving atatcDcnt* ara anavera to tha apacifie
quaationa aaked by ycu for uaa by the national Aaioclatloa of
Raaltora lo hearing to ba bald involving Intraa CJta aalaa of land,
and tha ragulation of aama by OILSR and HUD.
1. Total eoata incurrad to data on HUD ralatad vork, involving
tima, matariala, eopiaa, lagal faaa, ate., haa amouDtcd Co over $6,600
ovar tha paat 1 l/l years Ic takaa approxlnaCcly 60 hours of
vork to eompila a full Proparty Report and Scatanent of Record
for a aubdivlsion, now chat preliminary atudies ^nd conCacta have
baan mada. Thia doaa not include Cloa spend by aganeiaa compiling
information aa tegueated by tha regulatinna A raquaat for aa
axamption can faaaibly ba completed in 20 to 25 houra.
2. A major itam of unraaaonabla action raquirad from OILSR ia tha
raquiramant of an audit to fila on a aubdiviaion vith groaa aalaa
over $500,000 Thia ia a major axpanaa, not to nantion tima con-
auming and diaruptiva, that Tranaae would not otharviaa incur.
OILSR informad Tranaae, via our attomay, that aobdiviilooa with
lots sold vere in vioUtion and vould require filing. lo compliaoca,
a report vaa filed (a Statement of Ricord) for Denali Subdlvlaloo,
**• '^•^•Ivad a latter from OILSR sta Ing that since all lota vera told,
thay Bw no raaaon to ragiatar the subdivision and would jetum Cfaa
filing fee. Ona weak later, another letter relating to Denali Sub*
dlviaion waa racaivad atating that tha aalaa vere "in violation"
and raciaion latter may ba nacaaaary. Tha lattara cama from two
different individuala.
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Huiy l«cc«rs fro« OILSR havm ladie«c«d difftttfit cue oft dmets for loc
MlM that'voro in "violacioa.**
V« h«v« boon unablo Co find any pare of Cbo RUD rosuUcions rolating
CO OILSR that iadicdte uso of a *'Sotcl«aanc Of for" yac vara raquirad
CO s«Qd out 410 laccara co buyara fro« 2 yaara back of faring co biiy
b^cln chclr Lot«. (Thia incurrad a eoac of aVwat $1*000 and only 11
of cha loca haira baan racumad.)
Rapaacad latcara fro« our accomay Co 0IL8K hava raeaivad a forft laCCar
in raaponaa chac doaa ooc anawar apacific qtiaaciona ralacing to our
aicuacion.
3. Tranaac baa aaincainad a policy of aalling only Co paraona who
hava nada an on-ais inapaecion of cha proparcy. Thara ia a lina to
chia affacc on aach cloaing acaeaBanc» aignad by Cha purchaaar. Laaa
Chan 2Z of all aalaa aada by Tranaac, Inc hava baan to iadividuala
vich an out of acaca addraaa. Thaaa individuala inapaec cha proparcy
vhila in Alaaka on vacacion or buainaaa.
4. OILSR haa adversely «£f«cted Tranaac, Inc., aa a davalopoanC
corpuraLfon, by addine Cur Cher conplUatlons Co Cha alraady involvad
Job of aubdividlnjt. This indudaa th« burden of extra paparvork,
Cina cakan from eaploya«a who could ba ■(igag<*d la othar projacca,
Cha coac Incurted and ifflpo«lrtg upon other agencies for docuaanCaCion. '
Siaca va do not sell out aide of Alaaka, chaaa burdana hava baan
unjuacly iapoaad upon Tranaac.
5. Tha baac axaapla of cha advaraa affacc OILSR haa cauaad cha
eooiflumer arose afCar Bailing of reclAlon letters aa raquiriSl by
the "Sactleiaent Offer." Tranaac received ^bout 100 calla for an
axplanacion fro« buycra. Tha lac er v^s very vague and lafc aoac
individuala wich th< f^vlLng that transAc was Crying Co caka Chair
lattd 4way for l««d than Ic is vorth (We w«re required Co buy ic back
ac the flane price th«y paid moa iocs havu approclated SOZ Co lOOZ
or Bore). Anochor feeling va« that this would place a cloud on Chair
Cicla and aooM buyers called tholr tiCle coapany and wa in Cum ra*
caivad calls froa chaaa coapaniaa for fur Char axplanaciona.
6. To parpacraco our coapany, va auac ba in buainaaa Co aaka a
profic. Aa our coaca Incraaaa, va auac paaa chaao cosca along co
Che coaauaar in order Co tu In tain 4n Incooe of a certain parcencaga.
Aa our cosca incraaaa do Co furchar govamaant controla, inflation,
or other iteaa, tha coat of each lot aold alao iacraaaaa. Aa tha
builder paya aore for the lota, ha auat recoup hia aoney by raiaing
tha coat of the houaea ha oalla.
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384
7. The closest scacc line to our subdivisions is sons 1»S00 sir
■lies away, that of Washington. The only advertising dons by our
company or real estate brokers esployed by us has bsen within Alaska.
Since we are clearly intras tate. OILSR regulations should not con-
cern themselves with our company.
I hope this information will bs of hslp to you, Tom, as well sa the
National Association of Realtors, in the struggls for clarification
of inters tate land sales. I have attached a cost breskdown for our
secretary's time and other costs incurred in complianco with CILSR
regulations.
Sincerely,
alph'^W. Pott
Vice President
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385
?7«ilisla£ry •;:udi2s and cos£
for iaforsui:ioa
?ull IS.r»!^ll rapcrs
Fill;i> fM
C3?I2S
fi23 Odd?
4C 2s:.:^
so
3C0
5«Cw-
350*00
3o.c:
;<laa Laaa oxAapcloa * 30
C^nsury P^rk •xasptloa * ' . .-iSO
Cc;:sos;;iooc Sao7«« fell 50
^lUi&stloa L&xd full 40
lajd faos - W&shlcscoa Atcorcoy
2k>nna Willard, iksx;u>7A^«
Shor^wood
Cs?laa (Tro^arty r«?orc, flla eoplca, ate) 5CG
riliaj f*a
Princ property raport
Print dsod of czuas
Copy ?7op«7ty SApore &t /J: copy Cwncar
Coplss
Z:iVtslcpas
lAl COST: $6,565.34
500
40Q
30
xo
30
30
60
70
221.11
75.71
. 223.13
221.13
76b. C4
1,703. 2v
436.25
50. 11
5. CO
5<^w. wv
75.00
17. 5C
7C.S5
503.^6
3v7.«^c
50. CO
67.75
Salar^v* for cina &pont by axacuslva mChLbara of Tranaae, Inc. not
iTiClU-tid.
Hourly raca flgurad zz $6.50 par hour, plu* 11.86Z ovarhaad
Copiaa at ICc per copy
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386
Wh(TEFORD.TArLOR.. PHESTON.'TlUMBU % JOHNSTON
109 W. PCNHSnyAMA^VlMUI
TOfWSON. MAKriANO aoM
October 21, 1977
kr. Richard A. Moors .
Gaylord Brooks XnvsstBMnt coopany
P. O. Box 400
Papar Mill Road
^hoanix, Maryland 21131
)tas GBZC - Baritaga Parm, Inc.
^ Our Pila Ho. RT 1905.116
Daar Dick:
In rasponsa to your lattar of Octobar 13. 1977,
I can provida tha following information concamiag ay -
^aalings with OILSR:
1. tha attomay** faas for thia officV'in
filing for a Statutoryr Exaaiption for tha
property known as GreuiCiald Haritaga
Fara^ Inc vara approxijuttly $1 500.00.
TO this total, you BUHt ad<3 tha fa« of
Bob Kaamay Ssquira, T- Fradarick
Paldaan, £aquLtr« and Robart M. Strieklar,
Baquira* all of who parfomad sarvicaa
in connaction with this prdpcdad Statutory
Bxaaption it should b* notad that at thm
tina work on this flLa wai tarainatad, thm
Statutory Exemption h^d not bft«n obtained*
t hava navei? asaamblad a coenplata registrar
tion; but ba>td on ay mxpo*uf to thli sub-
ject aattar* i f»i that tha attornsya* f«oi
involvad in such a projact would aaeaad
$10«000^0.
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Kr. Ricdiud A. Hoora -2- OetolMr 21. 1977
'2. Aa you know, OILSR doni«d th« Statutory .
tion for Graaafiald baaad on a iiumbar of
Itaaui. Tha Titla Opinion on th« pcoparty pxa*
parad toy T. Pradarick F«ldmAn cited potential
dOMar rights of unknown vpouaea where ()eed4
in ttw chain of titla hAd been aigned by a
nan^ only* Tba Exemptiftn was also d«nl4d fllnca
aov«ral pcwar compania^ bad obtain ad f igbti of
way over portions of tha land and th* right*
of way could not ba locatad on tha ground and
had navar h—n. ralaaaad.
Thaaa itau asa of ainor natura and oecur la
•vary davalopnant. to dejiy an &ceiqption and
raquira full ragistration dua to thaaa ainor
■attars* la to dafaat tha purpoaa of tha law
toy adharing to tha lattar of tha law.
3. Zn ay opinion,, tha originiUL full . Diacloaura
Act was intended tcr pravant. abuaaa* in tha vaoa-
t ion or «acond*hoine oarkat. ' Graanfiald was,
obviously Intended as a priaary naaidantial
coRraunity with resident;! of be|th Maryland and
Pennsyivojila puxchaaing lots. Z baliava that
aubjef ting *t]ch developments Xo thaa# laws
subvarts tha puipoaa of tha laws for no good
raason.
4. Z baliava that you would hava aora aeeurata
inforaation concaming othar problaas oauaad
to tha davalopar and tha consuaar as a raault
of tha OZZiSR.
Plaasa call if z can ba of furthar assistanoa.
V ary truly youra,
DBG « lav Dala B. Garbutt
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audio mOOFG, R60llOr/326HSIfM«.Sule1.Ar>clx)iag«.Ala9l(a 99501. ph. (90?) 27^21)9
October 28, 1977
Albert E. Abnhav
National Association of REALTORS
92S ISth Street N.W.
Washington, D. C. 2000S
Re:. OILSR Rules « Regulations
Dear Al:
Earlier this year I received a letter fxxiii HUD infondng m that I mbs possibly
in violation of the Interstate Land Sales Act and dennding that I funiish in-
fbxnation on any subdivisions in which I light have an interest.
I furnished the infbiiation and then was givm thirty (30) days to either film
a Stateoient of Record or request an exem>tion on four (4) di^eroit subdivisions
in which I was the developer. In either event considerable si^porting doasHnta-
tion was required.
We filed for an mm^ion on each of the subdivisions.
The cost of asseabling the various docuMnts for each subdivision was only ap-
proxiMtely $100.00 plus the $100.00 fUing fee with HD. However, it took apn .
proxijnately 7S hours of mf tim which I value at considerably »re than $SO.0O
per hour and approxinately 100 hours of mf secretary's tiae at approxiBately
I2S.00 per hour to try to understand and convly with the regulations that were
furnished us.
Our request for exeaption was denied because the nuRber of lots in the four sub*
divisions, which they claia represented a '^conaan proBotioaal plan", totaled
302 and 300 is their upper limit for emiiptians. • "^
We were, however, fortunately provided %dth a Settlepent Offer i4iich we could,
and did, sign which required us to send a letter to each purchaser of a lot
after August 1, 197S offering then a return of all their investaent in exchange
for their interest in the property if they so request %dthin 30 days. We sent
the presecribed letter to the lot owners which thoroughly confUsed thai and
while the 30 days is not quite up, no one has yet asked for the rttum of his
investnent.
A HUD represenutive fron Seattle who was sent to Alaska about a year ago told
us, among nny other arbitrary rulings, that any subdivisions in the Mttaousfci-
SUsitna Borough, where mf subdivisions were located, (soa» of which could be
■ore than 100 miles apart) would be part of a oomaon promotional plan if one
person was involved in both subdivisions.
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389
Albert E. AbrahoB
Pife TWO
October 28, 1977
Of the 302 lots in our '^coonon pronotional plan" only two (2) wtze sold to
out-of-state residents and none were sold to wnfooB idio did not see the prop-
erty before agreeing to purchase.
The unwarranted rogulations of HUD will prevent ne and my other saall develop-
ers fron any additional subdividing.
Per w^ understanding of the regulations, I could not now evm divide one lot
into two lots in the Matanuska-Susitna Borough without filing tuder the Inter-
state Land Sales Ragistxation Act because it would be part ot a '^conaon prono-
tional planf*.
In my case nost of the lots were already sold and the increased oost dua to HUD's .
axbitrazy rulings will have to be borne by ne and not passed on to the oonsuaar '
as they would surely be if I had not dacidad against any ftarther subdividiag.
I hope w^ letter is not too Ute to be of use. I just recently returned to
Anchorage fron a trip.
Sincerely,
/ludie L. MDore
Alll:pw *
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L.K. FELDERL.
w^oassoeiffTES
October 26, 1977
National Association of Realtors
925 15th Street » N.W.
Washington, D.C. 20005
Attentions Mr. Albert E. Abrahams
Government Affairs Office
Dear Mr. Abrahams,
I am a member of the Austin Board of Realtors as
well as the Austin Association of Builders. * *
The following Is my experience In trying to deal
with the HUD Office of Interstate Land Sales Registration.
In 1973 I set out to develope approximately 250 lots.
It was my Intention of building homes on many of these lots
myself (which would be exempt from OILSR) and sell the
rest to other home builders (which Is also exempt). Bow^
ever, to protect my "right" to be able to sell lots to
anyone I decided to try to comply with OILSR -by either
getting an exemption or registering the property.
The following Is a brief summary of what happened i
I contacted a law firm around January 1974 to assist ae.
They first had to research the law.
During the next 12 months of discussing the matter off
and on with the law firm I was finally advised that con-
sidering the purpose and intent of the development that I
should submit for what was referred to as a "300 lot ex-
emption", but they cautioned me that In view of the fact f
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391
L.A, F«Id«r pagA bvo
I had previously devaloped sons adjoining land thm OZtSR
peopla could ultlaataly decline the application for an
exemption then Z would he hound to apply for a full regis-
tration %fhich would require such more legal work and time
delays*
In considering their advise Z told a friend of nine
ahout the matter and he advised me that a different law
firm had obtained an exemption on a different technical
matter by applying for an exemption under the **Zndividual
approval** section.
Inasmuch as Z wasn't even sure I would he selling
lots to ln<^ividuals Z didn't want to risk the expense in-
volved to get A full registration %fhich Z was told by me
law firm %rould cost around $5»000«
. Being a little disgiisted with my law firm for not ad-
vising ne of tha third alternative Z hired the second law
firm* The fLrat lav firm sent me a bill for $1,904.16.
(copy -A- attached)
IXiring the next 10 months the second law firm after many.
confer encee with me and OZL^R people, a special trip to
Washington for one of the lawyers, an exemption was issued
to me from OILSR* The total legal fees of $3,06§r:7l (copies
-B- attached) ^^
After two years Z thought Z had resolved the task of
complying vrith a government require:nent However, this was
only the beginning. One of my requlrententa %#as to file an
acnu«hl report of sales of lots I sold to individuals. Being
the exemption %ras not issued until July 29, 1^75 (see copy
**C" attached) and Z had no lot sale^ that year Z carelessly
failed to file my annual report by the dealine figuring it was
not necessary.
Zn March 1976 Z received a termination notice (copy mis-
placed). Z had the law firm see if he could get me reinftated.
He did, legal cost $150. (copy ''D** attached)
Zn 1976 Z sold two lots to one individual. Zn December Z
filed the necessary annual report.
In January 1977 HUD sent two special OILSR Investigators
here from Houston to examine all my records and related docu-
ments.
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392
L.A. Felder page three.
In March 1977 I received, through my law firm another
termination notice, (copy attached) They «aid Z had the
purchaser sign one of the preliminary unapproved restrict-
ions. Z did not agree, but by this time I was too disgusted
and tired to care. I ignored the notice. In April of this
year I received a second notice. This time from the '*Bnforce-
ment Division**, (copies attached) I was told to send a letter
(of a sample they enclosed) to the one purchaser. The re-
gulations stated that I was not to* discuss it with hin personally,
and send it by registered mail. I am a friend of the purchaser
and felt this was ridiculous.*
At this point I was more than willing for theWlt>le night-
mare to be terminated.
Copies of my letter to OILSR and their reply in attached.
Sincerely,
(r
L.A. Felder
LAFibe
enc.
P.S. The law firm sent me one final bill of $25.00 for
forwarding OILSR termination notice to me. (copy attached)
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393
L. A. Feld«r, Inc. D«c«inb«r 10, 1975
537 East Woodward
Auatin, Texas 78704
December- 5 , 1975 - Fee for servlce» rendered in
connection with HUD claim for exemption in- ^
eluding review of J\me 18, 1975 HUD letter and
restrictio ns ; conferences with Mr. Felder and
review of HUD rules and regulations; revise
claim for exemption; confer with Mrs* Lai^ead,
HUD, Washington, D.C.; prepare revisions to
restrictions and claim for exemption a4d pro-
ceed, with filing .exemption. - ^ T SO tOO
yoet?
IN ORDER TO IN8URB THAT PROPER CREDTT IS
GIVEN TO YOUR ACCOUNT. PLEASE RETURN A COI*Y^
OF THE BNCIjC»EO STATEMENT WITH YOUR PAYMENT.
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I
394
May 31, 1975
L. A. F«ld«r, Inc.
537 Bast Ifoodwmrd
Austin, Taxas
Xerox
Travelling axpansa
Recording f •••
Miscellaneous expense
Total
Q^
~ I
;(
m ORDER TO INCURS THAT PROPER CRCDIT 18
GIVEN TO YOUR ACCOUNT. PLEASE RETURN A COPY
OP THE ENCLOGEO STATEMENT WITH YOUR PAYMENT.
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395
L. K. Fald«r , ; . •
537 East Woodward
Austin # Texa«
June 3, 1975 - Fee for services rendered from
•, February through May, 1975, in connection with
;: / : a claim for exemption to be filed with the -.
'-" • Office of the Interstate Land Sales Registra-
;, tion for various lota in Granada Hills and lots ,
-V. in Granada Bstatesr Section I, including initial
• > conferences- with Mr. Felder regarding the past
*' operations of the subdivision; discretion of . • V . .
• •••builder's exemption and various other claims xor,,.
'i'- exemptioni review documents received from Mr.. .. . , ^
'/• Felder in connection with proposed interstate
exemption? research in HOD regulations and
Siteistate Land Sales Registration Act regarding
amount of lots actually includ^ld within the
. tSbdivision and conference with Mr. Felder regarding
onsite exemption; telephone conferences with Mr.
• Plantz and Ms. Spivo regardint the. Poasibilities ,.,
of converting a builder's exemption to an onsite
exemption and- telephone conferences with Mr..
Felder regarding samej preparation of draft ^ ^
statement of reservations,, restrictions, *i/
taxes and assessments and draft claim for . ' .
exemption for onsite exemption; telephone confer-
ences with Messrs. Snyder and Kelly at the '
title company regarding mortgagee's ti,tle policy
and title opinion necessary for lots in Granada
Hills; continue working on draft statement of
reservations; title search on lots within * "^
Granada Hills and preparation of opinion letter
after a trip to Stewart Title Company; preparation
of quitclaim deed in connection with one lot
located within Granada Hills; final draft of
opinion letter; preparation of exhibits, including
all plats and reservations and restrictions; work
on final form claim for exemption and statement
and telephone conferences with Ms. Spivo regarding -
various problems with the claim for exemption;
telephone conferences regarding summary of taxes
on various lots; preparation of plats as exhibits;
trip to Washington, D. C, to present claim for
exemption and meetings with Mr. Plantz and Ms.
Spivo regarding claim for exemption; and telephone
'Conference with Mr. Felder regarding filed claim. l^SSO.OO
33-716 O - 78 - 26
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396
L. A. Felder, Inc. Ootober U, 1975
Kr. L. A. FaI<Ur
937 UoodwArd
Austin, TsxAt
L
For profettional tttrvlcet In eotmttctioa with tbm filial pr«p«r«tloii
of reseriotiont for Granada Eatataa, aaction 1, Ineludiiit coaplata
raviaw of raatrietiona and aaating with Mt. Faldar to ravlaiir final
draft of raatrietiona; praparation of final draft aftar rmwUm of
tha ra<iuiraBanta of tha Offica of Zntarstata Land Salas lastatratloa
and praparation of ratification agraaaant in eoonactioa vlth a prior
sala OS a lot in Granada Batataa. aaction 1.
For aarvicaa aa abova— ————— —— ———-•— JISO, 00
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397
r n
L. A. raider, Za«. Ootdber 14, 1979
937 U6odw«rd
■ Austin, Tttxaa
For profettional tarvieat in eonnaetion vith Granada Rilla and tSbm
inqidtiaa fron tha Offiea of Zntaratata Land 'Salas Xagistratlon
ragarding prior lot aalas including ravianr of ail prior l^t^a^aa
.and. tha lattar fron- Mr. Dlahl; talaphona confaraneaa witbHr. Faldar
and aavaral talaphona eonf araneas With Mr. Diahl at OILSR; raaaarch
into pravioua varaion of tha ragulation pronnilagtad by tha Offiea-
of Zntaratata Land Salaa Xagiatration during tha pariod 197Z-1979
to dataxaina vhathar tha now inapplieabla intra-atata axaoiption
would apply to aooM of tha prior 16c aalaa; talaphona eonfarancaa
with Mr. Diahl raaulting in tha datamination that only thraa of
tha prior lot aalaa raquirad notificatloa of righta of raelaaiotti
praparation of two. affidavits in eonnaetion vita 4Bha aala of lota
in Granada <Batataa,.aaetion 1, and prior lot aalaa in Granada Hilla.
reparation of two.afli
r'anada -Batataa ,. aae
For aarvieaa-aa aboVa———————— —--«—— ^——$229.00',
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398
OePARTMCNT OF HOUSING ANO URBAN OeveLOPMSNT
OrFICI or MTntTATE LANO ULES M GISTIIATION
WASMINOTOM. D.C. 3MM
CPCTTPIED HAIL "'mmmm^
Cordoa K. MUm. Uqulr* /5^5S^
Bcoiiii, Kono^y, Rom, Sokar JUL 9 9 tSTS ^ * - tr^^f^Zli
221.UBaC «lxth 8CXM6 - <202) 7S9-23M
Att«eia» Xesos 7B701
DMT ISr. VlMX * .. 1 .
Sub5«ett oaSR to* 2*0980-49«99» Granada Batataa. 18 loU*
Thla Offioa baa saealTad your GLala of ftSMptioo^ifflamtion and « ooyor
of tha Statanaat of Baaarrstioaa, Baatxiotieaa, taoaa and Aaaaaaaaata on
tiia o^p^QDad ■ ^^^ Y la lont
Vo bava appxovad tha Statanaat of Basarrstieaa, Baatxlotioaa, faoaa and
Aaaaaanaata aa to f oxn and oontant baaad oa tha infoTttton vtaioh jaa ""'
haTa aubnittad. Thia approval ia not to ba ooaatxuad aa aa oplaioa bgr
thla Off loa that tha' actual aathod of aala qpalifiaa tha aobdivlaioa foe
tha azanption from, tha ftdl fning and diaoloauxa raqiai r aaa Bt a of tha
Lutaxatata Land Salaa Toll SLaoloaura lot, but onlj that tha davalqpar
baa oonpliad with tha prooadnzal x•q^lx«■aata for **''^^*<**g aiioh anaptloa-
and baa rapraaaitad that tha aathod of. aala aaata tha raqiilraaanta foe
ption.
Thla approval la Ualtad to tha lota whloh ara tha aubjaot of tha Claim
of Bzaaptloa and doaa aot aztand to tha xaaala of aaj oooh lota*
kaj rapraaflitatlon that thla aubdlvlalon baa baaa xaglataxad with or
approvad by thla Offloa or tha *V. S. Oopartaaat of Bouala^ and Qltbaa
Bavalopaaat vould ba la violation of tha Aot. Zf aaj raaarvatloB,
raatrlotloa, tax or aaaaaanaat, vhathar or aot oif raoord, ba^aot baaa
follj dlaoloaad la tha Stataaaat app ro v ad by thla Offloa, aaj mIo aoda
by aaaaa of auoh laooaplata or aatma Stataaaat voold alao ba la violatloa
of tha Aot and ooold aubjaot tha davalopar to both olvll UabUltgr and
orlalaal panaltgr*
Thla approval la baaad upoa your rfpraaaitatloa that ao aalaa off ariaci
ara bala^ aada la oonaaotloa with thla aobdlvlaloa othar thaa tha lota
af f Iznad to by tha davalopar la tha docuaaatatloa of tha flllnc* Va alao
raly oa tha r^praaaatatloa by you that tha ooatlniad oparatloa of thla
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399
subdlTlsloa %fill te la a miner ooniist«it vlth tha daia of &BH9tloa nd
that th« aoknovlcdgad oopiat of purohasar'a atatHiaat togothar vlth tha
dair«l0P«r*o affiLzBatloaa vlU ba filod tlaoly vlth this Offioo aa ro^iixiA
^ Sootioa 1710.11(b) of tha Sagolatioaa. Zf you hava raliod vpoa tha
pxovlaioaa oT Saotioa 1710.U(o}(l) of tha aaotloa to aatthUah tho tlM
of salo, joa mat fllo vlth oaeh aoknovladgod itatoBMit nd afCLzaatloa a
oopy of tho asplloahlo oontzaot of sala.
Thia vlll ba tha color Botifioation of tha raporting xaqioimnt of Saotion
1710.11(b). PSalluza to ■obait tha roq^ixod aoknovlodgad oopioa of tha
Statooanti of Soaarvatloaa, Saatziotioiia, fizaa and AaaaaMMAta, tha
oontxaot of ulo if xoquirod, and- tha davalopar*! ol^Md afflzaatloa vlthia
51 days (poit aukad not latar tbaa oaeh Jannajey 51) aftar tha npixatlon
of oaoh nalonrtar yaar will aotooatioally ravokt thia approval for tha mtira
proooding nalamlar yaar. Suoh ravooation will aako Yoidablay at piizohaaar*a
option, any aala aada dnriaff that oalandar'yaar. In addition* aooh
ravooation vill naooaaitata yoor applying for a nav aiaaption. Ho w a va r,
avan if your raqioaat for a nav aaca^tion la approvad, it la not ratroaotlva
and loaa of tha aaca^tion dnrljig tha pravlona yaar will not ba affaotad*
XVxrthaxaoray any nonaraapt. aalaa. would. ba.l2L .Tiolatloa of tha Aot*
Slnoaraly*
. 0«P«ty idamtW^^
'"^'^^ (Acting)
eei .' Mr. L. A. FaUar
jSSarafeML2id Salaa Adpiniatratoir {
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L. A. Tmldmt, Ziio.>
537 Woodward
Austin r Tsxas 78704
. TftlaphosM .tollf 4,
n.ti
Aug. 23, 1976 - Fe« for sarvlcas raadarad in con* , ^,
naction with tamination notica froa BDDr
inclxsdiag confarancas with Mrs. ftprigg at
BUD and Mr. Faldari praparation of rains tatanwnt
of axamption lattar; confarancas with Mr. Faldari
ragarding convayanca of lot to Booiaownars
Association and praparation of daad and lattar..
iso.ao
tU ORDER TO 1N8URK THAT PROPER CRCOIT 18
GIVEN TO YOUR ACCOUNT. PLEASE RETURN A COPY
OF THE ENCIJ06EO STATEMENT WITH YOUR PAYMIHT. •
''1^
■'■p-
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401
Mr. L. A. F«ld«r
8016 Bl Dorado
Austin, Toxas 78737
0«ar Mr. Feldori
Snelosad is a copy of tha Tarmlaation Motiea f roa BUD nhioh
%fa iraceivad thia ■oming aad which Z duseassad with you toy talaphona.
Lat ua know if you wiah to taka any furthar aotion la thia
ragard.
.Tour a truly.
g.o^(Lxr . V
J. Gary Barton
JCBtlam
Bnolosure
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402
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
OPPice or iNTcasTATi lano »ai.m kcoistmation
WASMINCTON. O.C. 20410
TSEMZ2AXZCDI IXJSJCZ
MAR 8 «77 BB
(202) 75S-2390
lCni!g-T RECEIPT JKUUtis^rtoj
J. Caxy Barton, Esquire
Brown, KaronBy, Ross, Balcar & Barber
1300 Xnerican Bank Tower
221 VSast Sixth Street
Austin, Tesas 78701
Dear Mr. Barton:
Subject: OQOSR Ho. 2-0980-49-99
Granada Hills/States, Section 1
You are hereby notified that the Statonsnt of Reservstions, RMtrictions,
Texas and Assessments a^ge a v et l by tliis Office on JUly 29, 197S, is
teaoinated.
Tiia restrictions vihica were a^roved as part of your Statcmant- of 1
tions, nastrictions, Texas and Assessiaents on Ttily 17, 197S, %wre not th«
ones which you included in X3m statoaents given to purchasers in 1976.
Actually, tley were the restrictions vAiich were paxtially disapproved fay
this Office on June 18, 1975.
If you wish, you my request reconsideration and present evidanoe to the
Aiftainistrator indicating that this action is not jvMtified based on the
requirements of the Act and the Regulations pccculgated thereunder.
If you wish to reapply for a Claim of F^oeqption under Section 1710.11 of
the Regulations, you mst file a Claim of Exoiption in the fiozm set forth
in Section 1710.101 and a StatflBoent of Raaervations, Restrictions, Xbxqs
and Assesanants in acoordanoo vdth Section 1710.102. Ih addition, you
sust sufcxnit evidence of title, a copy of the sales co ntra ct to be used,
a plat of the sviadivision and any proootional material which you have
available.
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403
In tht altnoMtlwi^ if you tdflh to «Btir into ]
you must: £ilA a Ststnonfe of XteosA/ t09>thBr %iitli WiBpogting doci— nti
in aoooBdann with tfat iastxustiom «id foamt outlixwft in Wt 1710 of
HtU 24 of thi OodB of fiiduaa nmuUtlons. FImm ladioBbB your
infatntions within 30 d«s of your isMaipt of this W±mr.
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404
^ 'ttlN \ OePARTMENT OF HOUSING AND URBAN DEVELOPMCNT
l*|]H||j]** * O^riCI or MTIMTATf LAND SALfS llieiSTRATION
XJuiUUL/ VASMIMCTOM, OX. 3S4I0
itfRll W7
mmmm
Winklor
CEFTZFZSD MOL
.RBT0B2I BBCBZPT B EOOB ST ED
J. easy Barton, Bsquivo
Bxoffiir MAzonoy,' Hoar, BalMr —
1300 Aaoriean Bank Towar
221 waat Siicth Straat
Anatia, Taxaa 78701
Oaar Mr. Bartoni
subject > Granada Billa/Batataa« Section If 0ZL8R Mo. 2-0980-49-99
A ravlaw of tha davalopar'a aacnowladgad stataaanta for 1976 ahoiia
that tha davalqpar gava a non-approvad oppy of tha Stataaaat of
RMorvationa, Raatrictiona* Taxaa and Aaaaaaaanta to that year's
lot purchaaar. Accordingly, that aala %iaa not aada pursuant to
the exaaption and waa in violation of the Zaterstate Land Sales
roll Disclosure Act.
To adndniatratively aettle this aatter and in lieu of aoy further
agency^ action based on the present facta concerning the aala
or lease of lots prior to your conpliance with the Rules and
Bagulationa of the Znteratate Land Salea Full Diacloaure Act,
we requeat that you agree to the teraa of tha encloaed adatnl atretic
Settleaant Offer.
Thia agraeaant will include aending a letter to the aole purchaser
in 1976. Thia letter ahall notify that peraon that aince you
had neither perfected a full StateMent of Record nor reefebred
an affiraative axeaption order at the tiaa of aala, he has the
ri^t under Section 1404(b) of the Act to void hia contract
and receive a ooaplate refund of all aoniaa paid on acoeuat
of the aaid contract, including principal, intereat, taawa,
special aaaassaants and property owners association dues.
This letter need not be sent to that purchaaar if has 1) bought
a lot with an exiating dwelliagf or, 2} ia a contractor engaged
in the buaiaeaa of building i or, 3) haa aubaaquently resold
the property and can no longer reconvey the p r ope rty to you.
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405
«lM text of tfa* MnelMttd latter is te b« vsad. Any dumg« la
tfa* t«xt or fon of thia lettwr raquiraa tha approval of thia
Ottiom. tMfor* any aailin^* tto lUn ia to accompany this lattar
ochar than a copy of a cuinenUy effactiva Proparty Raport if
you hava oftactad a xagistTaticm with thii Offica, Tha lattar
Shall ba «*nt cartlflaA nail, ratsim jfaeaLpt Tv^uaatad. 9m '
cacum raeaipt shall- ba ntalna^ in your filas*
iTou *rm adviaad that tha thirty (30) days Mntioasd la tha ■odsl-
lattar ia in no ^my te ba eonsi4srs4 a IlAiit^tion on tha xps^t
of tiia purchaiar to void hia contract or to brln^ suit mdur
the Act for a saAmd or daMgas. Haithar yo« aor this Ofttos
eaa ^taciOgm thia ri^t.
If yoa accapt this propoacd sattlavant a9ra«nftnt, plaaaa utaeate
tha ancloeed Sat tin nan t Of far and ratxira It to thia Of flea vithin
20 daya of your racaipt of this lattar. Zf ywu fail to raapond
to thl* lattar vitM^ tha allottad tJxm, wa shall assuna that
you hava raj«<t«d the 5attla»nt Offer and consaqiwntly, va vill
aaauBa tha roaponfliiilllty of notifying purchaaera of thwlr rlghta
and consider wHac tar tha r action laay ba nacaaaary to pro tact
PQcehas«Qi and sssom fuU cmplianos vith tha profvisisas of Um
Zatsrstete Laad Salas mil Diselosvra Act*
t>laaaa in Com us of your Intantiona r awarding tha aubiaissioa
of a StatadBnt of Jlacotd or an axen^tion ca<[uaat. C^iastlOQS
concaming filing a Stataaant of Record or submitting aa
raquaat can ba dlractad to our £xaaination Diviaian, (202)
755-53S6f or ExBin^ption Staff , i202} 7S5-Z390*
Za rspiy^ pUaaa zafar te Bd ViaklMS.
Siacaraly*
'INpiractor
rSband Salas Baforoaaaat Oiviaioa
Bacloauraa
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406
May 25/1*977
DopnrtsBent of Housing and Urban Dovttlopnsnt
Off Ico of Interstate Land Sales Iteglstratlon
Washington, D.C. 20410
Attention I Mf. William Rogers
Reft Ed Winkler
Subject I Granada Hllls/Sstates* Section It
GZLSR No. 2-^980-40-99
Dear Kr» Rogers,
To comply with your April 11, 1977 request t I a»
attaching a receipted copy of your. form. #FRI-376« Zt
was given to the only purchaser of xinlnporved lots in
Granada Estates Section !•
Z %«ould like to add that Z am primarily engaged in the
homo building business. It Is xsy Intention to build hocaes
on all the remaining lots In Granada Estates, Section I«
Sincerely » ' ' ^
L.A. Felder
LAFtbe
enc«
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407
f*l-J74
Mki?^j 1977
Dear ^JO/fV H. CgyrCH P/ &J^^
We are writing you at the request of the Office of IntersUte Und Sales
Registration to infora yon of a setter of interest to you concerning your
^.^^nt to purchase i j i '* fi 2. ^75 / jj ir/tA^AOi^ ^^TTfTlS^
At the tiae you entered into your lot agreeaent. there had been no effec-
tive Stateoent of Record filed with the Office of Intarstate Land Sales
Registration, Departaent of Housing and Urban Oevelopaent, nor had an
exception been established as required by the Interstate Und Sales Pull
Disclosure Act, 15 U.S.C. 1701 st seq., which becaae effective on
April 28. 1969.
In view of the fact that your purchase agreesent occurred prior to the
effective date for an exemption or a Stateaent of Record in accordar.ce
with the Rules ar.d Regulations of the Act, you say, if you wish, void
your sales contract and any paynents aade pursuant to this agreeaent will
be refur.ded. If you have resold your lot, however, your ri^t to car.cel
has expired and is not transferable to the second buyer. If you have
Bade ioproveeents to your lot %xA feel you have been daaaged , you say
have to file suit if you wish to recover those dasages.
So that our records aay be brought up-to-date, we ask that you notify us of
your intention within thirty (30) days froa t^.e dat« that you receive this
letter, after which tiae we will assume that you wish to retain your interest
in the property. In the event your property has been deeded to you ar.d you
elect to receive a refund within the period ir.dicated, prior to such refund,
you will be required to execute the r.ecessary docuaents to reconvey the
p.'^operty to us free of any restrictions and encuabratices other than those
contained in our original Deed pf Conveyances to you.
If you have any questions regarding this (batter, please feel tr^^ to call
this Office and every effort will be aade to assist you.
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408
OCFAATMCNT OF HOUSINO ANQ UMSAN OKVCLOINiBNT
JUN2I 877
V WH i OFnCI OF MTCMTATLLANO SALfS MOIfnUTION
XJ^fl^ «A»«M«TOM. A.C JNIt
in-2M
Mr. L. A'.~r«Idtt . _ - —
L. A. Fttldar sad AjaoctatM
8016 II DoTAde
AiMtia. ItaM 7S737
Daw Mr. r«ldws
tabj«et: Grca«4« HilU/BsCAtM, •••tioo Z, OXLOl «o. 2-09aO-49-99
Ihia vlll «ekaovUdf« r«e«lpc of your loccor of Nay 23, 1977 and th«
copy of tba lottar a««e Co Mr. Cnttdifiald. Ihaak yoo for jour
oooparaeioA la th« rMolncioa of thia aattar.
Siacaraly,
siacaraiy, ^ — >^ >^
(\j.,.Jl^ .^^-—
m. millM lofora
/oiraator
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409
Tl. a. Tmldmr, Inc.
537 Woodward
Austin^ Taxaa
"1
I
ISXiS Application
Fabroary 5, 1975
B&WSSS. Through Data
Sarvicaa ra:
January (1974) conf. Faldar
Fabmary (1974) Faa to Alan Mintar ra raaaarch and prap*
aration quastion and answar ahaat
May (1974) Conf. Faldar, Mintar and Davidaon ' ^
Juna (1974) Conf. Mintar, Canpball
July (1974) Conf a. Mintar, Davidaon, Campball ra quaatiorfaira
January (1975) Conf a. Mintar, Davidaon, Campball, Faldar
ra. I8LS filing; axamination of quaation and anawar ahaatj and
draft; praparation application and axamination final drift
Talaphona Calla
Xarox Charga
A
5«°y
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410
JUly 19, 1977
Hr. L. A. Fttldar
L. A. Falter » Zao.
537 Woodward '
Austin, Taxas 78704
Lagal aarvicaa randarad during March and April, 1977,
ragarding noticaa fron tha Off ica of Intaratata Land Salaa Bag<-
iatration and talaphona confarancaa and eorraapondanea with Mr.
Faldar f2S.OO
P'
IN ORDCR TO INSURE THAT PROPER CREDIT IS
GIVEN TO YOUR ACCOUNT. PLEASE RETURN A COPY
or TM« BNCLOOBD STATEMENT WITH YOUR PAYMENT.
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A. RKXFORD WIUJS. Jlt. CPCU.
^^.^ . r^^ • , ^ STKWAirr II. SMITH. GM
BEASLEY-KEIX
INSURANCe REAL BSTATE INVESTMENTS
DfUWER K. 1402 NEUSE BLVD.
NEW BERN. N. C 28660
OctObar 21i 1<177 (919)633.3043
nr. Dudlsy L. O'Naal^ Jr.
Govttrnnttnt Affairs Offics NARS
ISS ISth Str««t N.U.
Uashington 25-. K 2QQQS
^^^r Dudlays
Uithout axhaustiva rcsaarch on tying down spacificsi it
will be inpossibla for ■• to b« as detailed as I would like
to be. I ae speaking here froii ay experience and the
experience of ay attorney i who has carried the lion's share
of the load of OILSR.
1. a. The time and cost involved in filing and exeaption
indicate a ainieue of three aonths delay and cost
of $500Q.OO upwards*
b> The tiae and cost involved in coaplete registration
would span a ainiaua of six aonths tiae and in
excess of $lQiOOO.0Q in cost.
2. I'm not sure it is a question of being.qpreasonablei
arbitrary 1 or bureaucratic i but aore a case of the
instability of the Rules<Cchange before resubait>i
lack of experience in the true understanding of
land developaenti excessive work load not antici-
patedi and in soae instancasi carelessness In hand-
ling applications. If we aust have rules such as
these, let's staff for it and budget for personnel
before instituting.
3. I believe this question can be answered affiraatively
on the total issue*
M The main burden shared by the developer^ builderi
and financier is
33-716 O - 78 - 27
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Hr. Pudlay L. O'Naali Jr. -2- Octobtr 21i 1^77
•• A burdsnsoaa and so««yh«t unraalistic set of rtquiro-
■•nts.
b* 9a lay in salasi tharoby incraasing land and dovalop*
■ant cost to the consuaar*
c« Tha tiaalinass of raturning applications and .
corractions.
d. Cartainly doas dacraasa coapatitioni haraby adding
adding additional cost *to tha consuwar.
a. Holding a Raaltor in liabo anaiting right to sail
f« Raraly providas any aora saraguard to tha consuasr
than tha avaraga davalopar yould do anyway*
5. Advarsa affact on tha consuaar •• runs hand in glova
with tha abova a«ntianed additional cost** dalay of
land occupancy 1 uncertainty of contractt no siapla
explanation without voLunes of reading^ and slows
coapatitioni sinca soaa landowners and davalopars
will not contend with it*
b* It is possible to derive considerable data froa tha
above 1 which would substancially increase cost as
well as being detriaental to tha tiaa of purchase*
I would like to recoaaend two approaches relative to
these regulations 1 being:
1* To those local 1 county i or state agencie*s having
land use or subcii vision plansi issue instructions
as to a ainlHun nuBb«r of paraits they aust cover
to aake their ragulatlonsi when coapliad witht Hfi-
aaterially axaapt from OILSR.
2* Uherein we we have adequate regulations at local
level 1 have a dapdrtncnt within HUP that could and
would expeditious y raviaw saav and approve for
satisfying compiiar><:a with Federal regulations*
Land control and land use Just basically are not a function
of national govamaanti as we •r^ t^ all devious in what wa
consider good use {i.e* progress vs poverty>* Our statast and
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nr. Dudlay L. O'Naal^ Jr. -3- Octobar 21<i 1^77
•van countiasi should ba vastad yith this rasponsibility* Thay
could handla it*
Lat*s start punishing tha bad guysi and ancouraging tha
good guys to procaftd in thair bast of land usa controls*
I hopai ^udlayi this will ba of soaa halp*
Sincaraily^
CBB:bw
xc: Dan Hanrahan
Al Abrahams
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REcnvrC- \^v
KfCNIK INC^REAIJORS 606 A 8TFCETANCH0RAQE. ALASKA 00901 TBJEPHQNE OKV) 2m4«»
1 OctobMT 25, 1977
^ Albert B. Abrahams, Staff Vica Praaidaat
2 HationAl AsaociAtlon of Raaltora
P OovarniDBntAf fAlcf
a " 925 15th Str«*t
^ WA«hingtDn, Q. C, 200005
3 . RBt Intaratata Land Salaa Ragulations
J Gantlaman:
Q In ragarda to your call to action datad Saptaabar
. 29, 1977, which I waa juit iud« awara of, I woold Ilka
s to provid« the following information for your usa at
^ hearings r«g«rding Interatata L^nd Sale*,
m
P Being frov ALaftka, wa hava particular proof that
9 0IL5R ia regulating Intra state lands aale* in that our
X advertiming madia d«ea not oroaa state linaa Our neva^
^ papers have less than a two percent out ot state cir"
o culation. I am enclosing a itateoient fcom a develop-
< sent corporatign^ TJtanaac Inc. which we have represented
g on several occasions on subdivision salai. The Statement
p speaks for itsalf.
* >iy company specializes in land salas la tha Hatanuska
P Vallvy of Alaska, which i« located fifty miles north of
g Anchorage- Although wa have not had the occasion to do a
^ EtUD filing oureelves> many of our clients hava I would
5 like to pass on soma of thtt thoughts and axpariancas sroa
of our cliants have had.
_, I, first, would lika to aantion that 0XL8R has only
m enforced their regulations in Alaska for the past two years,
m They originally came in with a bang and iamadlately tried
± to put a stop to all illegal subdivisions. Thay ttven went
Q ao far as to issue ceaa« and desist orders and aubpeoned
m devel<3pers to Hashington^ D,C. The developers Iti our araa
fwere npt aware of the regulations and did not faal thay
were in violation since they were selling aalas vithia
u Alaska and with one it* inspections.
g Through our local Association of Raaltora and pras-
IJ suras applied through our congraaaional dalagatioa, OZLSft
sant a representative to Alaska to give a abort talk on
tha regulations at the local HUD office. All along, tbe
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local BUD of £ic« imi initructed by OZLSR not to qiv« any
IrDformation out tegardinq the regulations, but raCar ftll
Inquiroa to their Washington, D.c. office. At thii
particular meeting the conaenauc of the developers present
*fas they reaily don't want to be breaking the law And
would like to coinply^ however, the instructioaa for filing
were extremely complicated and ambiguous » They requested
that 0IL5K send a representative to Alaska to hold a seminar
on how to file* OILSR responded that they did not have the
manpower or the budget to send someone for that purpose .
They informed us that we would have to work directly with
the Washington, D*C* office like everyone «i«e.,
As a result of thia, sevsral Charlatans appearad in
Alaska who claimed to be experts in HUD filings. One, for
instance, « Hr, Bob Andrea, charged anywhere from 55,000-
*2 0,000 to do HDD filiags for local Developers. OltSU at
that time w«« very tight and granted very few exemption**
In fliontha following, our congrssBlonal delegation applied
pressures, plus the fact that data was produced to prove
our media did not cross state lines and as a result, in
recent months DILSR has been more liberal in granting ex*
•fflptione in Alaska. A4 it stands right now, the going
rate to have aodteone do a filing for you in Alaska is $L000
for an exemption and $5000 for a complete filing.
In answer to some of your questions on your call to
action, Z would like to provide the following information*
In regards to the time and co«t involved in filing, the
regeatration fee and the cost of preparing the filing are
insignificant when compared to the costs sncountered by
Isold ing a fully developed aubdivision off the narkat for
six months, A current subdivision we are now marketing
called funmerwoods Subdiviaion, was developed by LOiMA PRIETA
Developinent Corporation, They started working on the appli-
cation Cor an exemption in March of 1977, Between corres-
pondence and unanswered questions and delays of OILSR, the
«xemption was not granted until September 1977, a period of
six months. The coet o£ holding that one and a half million
dollar devalopment off the market for six aontha must be
passed on to the consumer*
In regards to the adverse ef facta, the OILSR rulea and
regulations caute the consumer, the following i« provided i
Ke have sold approximately 500 lots to cuatomsra in
developments of Transac, Inc* They were required to send
letters of recislon rsattlement Offer") to the buyers-
- The value of the lota they had originally purchased had
already doubled, when these letters went out we vere flooded
with calls from buyer* They did not understand what was
going on and they thought they were required to sell back
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416
th« property at th« original purchasa prioa and thav thought
we vera crooked and they did not have the proper title to
their property; many threatened legal actiom we not only
had calls from buyers, but many had hired attorneys to
look into the matter. It took many hours of our time
to explain to these people what was going on. In order
tto explain it you Just about had to explain all of the
OILSR rules AAd regulations which are hard enough for a
developer to understand.
Z would also like to mention that Z have sold many
lota and seen many sold vhere a property report is given
to the buyer at the time of sale I have never seen a
buyer read the complete report before ha signs the receipt
saying that he has received and read a property report be-
fore buying Personally, I don't think the property re-
port has any effect on the buyer whatsoever. They look at
it as a Government form and a requirement to purchase the
property In my opinion. If the buying public was reading
the reports the/ would not have bought the hundreds of
millions of junk undeveloped property that we have seen
sold in Florida and Arizona.
Z feel the only possible «#ay the Government is going to
protect the consumer is to eet standards for Interstate
Land Sales and make it a criminal violation for anyone who
violates them, personally do not like this kind of legisla-
tion.) This would eliminate the unnecessary filings, paper-
work amd red tape. There i^uld be no expense or time delay
for the honest developer. The Government could spend their
time and money on investigating and prosecuting the dishonest
ones.
Z would also like to point out that in regards to the
attached statement from Transac, Znc. , it is possible for
either their Washington, D.C. attorney or representative of
their firm to be available for testimony at the hearing.
If you need further information, contact them direct, as I
will be on a cruise to the Miami Convention. At the Con-
vention, Z will be staying at the Seasons Botel.
Z would also like to mention that Z am the Alaska State
Chapter President of the Farm and Land Institute and the ,^.
opinions expressed here are very close to the consensus of '^
our membership. * .
Cordially,
KRENZK ZHCORPOl
TFK/pr _ ..^^
Enclosure "'"" ' •*«•
cc: Audi Moore
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417
goamBVY-^
/nce 1907 ) ] RECEIVED SEP 2 S 1977
September 23, 1977
Mr. Albert E. Abrahams
Staff Vice President
Government Affairs
National Association of Realtors
925 15th Street
Washington, D. C. 20005
RE: OILSR
Dear Mr. Abrahams:
I enclose the attachments of my misplaced letter of
October 11, 1976.
Because the size of my "confession" discourages its research
I would point out that the OILSR had to waste their time
and our money on an operation that, -
1. Had no mortgage on the land subdivided and gave
buyers free and clear title insurance policies.
2. Paved all roads and installed water and gas mains in
front of each lot and paid in full for these services before
the first lot was sold.
3. Never sold a lot to a purchaser who had not inspected
it and usually more than once.
4. Before signing a buyer up furnished him with a voluminous
property report printed years before OILSR "invented" such a
report.
5. Who averaged sales of less than 10 lots a year since
opening in 1964. (The Interstate Land Sales Act said the
secretary could exempt "any subdivision. .. .if he finds
enforcement. .. .not necessary in the public interest and for
the protection of purchasers by reason of the small amount
involved or the limited nature of the public offering.")
I can only add to the history that not one lot purchaser to
this day , two years later, has exhibited any unhappiness wTth
2212 THIRD AVENUE NORTH BIRMINGHAM. ALABAMA 35203
(205) 251-0225
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418
Mr. Albert E. Abrahams
Page 2
September 22, 1977
his lot purchase at Mays Bend. And of the 38 purchasers HUD
wrote telling them how to get a refund of cost, taxes paid, and
interest to date not one has asked for a refund. Zn fact, all
9 who responded wrote letters of indignation at the OILS actions
or ~of satisfactiT>n witfa~"their purchase. (See enclosed)
Sincerely,
^Louie Reese Am/, ^tf^^CFifl^C^d^
LRApb
Enclosures
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419
Route 4. Box 554
Pell City, AlabUM 35125
August 12, 1975
^Mr. John R. McDowell
Depertment of Housing end Urban Development
Office of Interstate Land Sales Registration
Mashington. D. C. 20410
Dear Mr. McDowell:
Having reviewed a letter froa The Reese Coeipany, Inc., Birmingham, Alabama, and
the letter from youj relative- tE> the ^allLrtq ot property within tUyt Bend, Z^ogan Martin
Laka^ St. Clair County ^ Alalhuu, I can only conclude chat BoAeane l^^ group, employed
by HUD> U conplitely wLUwut aomethlng to do to eafn their eaLafy They apparently
th4n hav« decided ta naJce thviceXvee a job of irrit^tin^. or Eor vie of a better verb,
infuriating the land owners of Naye Bend and The Reese Company, Inc.
The Reese OnpsAy, tnc- did not lell ne the lot Z purchased, Z went to them to
buy it. I had ccmiplet«Iy lAvemtlgatad the suh-^lviKiOrt befor* dficlded to buy, or
even to talk wlfih thair a^ent. diicovered in ny InvectlqaQion, frOA talking with
other cotBpl«tely Aaciifled proporty owners that there wai BdaquAta 4l4Ctrlclty« $as
water, roads, and that title iniuronce prcxv-ing free title, would be provided with the
purchase of each lot. My mind had been definitely made up before contact with them.
Miile I do not reside in Mayi Bend permanently at this time, Z have built a home
with the intention of fttlring thsre in seme future year. Z look forward eagerly to doing
this, as each time i 90 aut t flAd it a happiir place to live. Hq h*vk hed little or me
vanderlism in this area, due to the many pemanent residents {tvclvv of sixteen homes).
^
I talked with the agent on two occasions. The firet, we* with the purpose of being
taken onto the property from the vator f rpntjqv, the second time to sign the contract to
purchase. I had no literature mailed to me, no phone calls, or any tolitation of any
kind.
Z do not know the intent of the law (15 USC 1702B) , but I feel that The Secretary of
HUD ihoQld cxeDipt this sub-division from registration under the Znterstate Land Sales
Act, as few of the lota sold vbc* to people residing outside the State of Alabama. The
Reeve caapany, ine hai made nof attempts to sell lots in Mays Ben to non-residonts of
Alabama by i&4il advertising or otherwise.
Z, as a pro party ownar in Hayd Bend, appreciate the interest of HUD in my %#elfare,
but I feel the tiuO or^^ni^Ation has "stopped proachinq and begun to SMddle" into the
affairs of Thp ntjs^c CQW|iany Inc. and the f«rOT>orty omarf o( Hays Bend. Perhaps as a
citizen, I could su'itjost that there are other nwan^ by wliich to spend my tax dollars, that
would be of more benefit to the residents of our community.
Sincerely, ^^
Mr. Loui'S Rooso III
Mr. .Jim rir.'j, .7r.
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11, 1973
Th« H—a» Campmrtf, Inc.
2212 3td kwrntam
■iriiii«liMi, AlabMB 35203
DMr MrTlttM«: ~ "
Jiwc a uotm to rMfflm -tlM hich r«t«cd im havtt for your eoopony and le«
poraooDol. C«ctai(Uy la deAUn^ wtcti ku la oar putctkAM 4f cha *«v«ml lota
wo am i« Tl»!r* Ato^ *^^ tran^dc^intu luv« boon hmillvd in «ccDnl4ne* with tho
high tchlcil *bflfid*Edi of yauf conpaay mad coBpl«C«l]^ Co ovr laCtihctleo. .
do not vant to t>« «riCluL of uUO *M tha tnttriut* S^lu AaC* for
I roco|Dlia ehc nacesflity of proCfcEln^ citlsafLi A^tiut iinicTu^lodJ coapanioa
■n^Afw) In latflTittcc land salsa ^ On cha othmr tHtd* I Am vary lorry tou at*
axptrlaoctag dlfftculcy vttli Eltft Chrouth Callurv to cevtfly ulch a tv^IicIsd
of which, I f««l aurvf you wnra althar uotaara* or thought 6iA not a^ply to your
Iftyi Baitd davalopBanc. KatrstEully, I 4o not htva tiaa to itudy tha riculacloii
la dataU, buc froa fhat your l«tt«r iTidlcataa Ic would •■** to' ■■ chat du
Cha bAiLt of yo^ic^ havlQg ^da OfUy tliraa lAtacitata t*lmm ilaca c«niicliv tfaa
4avt;apf*«ac Iti 1965, tc would (oa* tflCMft cha txciptlon dead Thria Irtarttata
aalaa Otft of Ona handtad and fovtcaan, OVar a parlod of tan fa*ri vich do
•dvarcUlog Incactt^ca^ wovld **«m co brlot t*ya land vtchia cha purvlav af tba
axeaptlon and Intont of ^ha Act, parctoularly If youf cov^ny will no* co^ly aol
Taj^licor iflcti 1IW>, ToQp tinea you illd not oilv«rclaa IntaratJito^ th* ftr^vt aalat
V4at havQ l>oan ^Mta to tndivtdtiali ^o hjid olthaf loan tho [iroporcy qx had flfit
hand lofonAclon from frlandi w<io had saan It. Any parion vho has caad tha data
which your tiaapany rapreiantatlva glvaa to a^ch Lot purchaaar^ vho vlilci th* tvil^
division, or Mikaa pnulaqc Inqury by Mill, could raadlly datimlna that /on nadt
no "falsa and alslaadlng pttwlaaa ragardlng tha natura of tha land and th* typo of
eoMuolty la «»hieh It U loeatad.**
Again, I want you to know that iqr alatara and I ara plaaaad with all •tf*ctm
of Miya Band. Wa ar* thoroughly ati Joying our houaa char* ind In fact, ahoold «^
of tha watorfrmit lots In tho first S«£tor rccurn to you aa a rasal t of tha WMk
controycrsy, wo w«Mt1(l Ilko you Co contact us so chat «a aay dtfcuaa pirdMOO of
additional lots.
I hopa you will ba abla, in aoaa way, to raaolva tliia ssittar without ospoaalwo
litigation. If Chora la any way I can ba of aaaiatanca, plaaaa lot aa know.
Vary tnily youra.
^^-<^1 ^ . , Vi^y -^^-^
CMlss) Bllostain Wright ^^'''^ r«*«- /; . • , \r^^^ * y
124 Rastwood Orlva, l^koshora /
RlrMinf;1i««, AUhaM 15209
IhHiao l.«ica^lrm - Hnya Bcn»l I^fa 7 awl II.
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SuLUVAN, LoNG^HaGERIY
' OCNCAAL CONTMACTOnS
•MOUSTMIM. MUMKIKAL AMtl IHKktMMO COMStlMICTWtM
BiMMiMOMAM. Ai»«c ssaea
BiRMiNOHAM, Alabama
August 12. 197S
».9.ao«a*M
• MAIM, A4.A.aS«OI
The R*«s« Coapany, Inc.
2212 Third Av«mM North
Blndnghu. AUb«M 33203
SE: Mays Bmd Subdlvlsloa
Lot Ko. 142
C«ntl«
In August 1972 1 purchssod Lot #142 in your Mays Bond Subdivisioa
for $12,300.00. I aai vary plaasad with this purchasa and I would lifci
to axprass ay appraciation for tba pnmpt coaplatloQ of th« paving, gas
linas and watar Unas.
I SB still of tha opinion that Lot #142 is ona of tha aost baautiful
lots on Logan Martin Laluu
Sinoaraly,
Charlas A. Long, Jr.
CALjr/ss
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422
Weyerhaeuser Company
DtorkM Division -^
P. O. Boxioeo
Mot Sprtnga, Arkanaoo 71801
June 13, 197S
Hot Springs, Ark.
Mr. Louie EMse '....v^-Z^
The Beeie Coapany, Inc. . v.:;^.*;,"* i*.'.*^"
2212 Third Avenue North*
Biminghaai, AUbana 3S203
Dear Mr. Reeae: . v-.v' •••■"■.■' -. • ' .■ 'r^.:~ • "...
. .;•.•■ ■'•-..'■■■■ ':'.■■■' "::.t^if^yr ■ '
I have your letter of June 9 concerning the Departiwnt of Housiog -
and Urban Development - Mays Bend Subdivision.
For the record, I Bust be the Purchaser referred to as a residaat "^
in the state of Arkansas, furthemore, I have no coaplaint with
respect to the manner in which this lot was sold to me. Mjr dealings '
with your Company has left nothing to be desired.
If I can be of any further assistilnce in connection with this matter*
please advise«
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423
Kr. Loui« R«es« ••:• ■ '^;''v:::rt^,- ■ ,r'<J'-^. ■■■-■■ ' • '.h/vfx-- . :■ . •
Th« Bmm CoBpuiy
2212 Third Avenos Worth .J"l^ .,•
Blrmlngh— , Alahti 352Q3 . ,, .v
De*r Mr. Reesa:
I r«ceiYed your latter of June 9, 1975, concToSng HUD's Interwntion
in Toar buslntfas^ «nd I a» mat dia Appointed to l«im that «noth«r
federal bureAucraey baa overstepped the Authority that was grAnted by
Congreee. I vlU agree with joa that, in eona eases, the lM3t la bene-
ficial to the pureheaer •lu), in fact^ waa neceaearr to protect people
from fraudulent operations* ^ - v .-^
Aa an crwner of one of four l^ta In the Maje Band SubdivlaioD located on
Logan Kartin l^km, I hAvv been Dost pXeaaed with your compAny's perfDrOAnca -"T
And feel that in no way Mas there ai\j mis re present At l^nt, preaaure^ or qulc^
aales efforts^ I porsonall/ vielted the lot aeveral tl;i¥»a and, »t jour
SAleemaniQ auggeation, got In hla boat and approached the property from the
lake side to get a good idea aa to how tho water front looked, I cannot
understand HUD'a refusal to grant you an ejcefflption in view of your coapAny's
perfonDanca The streeta have been paved, the water aysteo ts In^ and your
coDpany haa constructed « nice public boat launch, pier parking facilities,
and picnic tables for the sole use of property owners Tour company even
did aoBa extra grading for as after the lot was purchased and I never received
a bill. I have several friends who have also purchasf^d lots and have built
homes there I have had nothing but favorable eonnents from then eoneemlng
your conpany.
AdditionAlly, I believe that your conpany Bailed m& a letter after I paid -~
my earnest noney and before closing offering Be the opportunity to cancel ay •-
sale. I could not looate this letter in ay file, but I believe 17 Baaory is
correct*
Tou Bay use this letter in any way you see fit, and, by copy of this letter and
a copy of your letter which I aa enclosing to Representative John Buchanan
and Senator John Sparkaan, I aa asking that they intervene in your behalT with
HUD in Washington. - .-
If I can be of any further assistance, please do not hesitate to call. - -
Sincerely,
C. B. McArthur
^Repreaentative John Buchanan (with enclosures) . d-V^'
Senator J ohn Sp arkaan (with enclosures)
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424
Contmmuionm of £ Und gaUs "eoQ. Ttit. *
M lu^a Ka SanAMt BBcriaon WtlUuu ipoMor of a ««I1
law obvloualy pacvar^wl by^ buf«aucratlc tiillAq^*
If v« bat* jvu wlt2» tlM Lao^th <>£ tUa «pl*rl*, elwrga It up to
our f**Ilag of rlgKt«ou« Lndi^AJtlon at bocosin^ «ni:AA(ii«d La tlu
ikslns gf oo* of t^ia H^jtiin^toii lKir*«ucrftcifla vhlch v* tud r«Ad vo
■acta About, but, for tlu fir it ^Lba, fully utpariaAcad, And vtut am
ajeparlanea Ic nasi
As AtlUcal laod d«««Iep«n for four gssaratlona v« a^ood aceo««4
by ft diviiloti of thd Da^axtiaut of Se^ntLaq &M Urbui a«v«io^i«at (EOD)
of Hllin? lot* in Intvcvtftta oaa^msrsm, and tinea ttm lav tiuy
«dBiinivt«r v«a spAcificaily dir*ct«d &t auch aotivltiaa, virh tha
inforaaca of cooea* tiut va ar* eonductlAg a frauduloot, hLqh praavura
aalBA cai&^ai^ aod t»v« ohaatad oar cuftoaar* at a racraatlonaL aub-^
dl^iaion, Maj^a Band, ffa dany aU thaaa accuaationa . Wa tiiliJt tiUa
ia provad by tha fact tliat hud on July 3, 1?75 wrota our lot purchaaa^a
that bacauaa wa had oot affactiwly filad undar tha lotaratata Lani
Salaa Sa^iatracJ-Oo Act purchaaari couM void tiiair purchaaa aod racaiva
rafurid of all paymanta nada^ And sot on* purchaaaz aakad for rafu^ or
cosplainad io any vay about the d*al ^ay had nda^ A^wavar, i of tha
3B wrlttan by BCD wrota lattara ccMfiralA^ tbalr ba^laaaa vtth thale
TJndar fra<juant 'raALLndar* of a poaaibla 9113,000 flAa ud two yaazi
In tba Fadarai panitantiary VOO tbav raqoaatad that uadar tJvaJr intar-
pretatlon of th« lav wa vrlta all racant lot purehaaara at^Uya Band,
a hlgh-ciaaa athically aotd co^aunlty of racfaational hocsaa on LaXa
Logan Maxtln, a lattar tlia amct taxt to ba dlcrtatad ttf t^«4, vith ao
aceoKpaayinq^ lattar or "itaa". Xn it wa vara to adAit out 'guilt',
aad offar to ra^orchaaa all lota raimburaing tiim ovnar for all principal,
Intaratt/ tazaa, apacial aaaaanaa&ta or proparty ownara aaaociatloo duaa*
Hhan wa cata^orifially daniad any incpropar daalljiga vitii oor Lot
purchavar* and rafuaad to adalt any auch daailAga or aign tuch a tartar
without at iaaat baing abla to hava oor aida of tha controvaray
accompany it, TOD than aaot tha lat^ac out itaalf aa ootad abava on
July 3, 197S, 4 day* aftar wa had filad for an Iniuoetlon la Fadaral
Coort to prc^ant it^
tta did i«rlta our porehaaars that if thay eontvod tbat aay aatarial
fac^a raapacti^ tha lot porchaaad by him vara alarapraaaotad to idm
cr conoaalad fron hlii, or if ha baa any othar griavajica vith raapac^ to
tha aannar in vhieh tUa lot waa aold to hlsr va would iUca to ba ao
adTiaad. tf wa find that any auch caaplaint haa any aarltr va will baka
vhatavar actlm ahall ba nacaaaary to radraaa tha auM
lut to back up a llttla wa aho^Ld fLrat axplain that tha Intar*
atata Land Salaa Act waa paaaad with th« Lawiatory purpoaa of aliolaatiac
carta in practicaa In Intaratata laad aalaa which ^^nx bayond that
anga^ad in and thought athical by avtahllahad Kaaltora vho ballarad
that thair boalaaaaaa thrivad on aatlaflad cuat^iara.
A larga- aagnant of thia aallinr Involvad tba anbdlTlaioo of naarly
tba vatt, and aalaa by sail to aaatMTt
warthlaaa Land in Florida or tba vatt, and aalaa by ,_ ^-,
paopla vho could ill afford to go ao far to inapaot tha proparty^ wfaieb
lack of inapaction allowad rathar wild lafaraaoaa if not alarapraaanta-
tlona la tha aallifig litaratura.
Aaothar aagiaaat iarolvad on aita aalaa and inapaetiona ia ahieh
tha :ialaamaii by iataccoB radioa and othar aaana paraaadad tba purohaaart
that aavaral purchaaari war* alwut raady to itgn up on tha lot balnf
■hown onlasa thay aignad up at oooa* All aorta of prasluBa aad caah
vara ofrarad to gat tha bfiyars to tha pcoparty. Fraa dinnara vara hald
J*'? f^ *^^^"l**tlc itoogai raactad glowingly to tha aalaa aitcbaa
and taUcad of iaaadiata naaa porcbaaaa, ate., ate, Ttanapoctation,
lodging, ate. vara aoaatiiaa offarad. -
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In wMny cu«a th« prosotac* did not mrmn o«m thm Uiid« or if tboy
4iA It was •object to hmmvy nort^A^as. Aad/or thay had not /at
Laatallad utllltla* and p&ving^ or if thoy liad, thay vara not paid for.
la all ca«afl tha Lot; pricaa w*ca yary hi^h in ordax to covar tho
vary ha^vy 'high praaiura*' adwctislng^:}? jattLng oxponsos, Mloaaooa
coraBimaioni aLon« o£t«D running ■■ hiqti ma ]SI of tho MiXor pricos.
And advoTtiaiog and pEOBotioa «ftan av*n Ugh«r.
I£ tbalr aalas vara >uec««*ful, I pra*uA« meat of thaaa davalopar*
pLo«ad tha caiti rac«J.v«d ovu aalling axpantaa LeitiO tha «0ianitla*
praaiMd ind roada, utilitl»<, •tc. Ot th* othar hand. If tha projact
was a failura, tha pcomotara had littla of thair own ^aay i;i tha projact
and could vaUc away with a ahru^ and tall thova alraady having bought
Xot*^ "too bad about thfl pacing and utilltiaa on your ttraat, our grood
plaa joot dlda*t woriE oat.*
mm t hink It intanatin? to aoto that in tho JUy 23, 1973 gporto
Illttotratod (piotad ma aid* to Gaofgo BomotolB* OXLSR Maiaistra^^
tho off oet; 'Aroond hora wo rftta dO¥alopara froa to aiaao 10".
Mr 4 B«r7tstain hijualf naa Bora ^Mtarata. *Tho grootost aorrico**
ho Mid, *wo can p«rfoca i« to «cara hall out of pooplo. Wt'To oot to
■ako than atop buying land aa if it w« a t? Mt."
Mr- Barrtstain ia alio quotad In Spor*> jilu»tratad ai ioyiag, "X
cut tho big rad «ppla_*nd t^toh th« t#6c»a ct^vi out", vhila «t onothor
tioo ho itatod that practically all tha ahuaaa in land aaXaa voro solos
by 0011 whjara tha buyar had not Ijiapaetad th# proparty,
Bot why is it that tvo od* In HDD raeoqtiiia* that thor# loot sight
bo a foir honoot oad athicaX land salaa paopla?
Th* abora ««plan«tion of tho ovlls tho lav «oo oiaod ot ooo
nacaaaaxy to Lllustrata wtiy I think it ao foollah for this boroott to
ba harasalng lagltiAata Land aalas paopla^ Juch as wa fool ffo aro#
rathar than using av*ry ounca o£ thalr snsrgy oa tho rool *flia flam*
artiats^ But this grrmjping foe aora and aora ptfw«r sosBS to bo
Inharajat in btu-aaucratic goramnant*
trow for «ur slda of tha story and tha thrust of thaso raucks
which is that a povac ^raaD^ing bureaucracy can , and gariarslly will ,
naks tsehlnical admin i.atr^r:j.vfl rulaa eg inclada tKoaa in no wy invoX^ad
in ^j> a igipropar conducr: *t which, tiia Cotigcsss dlrsctad tha anaglicig
In 14^3 w« votarad into a partnarship a^rsaflaat with tha Maya, an
old> w«ll-kxiown, and highly ragsrdvd favily of Pall City^ who ownad
without sny ttortgaga laop «cras of Laad now icnown us Hays t*ai. In
uditioh to ag rasing that tha Kays fuiily vouLd Cumish this land and
wu would put up 4ll davalopnant nonayn tha igreamant provldad that
oftoa all th« Ijuid TsLua snd th« da^vlcpnant cost was tacovaradn profits
would ba dlvldad hatw««n tha I^nd ownar and tha davaiopvr., Vid also
for tho peot«ctloQ of our lot buyars <»nd of course ctut caputatlon} our
agraamant with th« Kays provLdad that w* wars to ba £umish«d a titla
policy insuring « good titla £rs< of any t ftortqaga or mctdnbrsncaf so
that w» would^ in turti fumislTaach purchaaar such a policy at tho tima
cf cloaiaq^ which wa hj.vs dana on a vary lot ssla ^
H< than« for cash ., gradod and pavod roads throughout tho first
racordad 3«ctor of iOl lots plus half a nila of county eoada to eoiuioet
op with county paving, fta (again for caah) built a soduri) watar systssi
aad Baifir ^i^ axtandod Alabass $•» aaina throughout this sactor.
Wa gavs tha watar syatsa to tha Lot ovnars subjtct OAly to our
raeov^ry of our coat and intataat. Ha racordad rastrictiona to pravant
any «Htaur construction or trailers, and sat up a hoawownars aasocio-
tJ-on to allow i f*ir ^hiring of any improvcDunts tha lot o*nars night
oara to aak* to tha d«dicatod park aad launch araa or otharyiso-
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All this wM don* a yaar b«for« Sanator Hilttws latxodoead tbm
Iat*r*cat« LmaA Sa1*» Act in 19<S and flva yaars bafora it paaa^d
Apcil 2i, iSiir axi4 aiqht yaars bafora tEa March 31, 1972 ragulatioaa
vara prontulgjtad*
Tha intarKata iMitd aalaa paopla maka Buch of t^« ptQ party rapert
thay dwiJwl in 1966. Za trying to aaka ruU diiclQiur* far our
puLr<:hAaafS >m pcLntad ia 19i4 a 14-pa9a lin^la tpacad, lag^l visad -
pceparty raporti vhich had avary thing wa could think oC vtuch would
inta^raat th« pufcba««c of a lot with a pEaaobLa to thii af faciei
"Ha would ba plaaaad to hava you join tho axcluaiva group at.
Maya Band.
Ha hav* baan in tha raal aatata businaaa aixty yaara i
think wa know anough to laava tha 'fast buck' alooa aa
for long ranga good will.
Tharafoca va pub Hah thia tadioua lattar to try to ba aura
uvmrf<nm un4ar*taada bafora thay aign up thm ia^rtuit dataila
of thia dau'alopaant. wa will appraciata yoar wailing through it.
Pint Lat ua «ay that wa hava no way of knovinq h«w faat or Ia
vnat: dlr action thi* gtaat L 000 aera davaloptsant aay turn. H*
ar a- par *uadad th^it it wLlX ba a faat noving raiidaatial da^alo^
aant in ita initial itagH. Ha hava at graat axpanaa atartad it
otZ with high raatrictlona and firat daaa watar, gaa and paving
to plaaaa our buyara.
If tha pcpulaticn growi to whara ic 1* j^stLfiad wa hopa to, and
raaarv* tha eight to» dvvmiop non-vatarfroat lAod anyvhaca and
va tar front Land in 5 action 15 and th« nort^h gn«*half of 5*ctioa
23 b oth in Tovnihip L7 South, EUnga 4 ^att far shopping cantaci*
coBHareial a^vHa, sarvica ttationi, ootalar public narinaa, yacht
baaina, fatiremtnt can tan, apartavitir wim \a± tsAAiJ cluba^
country clttba# golf eoMfiaa ^£ dthar cauuarciai or racraational
Again raaambar thia 14-paga documant waa givan in advanca to avary
purchaaar baginning aix yaara bafora BDO *invantad* lEalrproparty
raport and aight yaaZF^afora tha March 31at ragulation that it ia
claiaad took ua in waa proanalgatad. .
Aanng tha 14 pagaa tha raport eovarads
Facts on tha watar ayataai and ita articlaa of incorporation. .
Tha Fadaral Powar rnmwtasiona ragulationa as to watar loval
f luctu^tioni .
Tha building natrictioos*
Tha non-profit BoaM Ownara Asaociation.
Of couraa it oaa.ttad cartain thinga «#hich BOD* a aany lawyara wara
abia to draaoi op but would c^at a aaall, low nark-up davalopar far out
of proportion to thair worth to kaap currants
I of tha SOD raquirad information iat
anca and da tail* on naaraat fira dapa
aga duap, boapital, doitoe, dantiat,
mg, public tranaportatioD.
SiJ^^f ^: ^^^ ®' "^ dataila on aaaraat alaawatary, Jr. ligh
ano nigh school.
Oistanca and dataila on naaraat fira dapartaant, poliea station,
garbaga duap, boapital, d«toe, dantiat, poat offica, ahopping
cantar, public tranaportation. ^ ^
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Pr«a«at eeadition of aeeass.coada aad a cross aoction sad dotaila
of eoostruetion of stroots.
Diatanco and population and condition of roada to all eitioa and
county soata within SO milaa.
Watac aystan tost boringa.
Eatimatod coat of aaptie tanka« tolaviaion recaption* foundational 4''
building pomita.
Eatiaatod cost of drainaga on aach lot. Oatailad ovarall drainage pie
Data on annual rainfall, taavaratura ranges, A»fMy*y^ ^^ hurricanaa,
tomadoaSf aarthquakaa, sod alidaa, brush firsa, forsst firss,
avalanchss, iFolcanic eruptions or other natural hasarda, unuaual
noiaea, propoaed induatrial developnenta , animal pane, vehicular
hazarda, etc., etc., etc. (Bow could there be worthwhile data on
many of theae hasarda such as tomadoea, earthquakea, foreat firea?)
Verification by formal letter of most of above from registered
engineers, utlXity companIea~or varioua public officiala in charge
of roada, water, telephone, gaa, electric, drainage.
Financial atat amenta from moat of above utilities including an
opinion audit (estimated annual cost 93000 to 97000) on the
development. .». . —
*Such further material information, documentation and caErtifica*
tiona.... necessary in the public interest*
This is only a sample. Theae inatructiona on the atatement of
record alone run to 14 tremendoua pages each of which was the equivalent
in words of 3 of these pages and in places quite techni c al.
Za there any wonder that reliable people aa quoted hereunder
esdmate the coat of compliance at 920,000 to $ SO, 000. .And the property
report must be reworked every 12 montha or ao. Zf you sell 8 lots per
year how much must be added to the price of each?
We printed our property report and did all the other things
mentioned as in the case of the title policy, for the protection of our
buyers and to convince any skeptics of the legitimacy and viability o7~
Mays Bend as a development eight years before BUD's regulation requiring 1
And the subdivision and utilities all built and paid for
before the first sale. Does, this really soundr^ike the kind
of high pressure operation the law intended HUD to be ".
concerned trith? Zf it did th4n our very: alow salea as follows did not
confirm it. Our subdivision map went on record in May, 1964. He sold
no lots in this year, we sold only 2 in 1965, € in 1966, 9 in 1967, 6
in 1968, 3 in 1969, 6 in 1970, 10 in 1971, 22 in 1972, 41 in 1973, 8 in
1974 before being warned by HUD in mid October to stop selling pending
a determination of our case. Does that sound like high pressure selling
or just maybe a legitimate merchant building up his good will?
Zn the latter part of 1972, through the press we begun to hear of
extended new regulations of the original Land Sales Act and were concernec
Zn April 1973, wm inquired of thm Birmingham Association of Bome
builders as to the Interstate Land Sales Act and Mr. Tinker Cheney, the
executive secretary of the Association, told us they had employed
attorney James J. Odom, Jr. to look into the matter. After pushing Mr.
Tinker several tiioes, he reported on August 29, 1973, that Mr. Odom .
decided «ie were not under the act unless advertising nationally.
33-716 O - 78 - 28
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tf*v«rthal«ii. ia ^ AbtuuUnc* of caution, on Vormbmg 23 # 1973 «
w« c«ll«<l on thfl Loc4l HUD offfic» Aod ««• r«farr*4 to Mr Jtrj
tlQlmmm who told u> tlut a dtwlopa; tud to tiav« 30 or aor« «pplieatioa<
^r y«4r from out ot it^ta bftfar« ha tud to r*gl«t«r- BUD*« Nr.HolaM •
Alio sAid thAt ths 1972 r*gul4tian« bmd b««a *up«r««d4<l by aanr oaas
OMdtt ia S«pcwqbaE 1973 («?t;ualiy d^cad u ot K^rch 31, 13721 , bat that
ha hadn't ba«a «^1« co obtain a copy sf thmo. yat.
Ha than, oa Auguat Ifth aod again on Hovambar 2t,1973 wrata tha
Brolcara lActituta of Uu AaiocLation o£ Raaltora bo gat thaix views
and quotad HUD « Kr BolaAa nc^ JKobart L. McAlIiitar Dlraetot of
Tha National Association of Raaltors,Stata and Urban Affairs OopArtasat
answarad us,
*Tba anBw«r to your quaatlon is , as I ucd«r*taad Iti tha
■>Ba as tha RUS officials gava you. ^^avac^ i bava coa-<-
taotad tha BOO offlc* of lAtar^tata La^d Salai Staglatratioa
ia HaahlAgtoA, D.C. * whc will ba aandlng &a a copy of thas«
• cagulatloaa. If th«ra is mny chaaga iA this aaswac t vill
lat you Jcaov tiamadiataXy^*
Wa aavar haixd furthar froa UAH and knovlng v« vara a&kii^ ao
affort to sail outiid* tha Pall City, Slrmljighju araa, oux «dTartialag
coniiitlag of vary occasional <da ia thaia tvo eltiai local papara, h«
aaauaad thAt if thara is tuoh a thing aa intra* tata co^i^cca (sad tb*
founding fathari ■ aaaad to think so) v« nut ba ia it and rslueod,
Alas on Octobar 24, 1974, through tha pcopacty ovnara, tXQSta« TIm Fi:
Katiooai Bank of SlrvLLRgham, ir« cacaivad a long qaastiOBftlrs froa nO
and adviaa that va sh£>uld oot sail say aora lots.
Ouf an«w«r asda DacvLiwr IT, 1974 r tat cut hov diffarant our
oparatlon was from thc>a at which tha law i#ai aijpad r and askad thalg
halp to avoid tha baavy axpaasa of eoatinuad raportiag to thair
agaacy. Ha saggastad *
*Zf wa ara ia iatarstata i iw irea, thaa ao bosiaass
ia Aaarica is ia intx-aatata coHiarea. But why than,
if thara is no iatrastata c^hnafcsr did tha fouadiag
fathars avaa rafar to iatarstata coDB*7ca7....
'And on this basis I ask year patlanca and iadulgaaca
in trying to halp us aumva without tha aicpansa of
hiring aa axpansxw law fl^m. (tha Hfational Association
of Industrial Parki, whoa* s^la* voluina, ia nuahar of
■alaa^ is incoaiaquazitial in ocotpaxijon to raaidantiai
lot lalas has astupstad th« coat of covpatant ra^orts
at 123,000 to 150,000. Saa Oacsnbar 1974 Aaal Escsta
Atlanta) .
*Z think you vill adsdt that tha trhcla ict and tha
zagulatioas ara nacaaiarlly vary, wry oovpLicat^ and
aicpaaai,Ta in ti^ia and aonay for a saall cparatioa «uch
as va ara to ha biu-danad with, tha atataiaaat of racord
aloaa is bayond tha girajp of tba ordinary layman »*
Jis. Doaaldsoa of BCD callad a faw day* aftar ay lattar and
luggastad i«a fill out a rathar coaif>ilcat«d fon davanding consldarabla
c«**arch aa an appU(^ation for axanptlon. Thii ^m did and inciudad tha
raqulrad $100 filing tm*. thiriag this pbona eonvanatlon I luggait^
that va should gat dcvn to funduiantala- tf RUD would a and an Inapactor
to Mays Band wa would taka as such tlsa off aa it took to gat his in
contaot wita aach of our purchasars for tbair privata intarri«w«. Aod
va would pay all ROO^ ■ axpatisas.
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i?i 4 i^*«"tlflq to aotft thAt throognottt tiM hrimt thm «ev«rn-
vut fiL*d d4f finding our fln^ l4g«l action Im irrint to oot «a
lAjunetloo) thT* v** th* inCBjcenc* thAt tho jmriiimuL haj aado «
tho cough lavflitigatiOQ, wh«n i^j 4 aattat of fact all tho "iacriainatlAo
Infonutioa* wai tjcurftctAd f^on our «i;c tight forward answara propoundod
to iM in th»ir quaatiori»ir»» ,
I •" ficaly convleicad that l£ thay bad «c cap tad mir off or to
co«a 444 if aay frauduiant, Upcopar oc unathical piracticaa wora
XMktitq placa tl»*y nouid hava grandad ua tha ra^iiti^^tidn axaaptlon
to quota tha Act for th« caa>a& that tha tagiatration waa "not
aacaaaary in tita public Latacaat and for tha protaction of tha
purchaa*ra by raaaon of tha aaall aaaust Lsvolvad or tha lialtod
eharaecax of tha public of faring."
Th«ir brlaf aaid. *Ia Octobar 1974 Otl^R LaariMd that a^laa wua
t*Xing pUca at Kays B«iut and bagan «□ iovaatigaticn of thoaa aalaa
activltiairvh^ii ■trlctl/ gpaa^cing thay laamad of It fioo u« tdian tha
First NAtion^l Bartk Truatsaa for tha land Owr^ara forward ad to u» * SUD
lattar <>( Octohar H, 197 4 ratify Ijig than thay night not ba In eonpliance
and mggaatlng ao furthar lot aalaa ba nada urvtil a datanaiaatlon w«
Bada. Qit Octobar 31« 1374 va anavarad tha TOD gua«tlonaira which had
accoQipaalad ttia lattar.
la fact r BQ oo-'tha^Tpot lATattlgation othor than ouoa^looa
propoundad by sail vaa arar &v3a. ,
Thafr brlaf forthar xtl^'ad
Plaintiff ... ."did not laAlc as aieanption from OZLSX oatll oarly 197S
aftar OILSR had bag^m ita lavaatlgaticn** Again thair invootigatlon,
conaxatad of Baaa guaatlona and aiuvara by aall only.
Sut tha infar^AC* vaa tbara, wo vara hiding and through tholr
InTaitigativa talanta thay caught aa, ^"^
AJ aantLonad Ln answar to our lattar of Oocaidbar 27, 1974, qnotod
abora, Ka. Donaldaon of BOD eallod aid lug^aitad wa apply for an
a^taAptioa vhlch r«quirad a lot of work and a 9100 faa.
Our appUeation for ayytion was doniod robnxary 27, 197S.
Aaoag^ tha grounda for daoial thay oltad an arhitiaxy adninlatratlva
rula {not a part of tha Lav Itialf} thAt do axaoiptlon woold ba givan
if S% of tha lota vara aold lae£|btata in any ona calandar yaax*
In thia ragard wa thlnJt it intaraating chat in 3 of tha 11 yaar«
ot «alaa va did not sail auff iciant lota Ko whara ona intaf i«ata lala
would not hava put ua in vlola^on of chia adsinlatfativ* ruling.
But far Dora Utportantr whan ordarad to atop tailing lota Octobaf *
24, 19 74^ va had airaady sold fl lata and alnca va vara about raady to
opan a nav lactor it i« con<:aivablaL that had v« >old 3 wjta lots bafora
tha year and va vould not hava vloLatad thi« 5i ml* which wa kn«v
oothin^ about at tii* tina- (Thia i£ not to dany va couid hava Jcnovn,}
Aut tfho can kaap up vlth a^atytEi-ng ooming out oT^wa 3 h in^ton today? tha
Largait huiinaaaaa vith floors full of lawyeri and CP^ don't laaa to ba
abla to^ And as par tRXO's Kr. HoLna^and tha ffational Asaociation of
_Slaaltors_ ratoonia froa SCti tha baaurocra^y can't Icaap cp aithar.
'Thus par ha pa a* a'dlract 'caault of thair ocdaftng oa to eaaaa
aalling in 1974 wa fail«d to sail anough lota in 1974 to qonllfy for
thair axafflption^
tha sacond raason wa wnra danlad tha axaaptlon was that wa had an
archltactucal control eooMittoo eontrollad by ouraalvaa. Wn ara at
loss to undarstand vhy thla control obviously sat up to prodnca "^^^^ «■
valoa in tha davalopaant %r«« haaif ul to our lot buyara who had tho sobm
flancial intaraat wa did in ■ainfaintng thnaa valuaa. And our financial
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cl*T<ioii«ri Atm g»n*fAlly l*si Li;t#iy to ^* undttiy r«tricriv* or
o«*i*d.. But ■varytijjuj ti^it could >» tp4Ll*<S out vat tlx«*d7 mAoA^zory
La 4 pA^** of i«s*l siiA* 'iJE^^a »p4c«l r^mtrictidni whieii vmrv o£
r»COt[J «xac* H»y 1», 1*65 > * y^jji b*Jor* tj» l«w m* pU4«d 4ad %
yvftrm b*£ar« t£i« 0«v r«7ulAt±oo vblch eQtD claiaad »Dt oa usd^c tta
act bwr* pnBilqatad.
Oou it rw^Iy m^krn trntitm tftat Af c«c- txyifi^ *o *^1I oat ia tlM
rsstrietioai 4v«ry <»nc*iTahX« prvbLaa tiut ugtit cta« op, oa tlw rar«
u&£3r«s««a probliit* th* d«v«Iop«f controllwl Lriitvit«ctural eoattol
eooKi^t** *rtulil bft caprtciou* or unduly raitrictiv* on tii« lot bofvr
Asd thixm lo«a 4 *a1«7 C*a you vLiuilix* Bucn 4iCrti<jB anl*» ia fSCC
Ic «As ii«c««*Ary ts pnt«7t t4« v%lua of prior trqvm Iota m ««11 mm
thm d«vaXop«r^ r— ilnf rnj locr
Slit f« Bcn Loportut th* ArcMt«rtur»l Control C^Dtleta* vu
t*t up by rftAtxlcti?fu racordvl uid sad* ad^nditory lUy 14,19(9, four
;fUL£j li*:^» tb* L*v wu p^isAd Xftrll 3S, 19«9. W* mifbt disp^OM "
wlttt tiU* trcbj.t*et'J^*i contwl coBaiitt»* in ■«<rtari dvr«lop«d iji tho
futur*, w« Af« p«£nAd*d to th* d*ti:iJBMt oi lot Uiy«-i la tJM«« •«ctOn.
Bat «#hat ds wft do vit^ tiu 42 ttt^^IiI lots in tbo ■■! luti
bound by raatrlctioiu «lfMdy of raoord?
And. til* third cvaaon w&-tmrt doaiod tho ^ _,-
it vu £riuduliint oc iaprop«c for tts to soil lots doun to tlM Qatar's
adqr* luh^^gt V3 thA fvdariJ. fo«Ax Caaaisaion'i r^guirad flood «n««aaat.
In Qn« o£ otix subaoTOftnt f«d«r«l Court ox««a our Attaf^tay got no tnanar
^hma. bm. a4k«d "Jod^o, thai* flood «Ai«iwAta lc« tw^uirad by tha aaa«
tJ.S. Covaniaant nov taking axctptLoa to it- If y<ra «*r* b«ytng 4 Laka
front lot woald yon prafor wa da«d you tba vtela lot aubjact to tba
•■ ■— n t, or a lot down to tha flood aaaanant and oalr « riabt to cxoaa
tha flood aassMat and gat to tba ntar
ActsaLly, tba aat—ant waa to allow tha ovaar to gat to ttaa aatar
i^t. aa a utility aaasBMat. And thn r«d*ral Vowar *''"— ^ttItw asad it
aa a aaana of Imtxijtq tba poblie t*v* aecsaa to tba aatar sad still
protaat tba Poufvc Co. Moat paopla h«d fait that t&« p«at polier of
allovid^ ttia Powar Co. to buy a* mcb of tha vlvrallaa aa tter wishad
vaa an undaair&i^la pubLLo poUcy. On mamt prioE p^war aivoaateoats
tba Powar Co cavma aoat of tba l^Jcafront land and wLll not sail tha
tioam aitaa but laaaa* trhi for 15 yaar* Aod ^alaaa tha raats aa thar
plaasa. (Haarby aacanplast Lakaa Lay, Mitehall sad Martin).
In othar vocda t&a Padaral Coira ma a nt 's own affert throogh tha
'•daral Powar Co^vsion to aaXa powar ^ipauadaaatB aoca aaaabia to
tba public is Intazpcvtad by HUD aa datriaaatal to that 9^m pablie.
Zt isn't as if va cancaalad tb* aasaaant^ ia tha coatraty «a pat
it oa tha nap of racord aad vamad avary purchasar fxoB lfi4 ia vritiaa
that his hoosa Bust b« built abova this aasavant. And tha haalth aa£^
Esnlng paopla £aquij«d avary lot to hava aa adaqaata hoasa sita abc*a
tba aasanant bafocv approving our aap of racocd.
wa wuid LUca h* i i m h to rairiaw all 3 of tha Maya Band salas
vhich by coniidarabla stratch of isAginatioa sight ha eallad iatacstafta
salas.
-1 .'^fi' ^^ "''^ *^^^ '^^^ V^ ■• **''^ ***• S» Halt. ilr. J,t,
rlaiMn^ bouqbc Uit 13, AOt fraa us but trvm L.«. Edwarda vho had
piiT«««d tba lot froa ua.. TSiB^at was naxt to Kr, flwnlaq'a
brother *i hooaa {Thovaa K. riaaing) , tfia n*xt y«*r on May J, 19^*,
viLiiout our.raalltin^ tb« lal* b>d iticb awaioaSa aTgtLiflcanca, Kr.
J. I*, flaai.^^ bou^bt a Lot f ron uj Adjaini^^ hii origiJi*! purchaaa-
™|^i£ J^iili louna Ux. ^ >oid t|iii Lot in JnttrttAtm tt— area?
^JSIortunataiy, aoEHwa to us MrrTTLr-fTagng^a s a " aatlva oSTBaorJU.
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Although irT«vmluit linc* th»* »l«a did not violets tlM'r«9ulAtloa
»ad did not *f fict our Mwmgtion, t»«dua« n«Lth»c ladic^tt iny iff ore
to ■iTT Lntarti:ats »nd *r*Tfl~T7ct <TXiMtion*bl« intic^tACft 4«l«i w«
bri*iLy out Lin* tJn circunatajicfli of th« gtii«t two out o* our 114 lot sali
^tAat Bigh t t>* ciilfrr^ int»ritit* «&!««,
Our firat goaaibj* in^«rat»t« sal* vaa in i»67 b«£or« th* law
vaa ovaa pu««d and va* no sor* an intarmtata *«!■ than tha abov*,
Mr, a. J. Eauan waa traaa tarred by Ivij amp lay »r Hontaano Cbamicai Co.
to AitAiaton, Alabaaa* a tcvn Z5 nilat aaat of Kayv Sand- WicJiout
any off-tAr-aita loLicitation h* appaarad at Maya Band, iAapa«t*d and
bought a lotj built bi* parcnanant tua« on it and livad in tba bouaa
£oc aa^acal yaars until ratxanifarrad. ftut vhan did b* bacofta a
^ casidast ofAlabasa? Hli«n ha wma tt»r^f*cEad, v»;i»d_^^ want tQ worle*
~'vb*n va built a ^uaaf So wond«f you naad good and aj^anaiva lawyttra if
JJQ3U bav* to dflKl vitb^^vamaantL
Our only otbftr aala, not obviously intaratata *ltb«r, vaa to
CoLonal Rlcbird A, ifaidratt of Atlanta who bought in 19 7Z* Sinca va
badfi't ddvar^iad out of atatar diract mail^ nwapapar, oc Otbarviia,
%ti*n uiaweriag BUD wa iwruirad oC Col- naldratt aa to bow ha had bacoma
Intarascvd la Logan Btartin and Maya Band, fla vf^ta ua, 'Va b«^a frianda
vho liva on tba lak*. K« llkad thia proparty ao w* loq^ad foe aooa*
thing coopacabla-' (enphaaia oucal . Anyvay ha aI*o appaarad on tha
propaaity without prior aoli citation and Laapaotad and bought a lot.
Do tbaaa tbraa lalaa aound 11X« an intaratat« aalaa caopaign to
you? AJaTuninq all thra* wacm: in fact claar cut igtaratata lalaa
ov*raIl our iiit«ratata aalaa w«ra*T57fil"Tr"out of"^"Ji ^ ' '
I rmally aaad not coomant on tba fact tbat Sill Thcffipa^n, Jia
King, Jz.t Ldula Haaaa III, Mra, ^llia Robinion or Miia Hary Azmlnda
Hays, all of whoa at ana tlAa or aso^bAr talk ad to protpacta an
Saturday or Sunday aftamoona, bardly qpjAlify aa high pcaaaura a^aasan.
Tbair proapacta waUcad and rawaly*d On tba Lota thay a« lac tad bafota
buying. And than 2/lrda of tba 69 faailiaa buying lota in tha Ciiat '
cwo aactocs indicatad tbair tat iaf action wltb thair lota by maJcing
haavy in^aatisiants in bouaaa on than, Doaa t^ fact that wa only
oannad our aalaa offica on Saturday or Sunday aftamoona and Mltlffln both»
and alAoat navar abovad a lot ttldw««k sound lika a high proasors salaa
or ganlxation 7
I will atraaa bowov^r that not ona buyar has oTar oxproteod to as
bis diaaatis faction with hi a purchaa*, nich l«*a compLainad of mls-
fapraaantation or tbat ha waa not in avaxy v«y *^ r ^ \t ^ fairly. But t
buy arm bAva a^tar baarin^ of our troubla takon tho tiaa to wsito as of
^•i^ confidanca in our aalaa oathods.
Ha bava navar triad to sail our lota aa baing daairabla land
spaculatlons , although thay bava appraciatad In valuar aticJOn^
atrictly to tba truth that thay vara daairabla raeraational hona aitas
with tha paving and watar alraadv in and paid for sad that thara vaa
no aortqaqas or liana on tha iota. — ■"■ """~~ —"
I tblolc it Intaraatlog that although wa had glvan B!n> cov^Lata
information lata in Aprils I racaivad a cartlflad nail aumuaa to appaar
bafora ttUQ in Waahin?ton on Hay f, 1^75 and to bring all tacorda. By
thia tina i^ vaa apparant th^t wa wara haadad dcvn tha long road to
apand a lot of aonayx and wa bad pravlcualy ampLoyad a local attomay,
tir. Marrln Chamar> vho aftar gatting into tha nuttar advlaad that wa
alio ampLoy a Waahington attomay, Kr. Langhoma Kaith Qt Hogan and
Bartaon, Kr. Kaith promptly acitnowladgad to m;D tha racaipt of tha
auAAiona and inguirad why? Mr, Kaith waa told tha lusvona was isauad
bacauaa w« had not fumiahad a ll*t Of our purchaaan which Ljat In
fact had baaa naiiad bo tha prop^ar parson In HUD in January , tSraa
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moathm hmiof, milm xMotaittiag • oagf of Mmm, BD ■i Wft o rt to NT.
loith ziSSCp? of tho liot ia Jaaamcf, 3 ■ootha boforo t^ fiBBSBi; iS&
now nil till tho oiHBaas onat still otaSl BonnM wo BadaotmHattia
otto ooeoB^ sobdivlaioo wo hudlo which tb^r ««AiB l««tf odidttod taoA
boco ia thoir hnda thtoogh Caboaiso, OOhaotoa, Oacdaor* Oomo ft ontoal
for oovoral Boatho. Xa fact, thia aattor bad boaa back aad focth to tba
axtaat that Cahanlaa ft JOhaatoa b^ »\^^^*f roeoiirad a daaial of
oa April 2%, 197S
ao tb^ aaid, failod to f ilo 2or naaptiaa
which tbv ogaia lator adaittod waa fiOad oa Jaaoarr 2« lf7S, g^SL
bofOto tba
a waak bofOra Z was to ap pa ar ia Ifcahtngtoa
raeaiirad a aail tooaipt for tba tmmnnu aad Nr. Kaitb bad aokaowlodpad
ita raeaipt by phooa Z was aorrad a daplieato tmmnnu ia ar of fico
in tba ptoa oae o of aqr aaploraaa aad eoatoMrs by oao who idaatif iad
biaMlf aa a O.S. llaraball, piaaiiaihly to iadioato to a >a i TOBa ia
towa that Z bad iiwailitiil aona borribla fOdaral eriaa.
tooh ia tba pow ar of tba Podaral Baroaoeraof today. Aad to
iUaatrata thair iaharaat nhaaiaioa for avor aoca p owa r » Z alght aota
that no triod by ragalatira iatarpcotatiaa to tnclorto indaitr i al
parka oadar thair "protactiTa* ara. Bat tba Vatioaal Aaaociatica of
Zndaatcial Parka aad tto Soeioty of Zadaatrial Baaltora* a aobotaaftlal
part of tho aMbarihlp ia which ia iadaatryf paraoadad tba Ooofcoaa
that tba raal aatata poopla ia ZIM, Oaaaral Blaotxle« Vord aad othar
largo mnpanlaa who bay practically all tba iadoatrial park lota wara
*parhapa" aoca aophiaticatad thaa thair baaafaetors ia WOO, aad i
ao "big brothar protootioa". Aad tba Coagraaa aaaar a tr a a ag a a i
objactioa ■aanJid tba act to apall oat a aponiflr oMapEEoa for
iJiBBKidral parka.^
Ihna in tba eaaa of thia third aad laat "roaaoaa" for tba
wo wara la fact alroadr aatitlad to aaaaptioa by tba aaw law
Zadaatrial Parka.
Bat bara wa wara atiU oaabla to aall lota oatil owar 20 aoatha of
affort to porsaada BOD that wa ara oot oporatiag aa iataratata lot
aalaa achaaM. Aad atraa after offariag to pay thair iaapaotora
to coaM aaa oar boyara, tba final arbitar of oar traatworthiaoaa.
Of ooarao, all BDD haa to do to briag aoat davalopara to thair
kaaa a ia to mn-rlnno to iaaiat ao aalaa bo aada aad to oontiima to
raqaira andlaaa aad aspaaaivo tad tapo aabaiaaioaa aad litigatiQa
which thay caa afford aad thaa wait . Obvioaaly, a largo high piaaaar a
orgaaiiatZoa with ita big 8alaa~^fOiiBa# big aaxlB-ap» aad big iipiai
badgat,. eaa ataad thia "baat" far battor thaa tba laall athical
oparator aoUiag at a alow paea at priooa aat la tba ligitiaata rathar
thaa tba high proaaara aarkat whara oftaa lota aall for 100% or aoKa
abowa thair valaa ia tba ligitiaata aarkat. Bat aafoctoaataly* it ia
aaaiar for tho high praaaara poopla to ooaply with all BOD's aipamiira
tad tapo jaat b o caa a o thair priooa ara aaeh bighar ralyiag aa tiMy ^
' ip rathar thaa valaa for aalaa.
Zf BOD ia abla to daatroy tho valaa aarkat bat aot tho
praaaara aarkatr aad thay hava failed ia tba lattar ao far» tho pablle
will jaat ha^ to pay aoro.
Aad whila oa tba aabjaet of coat to tho poblie wa would
woald bo aaa^pt if wo aold oaly to boaa baildara* Za tba
battar off to bo f orood to bay froa a boaa hnllrtai^ Toa aay \
aoro tba boaaa will coat aoro if it's lapoaaibla to gat a iiiwti»r oi
Za apita of our baiag sura that our baada wara eoaplatalf eli
at laaat iaaof ar aa tba iataat of tha lav to atop fraadalaat laad
lot aalaa waa concara ad it *raa aot aa aaay daoiaioa to aatch oar aa
aaaaa againat tba awaaoaa financial and lagal faoilitioa of tha O.S
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Go^fxaMat. (TIm amiiua «ppxoprUtioa pMdiaf la August 197S £or tha
Of flea of Zataratata Laad Salaa la $2,700,000.00). Na raad rapaatadly
what ttaa xagiatratioa eoat la ia aoaay, aot to aaatioa papar «ork,
awaat aad taars (baliava aal).
TO quota a fair aoureaat
lt*qistration prov*4 to ba both axpaaalva (about 920,000-
f3S,00{» aod t i m m conauniji^ (Uir«a to aiaa aoatha to coaplata) • Thaaa
axpvuac lAcraata oux ^isk uul ■xpoaoras tha capabla davalopar auat
pass thmim ccsu aa to th« sod U4r." WiUiaa b. Bara, Jr., Bagional
Viea Pr««id«zic of thm tfAtiloaal Ajiociatioa of Zaduatrial Parks ia
July 13 7S a#jtl tJtata Atlanta .
JLaotbar davmlapar irrota uai
^Oor ioitlal fa« to tba attarnays la HubioTtoa U Sl.OQQj vid if
wa h*v» to go to 4 cooplata ragi*tr*tion, it i% oar api&ioa tliit t^bm
faa vlll go to f^S^OOC. if v* ira AhXn to gat &a «x*aptlon, v% **ciAata
our total faaa la W*<fcLington at 515,000. lo *xWition to «il<, I tuva
parioaally bad to ■paut Sl.aoo vlth ay own attoraay advlaisg ma aa to
hw to daal aot only witb ay principal but with waabiugton." Wa. ..-Ji^ns,;,
*Ia tba flEit. part o£ July, va cacaivad from oar WaMhijigtoa
counaal a l50-pag« docuaanc vtUcb is tba ou^liAa vbicb va ara 4Uppoaad
to uaa in davviapijig ou^ regiitratloa vhich wa bava baaa askad to fill
oiit just=iJi caaa tbatr'a tha- dir*(;^on va Intand to go, I bav* oa*
paraoD fuU-tiaa oa go^ ataff dolri>g notniog but thia wocJc. $o^ avwi
tbougb wa ara a coKplataly tirban aubdlTtaion, hawir^g *Qld Sa,«\ of our
lots to t04rn raaidants, our cost vill ba cosjidari^la to prova our-
lal^rva ' iooocaat' or aot aaading to ba undar tba jurisdict;lon of tha
act.* Sad Quota ...
Zaddaatally, tha Local SOD offlca lad thia davalopar bo baliava
ba also was aot cora r ad, Hban SOU can't )uap up vtt^ tbalr ova
actlTttiaa what ehaaca do local paopla baT«? . -jjLji^
Aad oar own local attoroay, ktc, Harvin Cham*rH,iayB i:*giat;£a^oo
will ooat ua a ainimim o£ SIS, 000 and amt be braugtit Mp to d*ta
avarytlBa a road ia pavad oa tba vay totSa naaiEyschoola , or tha
aaaraat MD aovaa, or tba hospital cbaagaa tba braadtb of its sarricas.
riaally, wa raluetaatly dacidad that wa eould aot afford to pay
avaA 920,000w or (2000 par lot, to lall 10 lots a yaar. Thua wa "bit
tba buUat" aod waat into Fadaral Court oa Juaa 30, 197S at which tisM.
wa ft lad aa in]\xactiva procaadJ-og
Bav lfly alrvady baaa dalAyad Ln mMj^lnq lay aala* fox Ah aoatba
Bi^MHtp ic ia oC llttla conA4qu*nc* ajtcapt to abow wby only a Cool
vould try to daai with miO witbout good Lawy^ra aijnca QtTD lawyara will
ua* avary tacbulcallty or D«aas to dalay a dacision to put finaacial
praaaura oa tba davalopar, Tba action vas filad Juiia <
30,1S75 raqu«atiAg aarrica on HOD, Tba haaring vaa aat for July IS,
^975, Oa July 17, UTS ttOD's l4wy«ra askad for a casatting d£ tba
haarlag to a latar data on tba grounds that SXJO had not baaa aarvad.
tba haaring vas postponad until July 19,1#TS. At tba haaring v*
laamad tbat^ suo had In fact baan aarvad on July 12, 1^7 s, flvg daya
baform Lac)c of aarvlca vas uaad as grounds for dalay. AndT^wouti
aa*H that a July 13,1973 sarvloa of a papar fil«d Joaa 30tb was itaalf
straagaly lata.
Of ooursa tha 3 Waahiagton Lawyara who daf andad tha Oova rna ant
ia Judga Saa Poiatar'a Court, aa wall aa John R. HeOowall tha
sdBiaiatrator of tha OLS, try to aaka Uttla of tha eoat and tachaieal
problaaM of ragiatratioa.
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Zb thAlr brl«£ Mr. NeOowvIl statad ttet aAay dmwmlopmr* makm
tbm fllin^A UiKas«^vaa, Ani tn* lawyers in ▼•rbal ■iijimiiil bsUttlad
our lAVY«r«' rtcocsuLdA^ion ihAn n alio ajtacia^a c^«cialiAt< ia
this £i«l4*tii* WduB^ujifUin lAv, ti^m ot aogu and Wart^on vbcHi tbmv
lab«Lad ^a 'ao«% vxptnaiv* 1mm tlrm. in Waahingtiu,*
Mr. C hTHT wasn't txyinq to tii^a u tlia *aoit «xp«i:*iw«* bat
thasa paopla who ha had a«trar haard of vara rac^Braeni^Ad by azh^i
lawyars as tha ^»t La. tnla flald. And it*s oratty obvloas Z ->«<"■>
that wa naadad tha bast. "— —
Thus tha vary WJO lawyars who 4*t so voluminous and tupar
tachnical in th a i r vrltJ-a? at tha inpLsBsntln? rag^Utions Ltut
paopla darling vith Uiaa Bnat hlra *60-aB*haur lawya^ to try to
daciphar, than try to tall you that any on a can handla thair own
^•9i«trations. lu-c doa»n't thaix racord so fir and thair iu2a of
tachnical racocds acd ■an«uw:a waxB anyoaa with itor*ial tittalli^aBca
that thay battac gat tha bast, la^al sdvlca a^rary stap of tlu way?
And don't forgat that thasa «ua Covarreiiantai lawyari will iJi
t, as in oar casa, asa avary cohm in thair own raoulatioa to
trap yoo.
Too lata to. halp lja p«jrh4ptH bat it doas appaar that tha Coograss
is b^coEu^g awarb ot uHj prsblaa in tha tandaney of tha baraaa's to
attauipr ta «xpui4 thalx pow^r far bayond tha intant of Congrass.
Savaral ncant Lavs hava pcovidad for fotura raviair of rolaa and
r«<ril*ticaa pccniilgacad ondar tha act to 'insora tha intant of Congrass
Is nor aaceaadad ^ * ""— — — — •—
A quota froa Sanator Ooaiiaiccis intarasting, 'Thara ara alraady
anough ?ovamjaantal ragulations for rhi (saall basinass) to eoatand
with. Tbay vhonldn't hava to hira a las/yar just to know what thair
rights ara.*
Thoaas Ehrllch Daan of tha law school of Stanford onivarsity
Whan a«kad tha quafltlon, *It** oot only tha ausbar of Lavs that paopla
coaplalA abou^^ Thay &lso coB:pJ.aJji abqut tha way tlw -laws ara vcit^att-
that thay at vary dxfflc-ilti to undarscuid This sama faallag appllas
to opLAlonj by coorts. WoaLdn't it h«lp if tha lagal langaaga wara
olarlfiad so tha avara^a parvon coold undar stand what it — snsT*
*A. Yoa'ra right that this i« a probl^an vid It's ona that is
vidaly crltlcixad. Z think law- schools tbcold put a high prsMiuB on
th* *iji7la daclarativa santanca-whlch saans to gat lost all too
fraqoantly.*
And ha furthar oasnantad,'. .. ^coogriis to, eontibutas to this
glat (of court fiqhtts and laws) which £ call Isgal polutiorv- Wa saa
tha «ff«ct-3 in our unlvvriity. To provia our cenpllano* wich all tha
ifadaral ml as Mtid r*guI<tiona ra^irai a buga staff, an anon&ous
■BOunt of pspaf work, and thooaaAds of bours of axpaiuiva lawyar work."
In closing, wa %#oald Lika to coosnnt that all this axe*s*
ragulation (U.S. Ma«#s ft wodd Baport, Juna 30,1^75) i$ a*tlmatad to
cost eonsuaajr* IIJO oaQ,000,aO0 la sddad cost to what thay buy.
And to quota Prasldant Ford who das<:ribai it ai ^axcaiilTa
iovmcnamnx. raguXatioss that itlfla productivity aLVninata coBpatitlon,
ineraks* conauBor costs and contribota to Lnflation
Says tha Prssidant: *Z want small businasj jcalsasad from tha
shacklai oC fadaral rad tapa I went to and unnacassary/ ««#«^y and
onclaar ragulations "and naadlaa* jupar work.
Mr. rord places tha annual cost to consuoari of onnacassary and
wastaful ragulatory poUcias at >2Q00 par f*«il.y
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Obviously-^ th» IntAivt o£ Congc«is La stAtin? tbm s«er«tary could
•XMBpt *«By «utidiuiil«n,, . .If h* tlnda •nforc«iaft(it....iiot n«c«as«ry in
th« public int«r«it uid fot ui* protect ion oZ purchasers by rsasoa of
tbs saall amount InvQiwd Qt th* LLnlt*d n«tura of tbs public of faring*
was to aneouraga ths axanpcion ot Voc lalaa of a dif farant eharaetar
from tha massiva - hlgli praasuca «ala l>y nail.
And to our nathod of oparation tha only r*«l subs tan tiva obj action
BOD could find wma that ona lot lala of doubtful intra* tit* eharaetar
put ua in violation gf ttUD « arbitrary *S% in any ona yaar* rula* and
that a yaar in which OUO cut of £ our aalaa laaving us lass than the
ona yaar in which to orancoma tha Si.
tfa think thalz antira position full of tha ridiculous and absurd
tachaicalitlaa for vhich Hashln^oa buraaus ara now bacomlng notorlaua.
To ?uota Haltar t. arindar, Profa^aor of Economics of Rutqara
UniTaraity, "It ta not until tha paijpla b*qta to catch on to tha
natiira of tha ayituaatic plundar {by tha atata) and until tha paopla
bagin to challwiga this coloaaal con gama that tha stata doaa in fact
turn brutiah."
In viw of tha many ^^uotaa abora, tha-. paopla and Prasidant Ford
ara baginnlng to 'catch on* tha.t tha stata is »"m1ng brutish.
To put it anotbar v«y our fioa baa cartalnly hmvx tha victim of
what Profasaor Balmut jchoak, tha Austrian aociolcgiiXr in his study
cf locial bahavlor calls 'tha pLaaatira fait by the powerful man in the
powar that anablaa him to be iznjuat>
To al40 quota Sanator VillJ.*a j, ruliirlqlit on thm EntaratJte Land
Sales Act , *Tha burdan* of tMa lagljlation fall aquUly oa ziim ijood
as wall as tha bad operator a and this Is what inevitably happana whan
Government seeks to singla oat an Industry and aabj«ct it to a itijui of
p Trophy Lactic machod of regulation* instead of <»^#4p<.rg and punishing
certain Illegal acta>
Aapr aaantative Philip Crane baa pointed oat that oaay federal
agencies are all in one comhinJitlon of prosecutor, judge and Jury and
that contesting thaix rulings can be laore axpensiv* than it is worths
£van if 4 builnaasoan w^na his case in coun , h« must pay attorney ' s
fees and litLgation coita, axp*na«s often fer in axcas* o£ t^« fine
he vould have paid for pL«ddxng ^no contest.* Al«o «v«n Lf be >ias
tuccasifUuLly clearsd blaaalf of one charge, ha facsa tha pcasihlllty
that the agency vill continue to search for viola tlona in an ef fart
to achieve viiidication.
Thus, as stated by Mr. Crane, «fe are now faced with the reality
that conplianca by soar cL on rather than compliance based on the merits
of the caaa Is becoming the rule, not the exception
Hell; after spending 56,400.81 in legal fees alone and on the
advice of this caun**l w» geve up and on July 8, 1976 were forced to
accapc an on<^9it« sxiiispr^ion by making the following face saving con-
cesi Larva to the bureaucracy.
1. We hold an election of members of the Archltecturai Control
Conmittae.
2. Hathar th«n cdnvaylng tha lots in the norsvl vay vith the
Paver Cvapany'i flood ea^sment set out as an exception vm
convey only down to tha Power Company aaaamant uid gLv* the
Lot pur Chaste an ea^apiftnt across tha Powar Company ^s easement.
3- tfe obtain effldavlca from aach purchaser Chat thay bave
parionally inapeetad tb* lot and land then to OILSK at the
•nd of aach year (We hid navar sold a lot that the buyer
did not walx ovar and in Joost casaa savaral times)
*• ^T'^ ** ^v* sold 299 lota we tmst go out of buainasa or
comply *rith the very expensive property reporting originally"
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Of course, thm only raason vm w«rtt abl« aftar owg 20 aoatlM to
work out this coapromisa was that OiLSR was parsuadad that tb&f ««ra
about to writs sobm naw casa law undar aoat uafavorabla rlrniMsi aiiLiai.
. i.a. thair parsacution of a thoroughly athical land salaa ooHpany.
Baspactcully suhaittad,
LH/ajr
P.S. If sha aaans it, it is haartaning to raad tha followiag quotas
from HOD Sacratary Carla A. Hills.
"Thar a is no industry in Amarica that is not aneuabarad by aora
ragulations that it can handla and snra than is naadad to gat tha job
dona."
* (Thar* it) A 5uBibla of ovarlapping-of tan conflicting-codas and ■
.rsquiationi provLdad by banavolant buraaucracias at avary laval o£ local
axui actional gw^rnmaat > '
'Hhaa g9T«rnnant gati into tha act, tha consusMr pays tha priea.
And ones Lnto tha act, tha govamiaant hardly avar gats oat, and tha
consuaar continual to pay."
*Tha liJcaly banafits of any fadaral regulation anst ba carafulXy
traighad against tha costs of such axpariaants.*
Sacratary Hills. "My whola approach to this condoainioa ragalatioa
is a cost balance. What ara tha banafits that Z aa baying for tha
consuaar? How auch do thay cost?
Z can assure you that if we lay on a responsibility, it will ba
passed through and tha consuaar will pay for it.*
*^Kr. tundine. ^1 tend to agree with you about being as cooearaad
with ov«rra gelation as Z aa with no regulation at all.*
"Highly technical and voluainous disclosure stataaants ara
complicated, costly, and, as we found during our study, often net
raad by tha buyer."
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Mr. AuCoiN. Thank you ve^ much, Mr. Boberts*
We will now hear from Mr. Smith.
STATEMENT OF HEBHAN J. SHITH, VICE FSESIDENT, HATIOnAL
ASSOCIATION OF HOHE BUUDEBS, ACCOHFANIED BT BOBEBT
D. BARNISTEB, SENIOB STAFF VICE FBESIDENT, AND OABT
FAUL KANE, ASSOCIATE LEGISLATIVE COUNSEL
Mr. Smith. Thank you, Mr. Chairman.
I am Herman J. Smith, and I am a homebuilder from Forth Worth,
Tex., and I am testifying today on behalf of the 108,000 members
of the National Association of Home Builders. Accompanying me is
Robert D Bannister, senior vice president, and Gary Paul Kane, asso-
ciate legislative counsel.
We certainly appreciate the opportunity to testify.
Interstate Land Sales Act passed and we supported it, and the intent
for which it was passed. Since then we have run into the same problems
that the Congressman from San Antonio was talking about. We have
a problem understanding why a legitimate subdivision within a city,
that has all of the protections of the local government, and has only
intrastate sales has to be governed and brought under the jurisdictions
of OILSR.
The Congressman explained he has not received an answer to that
question, and neither have we. This is a classic example of how an
administrative agency can distort the purpose of well-intended legisla-
tion over a period of years.
OILSR's involvement in regulated jurisdictions is the area that
most concerns our homebuilders. OILSR has extended its jurisdiction
from undeveloped lots in remote parts of the country to the sales of
fully improved or development lots in metropolitan areas where land
development activities are heavily regulated.
For example, in most of our areas — I would say this is true in Port-
land and Fort Worth and other areas that we are concerned about —
before a builder can even sell a lot he must gain approval from local
and State governmental entities.
Mr. AuCoiN. Do you think it would be true in Florida and Michi-
gan, as well?
Mr. Smcth. I believe it would.
I know it is true in Orlando and Battle Creek.
The builder's plans must be reviewed by planning and zoning au-
thorities, environmental review boards, departments of public works,
public health and engineering, local utility districts, school boards,
city councils, county supervisors. We can go on and on and on with
what happens in the local jurisdiction that has the controls within
their area.
There is another oddity here. Even in cases where an FHA lot is
approved, or in an area where VA loans are approved or where Farm-
ers' Home loans are approved, we still must file and receive an exemp-
tion from OILSR if the subdivision was over 50 lots. In some cases
these requirements are within the same Grovemment department.
OILSR's intrusion into this process generally comes in the form ^f a
letter or subpena sent to the builder, scHnetimes after house and lot
sales have commenced. The builder is compelled to appear in person in
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Washington, D.C. We have several cases of where a builder received a
letter that scared him to death. He did not go to the State capital or his
local city hall, he had to go all the way to Washington, D.C. He had to
appear on something that, very f ranlJly, he knew little about, because
the letter was very brief.
As Mr. Roberts said, our people mainlv are made up of small entre-
preneurs ; 52 percent of our 103,000 Komebuilders has 6 or less
employees. They can hardly afford to pay, as the Congressman from
San Antonio said, $20,000, to have a subdivision registered — approved
by OILSR in an area already having regulations.
We see OILSR's intervention into local regiilated jurisdiction as a
classic example of wasteful and unnecessary Government overregula-
tion. Consumers receive no benefit whati>oever, and builders incur
substantial hardships.
NAHB strongly believes that OILSR should have no authority even
to question subdivisions regulated by local jurisdictions.
In previous hearings in the House and Senate committees, I have
heard a lot of testimony from others. I have never heard one c<Hn-
ment that a legitimate subdivision that has been approved by the
various local agencies, are having problems that would require OlLSR
involvement. In fact, I heard Senator Proxmire say that he receives
approximately 1,000 letters a day letting him know how his ccwistit-
uents feel about what is going on in Wisconsin. He does not remem-
ber receiving a single letter on the subject that we arc talking about;
that is, consumer misrepresentation within a regulated jurisdiction.
What are the effects on consumers? When confronted with uncer-
tain filing requirements, potential delays, cost of a protracted dispute,
and the potential civil and criminal sanctions, manv builders — and I
might add, most builders — are simply refusing to sell lots whatever to
individuals; they only sell to other builders. This can prevent a fam-
ily which does not yet want to be tied to a particular builder from buy-
ing a lot in a good neighborhood either as an investment or as a future
homesite. Those families who do purchase from the second builder
pay a higher price for the land as a result of paying two builders'
markups.
We believe that Federal involvement in the development of houses
should be kept to a minimum. This area of law traditionally has been
a concern of State and local governments and should continue under
their auspices.
OIIjSR regulations that came out on June 1 are over 800 pages,
and again restress and reiterate some areas of regulation. If we were
to go through these new regulations — and our lawyers have expensively
gone through them for us back home — we find that, for example, in
one area these new regulations require that Bit least 30 percent of the
lots in the subdivision must be improved with roads and electricity
before we file. You can see where we not only have the expense, as
Congressman Gonzalez talked about, of the filing but we have on top
of the $20,000 he was talking about, the expense of time delay, and
that is getting more expensive every day. Every time the Federal
Reserve meeits it gets more expensive.
And consequently, we are looking at a considerable amount of
money while we are awaiting some answer from a bureaucrat in Wash-
ington on whether our subdivision is exempt or not.
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So, very candidly, we just flat do not register with HUD.
Testimony last week at HUD hearings in Dallas reflected that in
Dallas County only two subdivisions, to their knowledge, had filed.
Neither one of those were in the city limits of Dallas, which meant they
were selling their lots to builders only. Consequently, before an indi-
vidual can buy, there is another price tier that can run anywhere from
$500 to $2,000 on the lot in that area.
The home buyer pays for it. Normally, they pay for it over a period
of 30 years, as they make their mortgage payments. Additionally,
home buyers cannot take competitive bids from several builders which
could also be another cost.
One of the things we need more of right now in our larger cities
are more construction lots coming on stream for competitive purposes,
not the elimination of the small homebuilder, the small developer,
entrepreneur. Forcing him out of the business only brings the large
corporate builders into the business.
This is the one thing that has driven lots up within our jurisdictions
faster than anything I know.
NAHB strongly supports the provisions of S. 2716, now incorporated
as section 715 of S. 3084, the HUD authorization bill.
I will not get into the details of the Minish bill and others. I will
.say, in studying Congressman Minim's testimony, a couple of points
that he makes that he thinks would be good, and we concur. We concur
with the attorneys general that have testified in these areas.
T hope you have in front of you subchapter 3 of section 715 of S. 3084,
which was approved by voice vote in the Senate.
Mr. AuCoiN. This is the Sparkman amendment?
Mr. Smith. Yes, sir.
Pertaining to regulated jurisdiction exemption.
If you will carefully read that you will note that Congressman
Minish's problem of installment contract method has been addressed.
The contract of sale requires delivery of a warranted deed to the pur-
chaser within 180 days of the signing of the contract, and it would
normallv take that long to get the improvements finished.
A policy of title insurance or title opinion is issued, so it doesn't drag
out.
A second provision in the Minish bill requires the developer to
promise to provide basic services, such as water, sewage disposal, and
so forth.
If you will note, in subchapter 3, the real estate must be situated on
public highway which has been built to a standard acceptable to the
municipality or county, and a bond or other surety acceptable to the
municipality or county for the full amount of the cost.
It goes ahead and mentions : At the time of closing, potable water,
sanitary sewage disposal, and electricity have been extended to the real
estate or the municipality or county has agreed to install such facilities
within 180 days.
In other words, this amendment exempts legitimate subdivisions
within a city that has these jurisdictions whore bonds are posted — and
I might add, bonds are a suretv acceptable to the Government, not
just any bond and not just the developer's own bond. We believe this
type of subdivision should be exempted from going through the $20,000
OILSR filing process that the Congressman was talking about.
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Mr. AnCoiN. It would, under this amendment?
Mr. Smtth. Yes, it would, under this amendment.
You will note that in contrast to the Interstate Land Sales Act,
which is merely a disclosure statute, local ordinances and reviews
protect the customer by substantial requirements, and that is not
changed in the Sparkman amendment.
It will probably clear most of the le^timate subdivisions and de-
velopers in the cities where we are actually trying to build housing for
the consumer at a price the consumer can afford.
The Sparkman-Tower amendment insures that the consumer will
obtain a lully improved lot which can be used as a homesite.
We support it 100 percent and appreciate the opportunity to appear
in front of your subcommittee, and would be pleased to answer any
questions you might have.
[Mr. Smith's prepared statement on behalf of the National Associa-
tion of Home Builders and a copy of amendment to section 716 of
S. 8084 follow:]
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STATEMENT OF
THE NATIONAL ASSOCIATION OF HOME BUILDERS
before the
SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
on
INTERSTATE LAND SALES ACT REFORM
Mr. Chairman and Members of the Subcommittee:
My name is Herman J. Smith, and I am a home builder from
Fort Worth, Texas. I am testifying today on behalf of the more
than 103,000 members of the National Association of Home Builders
(NAHB), the trade association of the Nation's home building
industry, of which I am Vice President and Secretary. Accompanying
me today is Robert D Bannister, Senior Staff Vice President, and
Gary Paul Kane, Associate Legislative Counsel.
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We appreciate this opportunity to present our views on the
Interstate Land Sales Full Disclosure Act, legislation proposed
to amend that Act and regulations recently proposed by the Office
of Interstate Land Sales Regulation (O.I.L.S.R.) •
Enforcement of the Act by O.I.L.S.R.
NAHB supported passage of the Interstate Land Sales Pull
Disclosure Act in 1968 as a reasonable means to protect consumers
against certain deceptive and fraudulent sales practices used
by a minority of unscrupulous land developers in their interstate
marketing of generally undeveloped real estate. A major ploy
in the marketing of this land was usually the fact that it was
sold to purchasers who were unable to inspect the lot site
because of its remoteness or the buyer's geographical separation
from the land's location. Many of the potential buyers were
purchasing property in anticipation of retirement, or as second
home sites, and often relied heavily upon the representations
of the seller.
A classic example of how an administrative agency can distort
the purpose of well intended legislation can be observed by
studying what O.I.L.S.R. did to the Act between the time of its
enactment in 1968 and today. We believe that a growing nunber
of transactions for the sale of lots are being brought within
the ambit of the Act that were never intended by the Congress
to be covered when it passed the legislation. O.I.L.S.R., in
our judgment, has vastly expanded its jurisdiction through
administrative regulation to the point it is creating financial
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and business hardships on professional home builders, is needlessly
increasing the cost o£ land and housing to the consuming public,
and is wasting tax dollars through unnecessary and duplicative
regulation.
50 Lot Exemption Situation
For example, the Act specifically exempts lots on which there
is a residential structure or where a contract obligates the land
seller to construct such a structure within two years. The Act also
exempts small subdivisions of fewer than 50 lots.
One situation which arises is where the builder of a 70 lot
subdivision constructs and sells homes on 60 lots. Under the
statute these should all be exempt sales . However, to close out the
subdivision or because of unsolicited interest from consumers,
the builder sells the remaining 10 lots to individuals. O.I. L.S.R.
has taken the position that the Act's 50 lot exemption does not
apply in this case, and that the builder must file for registration,
counting the lots both on which homes were and were not built.
Regulated Jurisdictions
Perhaps, the major concern of our members is that O.I.L.S.R.
has extended its jurisdiction from undeveloped lots in remote
parts of the country, to the sales of fully improved or developed
lots located in metropolitan areas where land development
activities are already heavily regulated.
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In most o£ these "regulated jurisdictions", before a builder
can sell even a single lot, he must gain approval from myriad
local and state governmental entities. His plans must be reviewed
by: planning, zoning and environmental review boards; departments
o£ public works, public health and engineering; local utility
districts and city councils or boards o£ supervisors. Generally,
lot sizes must meet certain minimums, soil compaction and/or
percolation requirements must be met, the land cannot lie in
an environmentally sensitive area or too close to an airport
flight pattern, and plans must show access for fire equipment.
And, in virtually all cases, the builder must either complete
roads and provide water, sewer and electrical service In
conformance with local controls, or post a bond or letter of
credit covering the cost of such improvements.
O.l.L.S.R.'s intrusion into this process generally comes in
the form of a letter or subpoena sent to the builder sometime
after house and lot sales have commenced. The builder is compelled
to justify in person in Washington, D.C., or in writing his
failure to file for registration or exemption. And, ultimately
such a filing, in fact, may be required. Sales of further lots
may be suspended in the interim, and in some cases, the builder
may be required to send letters of recission to all purchasers
offering to buy back their lots and homes at the original
selling prices.
In the current market of rising real estate values, letters
of recission are generally not accepted. But a letter suggesting
difficulties with the federal government clearly affects the
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builder's credibility with past and potential purchasers and may
affect the marketability of later lots.
We see O.I.L.S.R.'s intervention into the "regulated
jurisdiction" situation as a classic example of wasteful and
unnecessary government overregulation. Consumers receive no
benefit whatsoever, and builders incur substantial hardships*
NAHB strongly believes that O.I.L.S.R. should have no authority
even to question subdivisions in these jurisdictions.
Effect on Consumers
When confronted with uncertain filing requirements, the
potential delays and costs of a protracted dispute, and the
potential civil and criminal sanctions, many builders are simply
refusing to sell any lots whatever to individuals; they will
sell only to other builders. This can prevent a family which
does not yet want to be tied to a particular builder from buying
a lot in a good neighborhood either as an investment or as a
future home site. Those families who do purchase from the second
builder pay a higher price for the land as the result of paying
two builder's mark-ups.
NAHB is deeply concerned about the rising cost of new housing
and the decreasing ability of many American families to afford
to purchase this housing. A leading cause of the increased price
of housing is the substantial rise in land prices. A principal
reason land has become so much more expensive is because of
increasing regulatory controls by all levels of government
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restricting the use o£ land and thereby diminishing the supply
of developable building sites. We believe that Federal
involvement in the development of housing should be kept to a
minimum. This area of law, traditionally has been a oonoern
of state and local governments and should continue under their
auspices. O.I.L.S.R.'s intervention into the hone building process
represents an unnecessary additional esche Ion ofgovemawnt, irhich
serves only to increase costs to the builder and ultimately to
the consumer, without increasing consumer protection.
O.I.L.S.R. Regulations of June 1, 1978
The proposed regulations issued June 1, 1978, do nothing to
improve the present situation. Under the regulations #O.I*L»S.R»
continues to intervene in the process of reviewing even fully
improved subdivisions in cities and counties with substantive
subdivision regulations.
Section 1710.15 p reports to provide an exemption for primary
homes ites. As a practical matter, this is an exemption feWf
if any, builders will use. First, in order to obtain the exemptlont
a builder still must make a detailed filing with O.I.L.S.R* and
specifically obtain approval from the Secretary. The filing must
include each of the following items:
(1) an application for exemption;
(2) a comprehensive statement;
(3) a developer's affirmation;
(4) a sample copy of the acknowledgement of on the
lot inspection;
(5) a sample copy of the purchase or lease agreement;
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(6) a sample copy o£ the deed;
(7) a general plan of the subdivision, including a
map and a plot;
(8) a copy of the escrow agreement or irrevocable
letter of credit required to assure completion
of recreational facilities;
(9) where applicable, documentation that: (a) roads
have been or will be built to local standards
and the lo<;a]. authority will accept responsibility
for maintenance (b) adequate precautions have
been approved to prevent flooding; (c) potable
water is available on a year round basis; and
(d) the land is approved for the installation
of septic tanks.
As we stated before, we do not believe any filing should be required
for improved subdivisions. Builders will be no more encouraged
to file under these regulations than they are under current
procedures.
Second, before the application for exemption can be filed,
at least 30% of the lots in the subdivision must be improved
with roads and electricity, and provision must be made for water
and sewer. Since lot sales cannot begin until the exemption is
approved, this means the developer must finance the cost of improving
at least 30% of the subdivision for the period it takes to construct
the improvements, prepare and submit the application, and receive
the Secretary's approval. Even under favorable conditions, this
could mean that the developer would be paying the financing charges
for three, four, five, or even six months without any revenues.
This could place a financial strain on many small business home
builders, and certainly would discourage them from selling lots
to individuals and thereby subjecting themselves to the Act.
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In any event, it is the consumer who will end up paying the
added cost £or these unnecessary delays in the form of higher
housing costs.
Finally, the regulations provide that the primary honesite
exemption does not extend to subdivisions on which the Secretary
has evidence or information that the approval of the exemption
would not be in the public interest. This provision may raise
questions of constitutional due process since no standards are
provided to regulate the Secretary's discretion, and since there is
no requirement that the applicant be notified of the specific
information the Secretary relied on in rejecting the application.
We believe this provision and provisions like it are subject to
substantial abuse and should be' stricken from the regulations.
Proposed Minish and HUD Bill s
It is extremely difficult for us to understand the rationale
for proposed legislation which would increase the jurisdictional
and enforcement powers of an agency which has demonstrated a
tendency to go beyond the bounds of its statutory jurisdiction
and disregard Congressional intent and purpose.
Accordingly, we oppose the provisions of the bills of both
HUD and Congressman Minish. We find most objectionable the
provisions in both bills which authorize the HUD Secretary to
issue cease and desist orders and to levy civil penalties of
up to $5,000 per violation. The HUD Secretary through O.I.L.S.R. has
already imposed unreasonable burdens on home builders, requiring
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appearances in Washington, detailed written explanations, letters
o£ recission and even repurchases in some cases. In an area where
the Secretary has repeatedly abused her discretion it seems
inappropriate to grant her the power to force a builder to stop
lot sales altogether or to impose, without judicial review, an
extremely onerous £ine. We £ind these provisions most unacceptable.
S. 3084
NAHB strongly supports the provisions of S. 2716, now
incorporated as Section 715 of S. 3084, the HUD Authorization
bill. We believe this legislation represents a positive step toward
correcting the hardships to home builders and consumers alike
caused by O.I.L.S.R.'s overreaching jurisdiction.
The exemption of the greater of 5% of a builder's sales or
5 lots a year is especially beneficial to smaller home builders
who may, without solicitation, inadvertantly sell a few lots to
out-of-state purchasers. Such builders may have only a vague
notion of the applicability or requirements of the Land Sales
Act, and imposing a registration or exemption filing on them
would create an unreasonable burden.
The 100 mile exemption is most helpful to the builder
operating near the borders of one or more other states. People
living within the 100 mile radius should have easy access to
the property and should be able to ascertain the facts necessary
to make an informed decision on the purchase of a lot. The
fact that a state border lies between the prospective purchaser
and the property should not in any way impede the purchaser's
examination.
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10
And we fully support the Sparkman-Tower amendoient to S.3084
which would exempt from the filing and disclosure requirenents
the sale of fully improved lots developed in conpliance irlth the
subdivision regulations of the municipality or county in which
the subdivision is located. In contrast to the Interstate Land
Sales Act which is merely a disclosure statute, local ordinances
and reviews protect the consumer by substantive regulation. The
Sparkman-Tower amendment also ensures that the consumer irill obtain
a fully improved lot which can be used as a homes ite.
Support of S. 3084
We ask that the members of this Subcommittee who serve as
conferees on the HUD Authorization bills accept the provisions
of Section 715 of S. 3084 without modification or amendment*
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July 17, 1978 (3)
Regulated Jurisdiction EScarption
Sec. 715 of S.3084 is amended as follows:
Itie follcx^ing language is added to subsection (b) of Section 715:
(3) the sade or lease of real estate viiich is located within a
municipality or county whose governing body specifies minlmm standards
for the developnent of subdivision lots taking place within its boundaries,
v4ien:
A. The subdivision meets all local codes and standards and is
either zoned for single family reside n ces or in the absence of
a zoning ordinance, is liinited esccliisively to single faniily
residences,
B. Ihe real estate is situated en a paved, public street or highway
which has been built to a standard acceptable to the municipality
or county or a bond or other surety acceptable to the municipality
or county in the full amount of the dost of the inprovements has
been posted to assure ccnpletion to such standards, and that
authority has accepted or has agreed to accept the responsibility
of roedntaining the public street or highway.
C. As of the time of closing, potable water, sanitary sewage disposal
and electricity have been extended to the real estate or the
municipality or county has agreed to install such facilities
within 180 days. For subdivisions which do not have a central
water or sewage disposal system, rather than installation of
v^ter or semer facilities, there must be assurances that an
adequate potable water si^aply is available year-round or that
the land is approved for the installation of septic tanks.
D. The contract of sale requires delivery of a warranty deed to
the purchaser within 180 days of the signing of the sales contract.
E. A policy of title insurance or title opinion is issued in
connection with the transaction showing that at the time of
closing, title to the read estate purchased or leased is vested
in the seller or lessor, but nothing herein shall be construed
as requiring the recordation of a lease.
F. Each and every purchaser or his or her spouse has nade a person2d
on the lot inspection of the real estate v^iich he purchased or
leased, prior to the signing of a contract to purchase or lease.
G. There are no direct mail or telephone solicitations or offers of
gifts, trips, dinners, or other such pranotional techniques to
induce perspective purchasers or lessees to visit the subdivision
or to purchase or lease a lot.
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Mr. AuCoix. Mr. Smith, thank you for your testimony. I am serving
as chairman of the 'homeownership task force of the Housing and
Community Development Subcommittee, and we liave been looking
into specific imbalance of government regulation and other factors on
liomeownership costs, and you have indicated at least two very specific
ways in which additional costs are passed along, and I appreciate that
contribution, as well as the full body of your testimony.
Do I understand you to say that with tTie adoption of the Sparkman
amendment, you would be supportive of the Minish legislation ?
Mr. Smith. I will say that we are fully in support of subchapter
8 of the bill, which is the Sparkman amendment. I am not saying we
are in favor of all of the Minish HUD proposal in tlieir bill.
Mr. AuCoix. So even with the adoption of the Sparkman amend-
ment, you would not be in a position to support the Minish bill ?
Mr. Smith. Certain aspects of it we could, yes, others we couldn't.
I would say tlie Sparkman amendment addresses many of his concerns.
Mr. AuCoiN. What would be left in the Minish bill that would
necessitate your continued opposition ?
Mr. Smitii. Well, frankly, although it does not affect liomebuilders,
we are concerned about the 40-acre limitation. We are concerned about
the small farms being subdivided for the purposes of a lO-acre tract
of ground or a 20-acre tract of ground. Altliough our builders are not
there, a lot of us would like to own a little place out in the country, and
we think this is overkill. We don't think that is necessary.
Mr. AuCoiN. If the Sparkman amendment v.ere adopted, given the
track record of the agency in the interpretation of the original statute,
stretching it as it has to intrastate developers, do you have any reason
to believe that the Sparkman language would be recognizable in its
application if it was finally adopted ?
Mr. Smith. Let me say this.
We sure would be pleased if that came back to a committee in Con-
gress to be looked at l^efore the regulation went into effect.
I could not say tliat they would not take that 1 pace and end up with
500 pages of regulations that would again overkill; no, sir, I could
not say that.
Mr. ArCoix. I wish we could offer a standard amendment to every
bill we pass, and that is that this act shall be wisely and responsibly
administered. Boilerplate language. That would be so great, if we
could do that.
I want to call the panels attention to a comment in Congressman
Minish's statement before the subcommittee, I believe it was yesterday.
He was referring to the Nelson bill and said that in its present form it
is an unwise proposal because it will exempt some of the worst inter-
state developers in the country from the requirements of the Inter-
state Land Sales Full Disclosure Act.
One of the specific loopholes that he described — and he described it
as a loophole — was the j^rovision for the 100-mile radius exemption
that, as you know, is the exemption that exempts sales to people who
live within 100 miles of the developer. And I am quoting from Mr.
Minish now :
It is a lot-by -lof exenipticm which means no matter how big the developer is.
he may sell to anyone within 100 miles of his development without being covered
by the Federal law.
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And then he gave an example of some of the nightmares that would
occur, and he cited the Pocono Mountains of Pennsylvania. Within
100 miles of that area are the metropolitan areas of New York City,
northern New Jersey, and Philadelphia, and I am quoting from his
testimony :
Taken together, these three areas represent a market of over 20 mUllon people.
Under the Nelson bill, none of these people would be protected by the Federal
law if they bought lots in that particular area.
He cited a specific example in that area in which 365 lots were sold
to people from New Jersey; 30 of the buyers were his constituents.
And most of the other lots were bought by residents of Philadelphia
and New York. And among other things, the particular development
promised improvements such as sewage disposal and water and it was
never completed, and the development concealed from prospective
buyers a dispute with the local township authorities, which made the
development unable to clear title to tlie lots sold, and it used high-
pressure sales tactics and committed other consumer abuses.
What do you have to say about that, any of you, in terms of the
wisdom of keeping the 100-mile radius ?
Mr. Roberts. With reference, Mr. Chairman, if I may specifically,
since I did address myself to the Nelson bill perhaps more than either
of the other two panelists.
Under the Nelson bill's 100-mile exemption, the New Jersey people
who are involved in the Pocono Mountains matter may have come
under that exemption. However, whether it be 100 miles or a mile or
1,000 miles, fraud is fraud, and fraudulent acts can be prosecuted, and
they are punishable.
In this case, had the Nelson exemption been in eflFect, OILSR's right
to prosecute would not have been affected in any way. As a matter
of tact, the enforcement aspect would be strengthened because under
the Nelson exemption the developer would be required to subject him-
self to the jurisdiction of the courts of the States from which the
buyers came, in this case, the New Jersey courts. And whether or not
Pennsylvania or the Justice Department wanted to prosecute on behalf
of the defrauded buyers, the defrauded buyers would have had re-
course in their own New Jersey courts, which they may not have under
the present statute.
So, in effect, the Nelson 100-mile radius exemption would have really
strengthened the enforcement provisions of the act, had it been in effect
at the time of the Pocono situation.
One other thing T think that we might want to examine is the dif-
ference between the product that is being offered. In supporting the
Nelson provisions of S. 3084, the product that we are talking alx)ut
principally is the primary residence homesite, and although resort
properties and others may fall within that purview, it is the small
developer or the individual primary homesite subdivision that we are
trying to get relieved from the pressures of this act.
But to repeat, the Nelson provisions would have strengthened the
enforcement powers that would have been available to the people who
were hurt in the Pocono Mountains case.
Mr. AirCoiN. Let me ask one final question, and then turn the Chair
back to Mr. Gonzalez. The Minish bill contains a provision permitting
rescission at any time up to 3 years if certain conditions are not pres-
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454
ent : If the contract was signed on the same day the contract was of-
fered, if the developer provides financing, and so forth. I understand
that the industiy has stated that this would dry up financing. I am
wondering if any of you gentlemen could amplify that for the record,
l)ecause I think it is an extremely important i>oint to bring out for
the record.
ifr. Beltx. Yes, sir, that is correct. The problem with the 3-year
rescission period is the fact that there would be no market for loans
to the developer on the paper that would be generated, whether it be
only contracts of sale or a deed or whatever type of instrument is used
by the developer.
Mr. ArCoTN. Why would there not be a market ?
Mr. Helix. Well, the investor, in effect, would have a sale that was
in liml)o for a H-year period.
Mr. AuCoix. So you would have a cloud over the paper?
Mr. Beltx. That is coiTect.
Mr. ArCoTX. With that cloud over the paper, it is difficult to find
an investor; is that what you are saying?
ifr. Belix. It would be impossible. It really constitutes a 3-year
option for the buyer. And in addition, according to the accounting
principles regulations, neither the seller nor the lender could count
it as a sale.
Mr. AuCoix. I appreciate that.
^^r. Smith, did you want to respond ?
Afr. Smith. Mr. Chairman, if that went into effect, I wish you also
would instruct the bank examiners that this was still a goiod loan,
because we would have problems of ever getting the individual buyer
to go to the bank for the first 3 years and being able to borrow any
amount of money on that lot that could l>e clouded.
Mr. ArCoix. Well, I think it is an important point, and it is one
I wanted to make sure, showed in the record of this hearing.
Mr. Abrahams, did you want to speak to that?
yiv, Abrahams. Just to add one other thought to Mr. Roberts' com-
ments on the Pocono matter. I sat there in hearings of Congressman
Joseph G. Minish's own subcommittee on this subject, and he had the
HUD people in, the OTLSR people in front of him, and flayed th«n
alive, if that is not an unfair statement. Because they simply — ^because
they had all the powers and the authorities imder existing law to
prosecute the obvious — what a])peared to us to l)e obvious fraud intent
of the developei*s in that particular resort. Property registration and
property reports are not a protect icm in themselves.
I think the main point here is that the criticism that the Congressman
directed to both HFI) and the Justice Department for failure to
prosecute really stiuids on its own. The issue drawn by the Nelson
amendment really is not the issue at hand in this case'. The fact is
that fraud can be prosecuted if the will is there on the part of the
agencies to do so. And, as I think Mr. Roljcrts said, the attorney gen-
eral — the attorney general of Xew Jersey — testified at those hearings
that his State law was quite strong in its protection of consumers.
Again, to reiterate what Mr. Kobei-ts said, the provision of the Nel-
son amendment requires the selh^r of the lot to make himself available
to the court jurisdiction of the State of the buyer. In this case, New
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Jersey law of considerable strength would have applied and resulted
in substantial prosecution had the Nelson amendment been in eflfect.
Mr. AuCoiN. Well, I appreciate that clarification, Mr. Abrahams.
I have no further questions, and I want to thank the panel for their
testimony.
Mr. Kelly.
Mr. Kelly. I thank you, Mr. Chairman.
Mr. AuCoiN. We are under the 5-minute rule.
Mr. Kelly. Which 5-minute period are we going to use ? [Laughter.]
I think probably, if we are going to be able to revoke these land
sales contracts, that we should have a law that would apply that to
everything, to automobiles and politicians. In other words, just so
that the public would really be protected, would you gentlemen think
that that would at least have logical symmetry, that if we are going
to do it in the land situation, we should do it for everything, and
especially for politicians? Or would you rather not comment on that?
[Laughter.]
When there are provisions like for travel costs and attorney's fees
and all of these things, isn't it a fact that you can wind up the developer
actually paying claims and paying money and really being held hos-
tage by the law in certain instances, and then the consumers just pick-
ing up the bill for it, when you start trying to give this kind of protec-
tion ? Is that a reasonable statement ?
Mr. Beltn. I think so.
Mr. Kelly. And that this business about there is not enough fee in-
volved for a lawyer, so the attorney general can just bring suit on be-
half of the public, this is just an invitation for litigation, because one
of the reasons that people don't do a lot of suing that is not justified
is because they don't want to waste their money. And so if it doesn't
cost any money, well, why not? And isn't that another increment to be
considered in this, and isn't that going to add to the overall burden
and expense ?
Do you all agree with that ?
Mr. Smith. Yes, sir.
Mr. Roberts. Absolutely.
Mr. Belin. Yes, sir.
Mr. Kelly. Do you, Mr. Belin, agree that probably the size of the
company should not be a criteria for anything ?
Mr. Beltx. I agree. It should not be.
Mr. Kelly. And, Mr. Smith, would you agree with the proposition
that when the elephant of Government starts stomping around doing
all of this good stuff for everybody, that it is almost invariably the
small businessman's concern that is damaged the most ?
Mr. Smith. Yes, sir, I believe it is.
Mr. Kelly. And it is a little ironical that, while the elephant is
stomping around, he has a trumpet going about how he loves little
business and how he hates big business. But it is the little people that
really are damaged the most by improvident regulations of this type.
Isn't that a fair statement ?
Mr. Smith. Yes, sir. We have enjoyed all of that protection we can
stand.
Mr. Kelly. I think that is probably pretty nearly true.
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Is there an opinion afloat in the industry that if the Federal Land
Sales Board were simply just abolished, that there is more than ade-
quate law available to prosecute everybody in connection with fraud-
ulent land sales through the FTC, the SEC, the FBI, the Attorney
General, and whoever else might be able to get in on the act through
interstate f raiul and so f oi-th, criminal regulatory agencies ?
Mr. Roberts. I am not sure that I would answer that completely in
the affirmative, Congressman Kelly, because there are areas within the
land subdivision development market in the industry, that, as proven
by some of the examples that have been cited here today, where reason-
able regulation, but with perhaps local enforcement, would be in
order. But certainly as you have pointed out there are many inter-
state laws imdor which consumers can be protected.
Mr. Kelly. What I am really asking is that between the ability of
the State to protect against fraud and the ability of the Federal Gov-
ernment, through the use of the mails for fraudulent purposes wid the
telephone and the SEC, there is a whole array of protections just in
the criminal code. And then the SEC and the FTC, and when you have
got through all of that, isn't the whole subject of interstate fraud just
covered like a blanket anyway ?
Is there anyone contending that that is not so, between the States
and the Federal Government, without any consideration?
Mr. IxoERSOLL. Congressman, I think you make a very valid point,
that there is blanketing of this industry by one agency ovefr other
agencies.
Mr. Kelly. Are you an attorney ?
Mr. Inoersoll. Yes.
Mr. Kelly. And what is your name ?
Mr. Inoersoll. William P. Ingei-soll.
Mr. Kelly. And do you know of any particular loopholes that the
law wouldn't cover, even if the Federal Land Sales Board did not
exist?
Mr. Inoersoll. Well, in the areas of fraud, I think that you are
correct. The Securities Act and the Federal Trade Commission Act
would apply to any type of fraudulent transactions that I have seen
in this industry. In the area of disclosure, I think that the Interstate
Ijand Sales Act does provide some additional protections that maybe
those acts do not provide.
Mr. Kelly. What area was that?
Mr. Inoersoll. In the area of disclosure, making certain representa-
tions, by requiring that representations be made to people at the time
of sale. I think that has been the primary benefit of the Interstate
Land Sales Full Disclosure Act.
Mr. Keixy. Well, there's no reason why the States could not do that,
is there ?
Mr. Ixr.KRsoLL. No, there is not. In fact, it is our determination that
most of jthe States do that the present time.
Mr. Kelly. And the States normally don't design the law in such a
way that their State or their territory constitutes a sanctuary for
interstate crooks ?
Mr. Inoersoll. No, T don't know of anv State that would want to do
^hat.
r. Kelly. I would not want any of vou to cro on record about this,
it is entirely possible that this whole land sales phenomena came
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about because some do-gooding politician, about election time, wanted
to demonstrate that he was saving the world for his constituents, and
that there would not be any other rationale for it to exist at all, based
on what we have? discovered here.
So I will just say that, Mr. Chairman, and not jeopardize the wit-
nesses. But, Mr. Chairman, that is something that the committee ought
to consider, is: Couldn't we do without this mess entirely? I mean,
now that we are all trying to save the Nation from regulatory control
and stagnation and strangulation and inflation and all of this other
stuff. This would be a really great opportunity for this committee.
Let me ask the witnesses just one more question : Would any of you
feel as though that, if the Federal Land Sales Board was going to go
out of business at sundown tomorrow, that you would feel that the
consuming public would be in great danger from the standpoint that
there isn't enough law and law enforcement agencies to protect them,
if they would just start enforcing the laws we have? Do any of you
feel that way ? [No response.]
Thank you, Mr. Chairman.
Mr. Gonzalez [presiding] . Well, Mr. Kelly, thank you.
I think, in all fairness to the witnesses, the question was kind of
loaded. [Laughter.]
That is about as mild as I can put it.
But thank you very much, gentlemen.
I regret very much that we have these limitations as to the use of
this room. We still have about 7 minutes. I understand that the limit
is 1 :45. But I gathered from the statements that you submitted, the
common fear that seems to pervade almost every witness pro or con,
and from the beginning when the legislation was first being prepared
and fears were expressed, that the Federal agencies involved would
extend enforcement efforts beyond interstate transactions.
And I think what I see reflected in your statements, particularly
Mr. Smith's, is that, look, what's really uppermost now in our minds
and is troubling us is this incursion more and more into these areas
that are already pretty heavily regulated locally such as the single-
home transaction. I think you were here when I referred to an example
from my own experience. A builder or developer was selling to an
officer of the armed services, and found himself confronted with this
problem.
And it seems to me that that is a proper area of concern, and I
think it is brought out very well in your statements, particularly Mr.
Smith's statement, where he states that — I was trying to refer to the
exact page. In any event, Mr. Smith referred to this intrusion, really,
because it appears to mean that the Federal agency has come into
what otherwise would really be defined as an intrastate, wholly intra-
state, operation.
Am I wrong in that conclusion ?
Mr. Smith. No, sir, Mr. Chairman. You are exactly right. For exam-
ple, in San Antonio, where you have several subdivisions that exceed
50 lots in size, not only does this developer have a problem, he cannot
sell to the Army personnel without exemptions, according to our
counsel. The fact that the military personnel cannot buy because that
has not gone through the exemption process means that he would
probably purchase later from a builder because that builder has not
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458
been exempt that purchased the lot from the subdivider. Consequently,
your constituent would be paying more money for the lot. And we
think he should have that right as an informed consumer to purchase
the lot directly from the builder, provided that it met the requirements
of your city oi San Antonio.
That is the reason that we have supported — NAHB supports the
Nelson bill, all of section 715, because in the event of fraud on out-of-
State buyers, as the attorney general from New Mexico mentioned —
the New 'York purchaser can be protected by the New York attorney
general. And so, consequently, we have protection for the out-of-State
buyer. We think that the individual buyer in San Antonio and Fort
Woith is well protected now, because of the many codes and ordinances
he has to go through, and we do not think that your constituents should
have to go through an exempted filing of the amount of money you
spoke of a while ago.
And I mentioned while you were out that on top of that ^0,000
is the carrying expense of the subdivision lying dormant while the
subdivider is awaiting approval on the national level.
Mr. GoxzALEz. So that actually, I think our biggest problem or
dilemma is : How do you define in the law, in the statute, in the bill,
this differentiation between the purely intrastate and what you ordi-
narily would consider an interstate transaction? Because the thing
that I noticed was that, in the particular cases that came to my atten-
tion in tliGf area that I am familiar with, every one of these men were
not interested at all in any kind of interstate kind of activities. They
were wholly and completely local, and I doubt they would be reccff-
nized, even by their fellow associates in the business, outside of the
San Antonio area.
And this is — I think this is the main problem, as I see it, that has
developed, and would-be a continuing problem here. These problems
clearly reveal other issues as to size limitation and so forth. The diffi-
culty of national legislation, when you have the situation of the d^ise
East and North and the sparsely settled areas of Nevada, such as the
attorney general was describing, will always present difficulties.
But this other problem, which I think reall.y imposes inequitable
restraints and burdens, is what I see as our continuing dilemma here.
Mr. Smith. As I testified to Congressman Minish, T would hope you
could help us separate the wheat from the chaff. And it is defmed in
the Nelson bill, m our opinion, and we don't think we should take an
elephant gun after a jackrabbit.
Mr. Abrahams. If it would not be inappropriate just to comment,
Mr. Chairman, T Wieve that lx>th State «ttomevs general made our
case for us repeatedly. Although they paid lipservice opposition to the
Nelson amendment, when any kind of questions and answers developed,
if T may say, in each case they said: It isn't going to be the New
Mexico or Nevada folks who are going to be defrauded. It is not the
people in our State and our areas who are going to be fooled by this
worthless land. They ai*e worrying about the folks coming down from
the frozen North to the beautiful Southwest and Southeast, and not
having adequate ])rotection, because of distance and several oiher con-
siderations. In my opinion they proved the case for the intrastate and
local exemption, which was what I think Senator Nelson had in mind
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459
Mr. Gonzalez. Well, those dramatic cases, which generally did in-
volve a sophisticated fraudulent practice, almost always were as-
sociated ,/ith something that we considered or defined as large or
extensive, tind not local ; local only in the sense that they were coming
in to speculate on local land.
But I tnink that that is our dilemma here, and there is no question
in my mixid that you have very well and very competently reflected
the experience of your individual members on some of the questions
that we have to express ourselves to.
And now, as I understand it, the Senate bill incorporated this
amendment that I believe the Home Builders Association had.
Mr. Kjxly. Mr. Chairman ?
Mr. Gonzalez. Yes?
Mr. Kelly. The second bells have rung.
Mr. GrONZALEz. Well, Mr. Kelly, we had better get going. I think
there is no alternative, in view of our time limitation here, but to thank
you very much, gentlemen. And we hope we will have a continuing
relationship during the course of these hearings. And the subcommit-
tee will stand in recess until 10 o'clock tomorrow morning.
[Whereupon, at 1 :45 p.m., the hearing was recessed, to reconvene
at 10 a.m., on Thursday, August 3, 1978.]
33-716 O - 78 - 30
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THE INTERSTATE LAND SALES FULL DISCLOSURE ACT
AMENDMENTS
THURSDAY, ATTGITST 3, 1978
House of Representatives,
Committee on Banking, Finance and Urban Affairs,
Subcommittee on Housing and Community Development,
Washington^ D.O.
The subcommittee met at 10 :30 a.m. in room 2128 of the Raybum
House Office Building, Hon. Thomas L, Ashley (chairman of the
subcommittee) presiding.
Present: Representatives Ashley, Gronzalez, AuCoin, Hannaford,
and Brown.
Also present Representative S. William Green of the State of
New York.
Chairman Ashley. The subcommittee will come to order.
This morning we resume the taking of testimony on the Interstate
Land Sales Full Disclosure Act amendments. Our first witness will
be Patricia M. Worthy, Administrator, Office of Interstate Land
Sales Registration, Department of Housing and Urban Development.
We are delighted to have you with us this morning.
Also on the panel will be Edward D. Steinman, Acting Assistant
Director, Division of Marketing Abuses, Federal Trade Commission,
accompanied by John M. Tiflford, staff attorney in the land sales
program.
Ms. Worthy, would you proceed with your testimony, please.
STATEMENT OF PATRICI4 WORTHY, ADMIHISTEATOR, OFFICE OF
INTERSTATE LAND SALES REGISTRATION, DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT; ACCOMPANIED BY
PETER RACE, OFFICE OF GENERAL COUNSEL, AND ALAN KAP-
PELER, DEPUTY ADMINISTRATOR
Ms. Worthy. Mr. Chairman, it is with great pleasure that we can
appear before you this morning.
I have with me to my left Feter Race from the Office of General
Counsel at the Department, and to my right, my deputy, Alan
Kappeler.
We are here this morning to discuss with you various legislative
proposals to amend the Interstate Land Sales Full Disclosure Act.
Bills have been introduced by Congressman Minish, the administra-
tion and Senator Nelson, the latter being incorporated into S. 3084
which passed the full Senate.
The Interstate Land Sales Full Disclosure Act took effect a little
over 9 years ago. The act was new; precedent was lacking; staff ^
(461)
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462
inexperienced in its new discipline ; aspirations as to breaking ground
were high; enthusiasm in the relatively new concept of "consumer
protection" was spirited, and the desire to execute tne congressional
mandate was clearly evident.
After 9 years of operating the program, we are able to see clearly
what has been its strengths and its weaknesses. Experience has be«n
profitable, and improvements have in some measure been due to trial
and error.
In administering the act, we have been effective in carrying out
the congressional objectives of providing full disclosure to lot pur-
chasers. There have been over 8,600 filings with the Department cover-
ing over 5,250,000 lots in subdivisions. Purchasers and potential pur-
chasers have had the benefit of a property report fully informing
them about the subdivision in which they bought or considered buying
a lot.
The Department has also been active in serving as an intermediary
between purchasers and developers in helping resolve thousands of
consumer complaints. In the last year alone, EtUD has reached settle-
ments with developers in which refunds have been offered to pur-
chasers from contract obligations amounting to approximately
$133,500,000.
Further, HITD has successfully used its statutory authority to
pursue a number of flagrant violators with civil and criminal action,
initiating 26 injunction cases against 54 companies and 82 individuals.
The Department has also instituted 1,100 administrative procseed-
ings against developers who have omitted facts or made misleading
statements in their nlings. These actions help to insure that purchasers
get full and accurate disclosures.
The Office of Interstate Land Sales Registration staff members
have been keenly aware that in the enforcement of the act's provi-
sions and requirements, competing interests of the regulated indus-
try and the purchasing public have had to be considered.
We believe tliat enactment of the administration program, together
with the regulations recently proposed, will result m overall bal-
anced improvement in the administration and in the furtherance of
the goal of protecting the interests of purchasers.
At the same time, we believe that the legitimate concerns and
interests of land developers will be addressed and enhanced.
Like many of the Membei-s of Congress, the Department recognizes
the problems of small developers in complying with the registration
requirements of the act.
The 50-lot threshold in the act is very low, technically subjecting
to jurisdiction many people whose entry into the land sales business
is minor or only temporary and who have no conception that Federal
law might apply to them.
TVe have recommended that a simple means of reducing the cover-
ago of the act would be to amend the definition of "subdivision" by
increasing the numerical threshold to 100 lots from the present 50
lots. For the reasons stated above, we do not favor the Minish proviso
to lower the. threshold figure of 50 to 40 lots.
The administration's bill proposes that the act should be amended
to cover lots of up to 40 acres in size rather than the present 5 acres.
Purchasers have complained to us about sales practices perpetuated
in the sale of tracts over 5 acres in size, but we have been prevented
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from taking any action because of the exemption in the current
statute.
A significant number of developers are selling large acreage parcels
located in remote areas of the desert or mountains which have little
potential for residential use or investment. We have found no corre-
lation between lot size and buyer sophistication when mass market-
ing techniques are being used. We believe that purchasers should be
given the facts about this land.
The administration would exempt the sale of real estate pursuant
to court order with certain added precautions.
Many developers of large subdivisions have gone into bankruptcy
and continue court-sanctioned sales, exempt from the registration
requirements. Buyers in these situations also need protection. Bank-
ruptcy courts are concerned primarily with the interests of creditors
rather than the interests of lot purchasers.
The administation would repeal the provision that exempts lots
solely on the basis that the purcnasers have made an onsite inspection
and the lot is free of liens. This exemption has been a problem area
for both the Department and developers. Not only has the language
been subject to misinterpretation, but our view is that the exemption
does not provide sufficient protection for purchasers. This lack of
protection is compounded by the fact that statutory exemptions apply
across the board and exempt the particular land sales operation from
the anti fraud provisions of the act as well as from the registration
provisions.
The administration would also allow a cooling-off period of 14 days
instead of the present 3 business days. Based upon our experience,
purchasers should have more time that the 3 days permitted under
existing law to revoke a contract.
Extending the cooling-off period should be one of the strongest de-
terrents in tne act to the use of high pressure sales techniques and mis-
representations by salespersons.
A 14-day cooling-off period as proposed by the administration is
realistic and should be adequate to give consumers sufficient oppor-
tunity to evaluate their purchase decisions and would bring the Fed-
eral requirements into line with cooling-off periods found under
several State laws.
The administration would amend the act to provide that unless the
Secretary has accepted State property reports, the Federal property
report will be used in lieu of any State disclosure document. Al-
though approximately 20 States already accept the HUD property
report as their own, purchasers in some cases now receive the HUD
property report and the State report for the State in which the prop-
erty is located and the State report from the purchaser's home State
as well.
By getting only one uniform property report, the purchaser would
be spared the confusing duplication that now exists. This proposal
would also assist developers selling in more than one State since they
would not have to go to the time and expense of preparing and filing
more than one report.
The administration proposes fuller recovery provisions under the
civil liabilities section. Restrictions on the amounts recoverable in
civil actions have been a significant problem by makng it uneconomical
for purchasers to bring suit for fraud or misrepresentation. Both the
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administration and the Minish bills would include in the amount re-
coverable attorney's fees and appraisal costs.
Both bills also propose amending the civil suit section to provide
purchasers with a remedy when a developer fails to fulfill promises
made in the property report. One of the most common and fla^frant
areas of abuse in land sales is a tendency for many developers re-
peatedly to defer completion dates for utilities and recreational
amenities or simply to fail to build them at all.
The administration bill would lengthen the statute of limitations of
the existing law for consumers from 2 years for voidability for non-
delivery of a property report and from 1 to 3 years for fraud to a
maximum of 4 years for voidability and 3 years after discovery for
fraud. These periods generally would not be affected by delivery of a
deed or by the sale or assignment of the sales contract or agreement to
a third party.
We believe changes such as these are essential in giving consumers
the full protection of the act. These proposals recognize that many
purchasers buy on long-term installment contracts and may not have
any right to use their land for many years. The developer's obligatiixis
may extend well beyond the current statute of limitations.
More importantly, purchasers often do not know of a misrepresenta-
tion until the dates have passed for completing promised amenities or
facilities.
Both the administration and the Minish bills would allow the Secre-
tary to issue a cease-and-desist order for serious violations of the act.
The Secretary's ability to issue cease-and-desist orders would enhance
OILSR's ability to act quickly to curtail such practices.
Both bills also contain civil penalties provisions. The proposal to
allow civil penalties after an administrative hearing is parallel to
remedies found in many other Federal laws and is specifically recom-
mended by the Administrative Conference of the United States as a
sanction for Federal administrative agencies.
This sanction is expected to be a significant deterrent to developers
who heretofore were willing to risk engaging in violations of the act.
The Senate bill would, like the other bills, amend the limitations
period. Although it i-ecognizes the problems of the purchaser whose
rights presently may be cut off by the assignment of the sales agree-
ment, the major problem of time would be compounded by an absolute
remedy cutoff of 3 years after the purchaser signs the contract.
The land sales industi-y makes extensive use of long-term land
installments sales contracts which provide that title will not be vested
in purchasei's until after the last contract payment is made.
In many cases, subdivision improvements, amenities and utilities, are
not scheduled for completion until 2, 3 or more years in the future.
Therefore, largo time periods elapse l)efore a purchaser may realize
damage from the developer's failure to complete.
The Senate bill proposes to amend the "onsite" exemption to exclude
from the meaning of "liens, encumbrances and adverse claims'* U.S.
land patents or Federal grants and resen-ations similar to U.S. land
patents.
A land patent is a grant, in this context usually an instrument con-
veying title to public land from the Federal Government to a private
party. When the Government conveyed land in most of the Western
States, it reserved the right to construct ditches and canals on that land.
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HUD agrees that the actual effect of land patent reservations for
ditches and canals upon individual lot purchasers is negligible. We
support repeal of the onsite exemption entirely but if it is retained,
the Department would prefer that the language be rewritten so that it
would be more clear.
The main purpose of the Senate bill, as we understand it, is to
address the problems experienced by small developers with essentially
local operations in meeting the requirements of the Interstate Land
Sales Full Disclosure Act. This Department is sympathetic to that
purpose.
In addition to recommending legislation to double the minimum* size
of a subdivision covered by the act from 50 to 100 lots, we are taking
steps administratively to alleviate the problems. We do not, however,
consider it desirable to do this in a manner which could sacrifice the
larger consumer protection aspects of the existing law.
It is our opinion that the proposed amendments do not in fact accom-
plish what they seek to accomplish. The bill is aimed at exempting
small intrastate developers, yet would exempt subdivisions where afl
of the sales are made out of State.
Further, the bill provides no numerical lot ceiling and would, there-
fore, allow exemptions for subdivisions of thousands of lots.
The Department is presently engaged in litigation right now in
Texas in an injunction case involving severe consumer abuses includ-
ing fraud and failure to build roads and to give good title to the land,
in the sale of over 3,500 lots near Dallas.
In our reading that subdivision would be exempt under the proposal
of the Senate.
Features common to both exemptions are their self-determining
nature and their provisions — limited in one case — for onsite inspec-
tions and lien-free sales.
The act already contains an exemption based in part upon a pur-
chaser's onsite inspection of a lot similar to the Senate proposal.
While HUD recognizes that an onsite inspection has value to pro-
spective lot purchasers, many complaints received by OTLSR cause us
to doubt seriously that inspections afford consumers the disclosure pro-
tection intended by the act. At least one-third of all purchasers who
complain to HUD made onsite inspections prior to signing a contract.
Few lot purchasers are familiar with local land-use laws, nor are
thev so knowledgeable as to be able to see that the ground wont allow
sufficient percolation to be suitable for septic systems, or that the water
supply is inadequate or perhaps unfit for consumption, or that roads
are improperly constructed or have no provision for maintenance;
that the utility companies cannot supply service at reasonable cost, or
that the land is prone to flooding.
Further, an onsite inspection reveals nothing of a developer's abil-
ity or intentions to carry through on performance of his promises and
representations.
As far back as 1964, this point was addressed by an official of the
then Florida Installment Land Sales Board before a Senate subcmn-
mittee hearing to determine the need for a land sales law. I quote:
It has been our experience that people who see the property are the ones that
are defrauded the greatest. They are subjected to the hard sen. They are sub-
jected to a salesman in a closed room where there is no regulation of what the
salesman has to say other than by complaint against him later.
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Just as importantly, the free and clear requirement of the expmp-
tions in the Senate bill pertains to a self-determining exemption.
HUD*s experience with the existing free and clear exemption pro-
vision in section 1403(a) (10) of the act which requires a HUD deter-
mination is that many developers do not qualify for the exemption
upon their initial submission because the land is not free and clear
of liens, encumbrances or adverse claims as specified in the statute.
Fui*thennore, of those subdivisions which do qualify for the exemp-
tion, a disturbing percentage do not operate subsequently as required
by the statute for continuing qualifications for the exemption. An
exemption based upon voluntary compliance with a free and clear
requirement is fraught with peril for both developers and consumers.
The proposed exemptions, even though self -determining, would
require the developer to file a form with HUD for every sale affirming
that the developer had complied with the requirements for the exemp-
tion in the case of noni'esidents and giving the developer's name and
address, a legal description of the subdivision and the developer's
signature.
One proposed exemption is for transactions with purcliasers who
live within 100 miles of the subdivision where the purchaser resides
in a State other than wliere the subdivision is located. The other ex-
emption is for intrastate subdivisions, defined as a subdivision where
during the year no more than 5 percent of the total lots sold, or a
maximum of five lots, whichever is greater, were sold to nonresidents
of the State whei-e the subdivision is located.
Any number of sales could he made to nonresidents who lived within
100 miles of the subdivision, and these would not be counted toward
the 5 percent or five lots.
Although nonresidents would receive some information through a
written statement of reservations, taxes and assessments, residents will
have no such safeguards.
Sales can l>e made to resident purchaser who do not make on-site
inspections, and the land can be heavily encumbered by liens, encum-
brances, and adverse claims, even to tlie extent that the resident pur-
chasers have no chance of ever obtaining clear title.
A fundamental problem with the 100-mile provision is its lack of a
realistic rationale. It has nothing to do witli the size of the subdivision,
the abuses tliat may have occurred, the character of the subdivision or
the manner in wliich it was promoted.
This provision could exempt many large subdivisions fraught with
chicanery such as those encountered by tlie Department in the Poco-
nos which are marketed in New Jeisey, New York, Pennsylvania, and
Virginia subdivisions marketed in the Washington, D.C., metropolitan
area.
For example. Captain's Cove, a »5,000 lot subdivision was marketed
using direct mail, telephone solicitation, fi-ee gifts, and dinners gen-
erally within a 100-mile area in Virginia, Afaryland, and the District
of Columbia. The developer was convicted for mail fraud, and we
received hundi*eds of complaints from purcliasers about the develop-
ers failure to build promised facilities and to disclose lack of dredging
permits necessary to make the land buildable.
Under the Senate proposals, these sales could be exempt and pur-
chasers would receive no disclosui*es. We would be happy to supply
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the subcommittee with other examples of potentially exempt sub-
divisions that have histories of consumer abuses.
The exemptions proposed contain several pitfalls for the developer
as well as for the potential purchasers.
HUD's experience in administering the act indicates that the more
complicated an exemption provision, the more subject it is to mism-
terpretation. It is not fair to developers to make an exemption avail-
able when it contains potential pitfalls which could result in that
developer's unintentional violation of Federal law. It follows that a
primary goal for exemptions should be simplicity, particularly in the
case of self-determining exemptions.
We do not oppose the concept of an exemption for fully improved
lots where all local codes and standards are met prior to initiating
sales. We have proposed an exemption in our regulations similar to
that in the Senate bill. However, we would recommend that the lan-
guage be reviewed for clarification.
On June 1, 1978, we republished for comment comprehensive amend-
ments to the land registration and exemption regulations. For the
reasons stated a moment ago, though some of the regulatory exemp-
tions are self-determining, the complex ones require submission to
HUD.
In developing these regulations, we have kept the small developer
and the specialized developed in mind. The results are, in tandem with
the administration's proposals, eminently workable.
We have proposed seven new regulatory exemptions related to the
character of the subdivision, as opposed to an arbitrary mileage or lo-
cation or percentage-of-sales factor. As such, the regulations are
easier for a developer to use in determining if he is exempt and are
much more meaningful in protecting the prospective purcnaser.
Specifically, the regulations would exempt scattered sites. A devel-
oper selling lots in various locations may be entitled to an exemption
if there are less than 50 lots per site, even though the total number of
lots in all sites exceed 50. This exemption would also cover brokers.
Our primary homesite exemption would be available when not more
than 300 lots were offered in the subdivision or scattered site and if
there were assurances of completion of various improvements. A third
exemption would apply to small subdivisions offered to a local market,
where there was limited promotion.
This exemption would allow small developers located near State
borders to sell without the cumbersome 5 percent out-of -State restric-
tion found in our present regulations.
Another proposed exemption that was originally issued to ease the
problem for builders selling left-over lots has been liberalized to in-
crease from 5 to 10 percent the number of lots in the subdivision that
mav be sold as raw lots without registration.
We have also recognized the burdens that registration can place upon
very small operations. An exemption has been proposed that would
allow a developer to make up to 12 lot sales per 12-month period with-
out registration.
In all of these regulatory exemptions, the privilege of exemption
would be from the registration requirements only. Fraud and misrep-
resentation occurring in the sale of lots in these exempted subdivisions
could still be enjoined, and developers could still be subject to proee-
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cution and purchasers would still have legal remedies for unlawful
conduct.
In conclusion, I would like to express a^in my concern to the sub-
committee that the administration's land sales proposals have been
deleted from the HUD bill. We feel that our recommendation to raise
the threshold of the act from 50 to 100 lots in conjunction with our
proposal of new regulatory exemptions will meet the concerns of both
the industry and the Congress with respect to the small developer.
In our regulatory proposals, the Department places utmost impor-
tance on the character of the subdivision and identifying those circum-
stances where consumers are adequately protected or where registration
would be an unneeded burden on the developer.
We extend our availability and willingness to work with the commit-
tee to assist in preparing legislation that meets both the needs of the
consumers and developers and the concerns of the Congress^
At this time, we would be pleased to answer any of your questions.
[Ms. Worthy's prepared statement, on behalf of the OflSce of Inter-
state Land Sales Registration, appears along with the following table
submitted by the Office entitled "Statement of Record Filings^:]
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STATEMENT OF
PATRICIA M. WORTHY
ADMINISTRATOR
OFFICE OF INTERSTATE LAND SALES REGISTRATION
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
BEFORE THE
SUBCOMMITTEE ON HOUSING
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
AUGUST 3, 1978
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Mr. Chairman
It l8 with great pleasure that we appear before this
comnlttee to dlecuaa with you various legislative proposals to
amend the Interstate Land Sales Full Disclosure Act. Bills hav*
been introduced by Congressman Minish, the Administratioo and
Senator Nelson, the latter being incorporated into S. 3084
which passed the full Sex^ate.
The Interstate Land Sales Pull Disclosure Act took effoct
a little over nine years ago. The Act was new; precedent was
lacking; staff was inexperienced in its new discipline!
aspirations as to breaking ground were high} enthusiasm In tlie
relatively new concept of "consumer protection" was spirited* and
the desire to execute the Congressional mandate was clearly
evident.
After nine years of operating the program, we are able
to see clearly what has been its strengths and its weaknesses.
Experience has been profitable, and i m p rov ements have in soae
measure been due to trial and error.
In administering the Act, we have been effective in
carrying out the Congressional objectives of providing full
disclosure to lot purchasers. There have been over 8,600 filings
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2
with thm DtpartawBt covering ov^r 5,250,000 lots in subdivisions.
Purehassrs and potential purchasars have had tha banaf it of a
proporty raport fully informing tham about tha subdivision in
which thay bought or oonsidarad buying a lot.
Tha DapartsMnt has also baan active in serving as an
intermediary between purchasers and developers in helping resolve
thousands of consximar complaints. In the last year alone,
HUD has reached settlements with developers in which refunds
have been offered to purchasers from contract obligations
amounting to approximately $133,500,000. Purther, HUD hes
Bucceav fully used its statutory authority to pursue a number of
flagrant violators with civil and criminal action, obtaining
91 indictments against individuals and oompanias and initiating
26 injunction cases against 54 oompanias and 82 individuals.
The Department also has instituted several hundred administrative
proceedings against developers who have omitted facts or made
misleading statements in their filings. These actions help to
ensure that purchasers get full and accusate disclosures.
The Office of Interstate Land Sales legistration (OZLSR)
staff members have been keenly aware that in the enfo rc eme n t of
the Act's provisions and requirements* competing interests of
the regulated industry and the purdiasing public have had to be
considered.
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In considering additional legislative changea we will
give our views and state our preferences concerning proposals
in the Senate and the Minish bills and we trill offer our reasons
why we fully support the legislative changes proposed by the
Administration .
Ito believe that enactment of the Adainistration program
together with the Regulations recently proposed, will result in
overall balanced improvement in the admin tat rat ion and in the
furtherance of the goal of protecting the interests of purchasers.
At the same time, we believe that the legitimate interests of
land developers will be enhanced.
DISCUSSION OF ADMINISTRATION A?^ MIWISH PROPOSALS
Like many of the members of Congress, the Department
recognizes the problems of small developers in oomplying with
the registration requirements of the Act.
50-LOT THRESHOLD
The 50-lot threshold in the Act is very low, technically
subjecting to jurisdiction many' people whose entry into the
land sales business is minor or only temporary and who have no
conception that Federal law might apply to them.
Prom a survey of non-registered, non-exempt subdivisions,
we learned that over half contain fewer than 100 lots. Moreowr,
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our exp«ri«Bce shoirs that in the smaller •ubdlvislons, thara ar«
usually laaa agreaaive aalaa prograna, aost of than ara local
in nature and tha probability of oonaonar abuse ia Miniaal.
Staff tine would be better apent on the larger aubdivisions for
which high vol\ima aalea requirenents often invite Misleading
sales practices.
He have thua recosHttnded that a siaple means of redueiiig
the coverage of the Act would be to amend the definition of
"aubdivision" by increasing the n\imerical threshold to 100 lots
from the present 50 lots. For the reasons stated above # we do
not favor the Miniah proviso to lower the threshold figure of
50 to 40.
40-ACRE LOTS
The Administration* a Bill proposes that the Act should be
amended to cover lota of up to 40 acrea in sise rather than the
present five acrea. Purchaaers have complained to us about
aalea practicea perpetrated in the aale of tracts over five acres
in size, but we have been prevented from taking any action
because of the exemption in the current atatute. A significant
number of developers are selling large acreage parcels located
in remote areaa of the desert or mountains which have little
potential for reaidential uae or investment. He have found no •
correlation between lot aise and buyer aophiatication when
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5
mass marketing techniques are used. We believe that purchasers
should be given the facts about this land.
COURT ORDER EXEMPTION
The Administration %rould exempt the sale of real estata
pursuant to court order, as the present law allows » provided
the Secretary has determined such sale to be in ths public
interest.
Many developers of large subdivisions have gone into
bankruptcy and continue court- sanctioned sales, exempt from
the registration requirements. Buyers in these situations
also need protection. Bankruptcy courts are concerned primarily
with the interests of creditors rather than the interests of
lot purchasers.
ON-SITE EXEMPTION REPEAL
The Administration would repeal the provision that svpts
lots solely on the basis that the purchasers have made an on-sits
inspection and the lot is free of liens. This exemption has be sn
a problem area for both the Department and developers. Mot only
has the language been subject to misinterpretation, but our view
is that the exemption does not provide sufficient protection
for purchasers. This lack of protection is ctepounded by the
fact that statutory exemptions apply across the board and s¥isti'i
the particular land sales operation from the anti-fraud provisions
of the Act as well as from the registration provisions.
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At present, if a lot buyer has personally inspected the
lot which is free and clear of liens, encumbrances and adverse
claims and has signed an acknowledgment of receipt of a copy of
a statement showing restrictions, reservations, taxes and
assessments, the sale is exempt— but certain information must
still be filed by developers.
Since the criteria of this exemption are relevant to
proposals in the Senate bill, I will comnent further when
discussing that bill. At this point, it is sufficient to say
that our primary purpose in seeking repeal of this exemption
is that even when all the qualifications for exemption are
met, purchasers will have little knowlege about the subdivision
and, therefore, need adequate disclosure information.
FRAOD AMENDMENTS
The Administration %rould improve the anti-fraud provisions
of 11404 of the Act by specifically prohibiting omissions of
material facts as %fell as misrepresentations of material facts.
Also, the proposal deletes language requiring actual reliance
by the purchaser on the mlBrepre^entationt Among other things,
this change should help in utilizing securities case law in
land sales enforcement cases. The Minish bill contains the
same provision.
33-716 O - 78 - 31
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COOLING-OPP PERIOD
The Administration would also allow a oooling-off period
of 14 days instead of the present three business days. Based
upon our experience, purchasers should have lore tine than the
three days permitted under existing law to revoke a contract.
Extending the *cooling-off" period should be one of the strongest
deterrents in the Act to the use of high pressure sales techniques
and misrepresentations by salespersons. A 14-day cooling-off
period as proposed by the Administration is realistic and should
be adequate to give consixmers sufficient opportunity to evaluate
their purchase decisions and trould bring the Federal requireownts
into line with cooling-off periods found under several State laws.
We believe that the 30 day voidability provision found in the
Kinish bill is too lengthy and may upset the proper l>alance
between the seller and the buyer.
The Minish bill also proposes a three-year right for
purchasers to void sales made on developer-financed long ten
installment contracts or where sales are made in the same day
as the contract is presented. Iffe favor the thrust of this -^
proposal which would minimize problems for installment purchasers,
but believe it unworkable because of difficulties developers
would encounter in seeking financing* but will be pleased to
work with the Committee to develop %rorkable language in this
area .
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SB6IST8&TIQM FSB
Tbm AdBinistrfttioo ifottld rmmovm tbm liait for tmm9
chaxgiMibltt for rogistration — at prsaont $1,000. Tha Socrtttary
should haw tbm autbority to sat faos to aora oloaaly ralata
to tha workload oraatad by larga davalo p aa nta and to aora
aquitably diatributa tha faa burdan.
EXCZfOSIVB FBDBRAL PROPBRTT KEPOMT
Tha Adninistration would anaiid tha Act to provida that
unlaaa tha Sacratary haa accaptad atata proparty raporta, tha
Fadaral Proparty Raport ifill ba uaad In liau of any atata dia-
cloaura docuaant. Although approxinataly 20 statas alraady
aecapt tha HUD Proparty Raport aa thair own, purohaaara In aoaa
caaas now raoalva tha BUD Propar ty Raport and tha atata raport for
tha Stata in which tha propar ty ia locatad and tha atata raport
froM tha porohaaar'a hamm atata.
Racaipt of voluninoua docuaantatlon discouragas purohaaara
from raading tha myriad of facta oontainad in aach and aay oonfnaa
the conaunar so onich that ha ralias solaly on tha aalasman'a
statamants. By gatting only ona uniform Proparty Raport, tha
purchaaar %rould ba sparad tha confusing duplication that now
axists. This proposal would alao assist davalopars sailing
in mora than ona atata sinca thay would not hava to go to tha
tima and expanaa of preparing and filing mora than ona report.
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CIVIL LIABILITIES
Th« Administration proposes fullsr rscovery provisions
under the civil liabilities section. Restrictions on the SBOonts
recoverable in civil actions have been a significant problea
by making it uneconomical for purchasers to bring suit for
fraud or misrepresentation. Both the Administration and the
Minish bills would include in the amount recoverable attorney's
fees and appraisal costs. Additionally, the Administration bill
specifies certain criteria to be considered by courts in determining
damages .
Both bills also propose amending the civil suit section to
provide purchasers with a remedy when a developer fails to fulfill
promises made in the property report. One of the most cr— on
and flagrant areas of abuse in land sales is a tendency for aaay
developers repeatedly to defer completion dates for utilities
and recreational amenities or simply to f4il to build them at
all. The Administration's Bill %rould allow suits for failure
to carry out obligations in the property report, and the Ninish
bill %rould permit purchasers to bring suit for the purpose of
securing specific performance of the contract and any other
promises made in connection with the sale or lease.
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STATUTE OF LIMITATIONS
The Administration bill would lengthen the statute of
limitations of the existing law for consximers from two years
for voidability for nondelivery of a property report and from
one to three years for fraud to a maximum of four years for
voidability and three years after discovery for fraud. These
periods generally would not be affected by delivery of a deed
or by the sale or assignment of the sales contract or agreement
to a third party.
The Minish bill %rould extend the limitations period across
the board to three years after discovery » subject to a cap of
seven years after the sale or lease.
We believe changes such as these are essential in giving
consumers the full protection of the Act. These proposals recognize
that many purchasers buy on long-term installment contracts and
may not have any right to use their land for many years. The
developer's obligations may extend well beyond the current statute
of limitations. Purchasers often do not know of a misrepresenta-
tion until the dates have passed for completing promised amenities
or facilities, or until they finally get title to the land.
For these reasons, purchasers are often precluded from obtaining
relief under the current Act. Either proposal would be an
Improvement, though we prefer the Administration's recoomendation
primarily because It provides for rights that survive passage of
title and transfer of the sales docximents.
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CEASE AND DESIST
Both the Adbninistration and the Mlnish bills would
allow the Secretary to issue a cease and desist order for
serious violations of the Act. The Secretary's ability to
issue cease and desist orders would enhance OILSR's ability
to act quickly to curtail such practices.
CIVIL PENALTIES
Both bills also contain civil penalties provisions. The
proposal to allow civil penalties after an administrative
hearing is parallel to remedies found in many other Federal lews
and is specifically recommended by the Administrative Confexenoe
of the the United States as a sanction for Federal Administrative
Agencies. This sanction is expected to be a significant
deterrent to developers who heretofore were willing to risk
engaging in violations of the Act.
The Minish bill contains several proposals beyond those
recommended by the Administration. For. example # we believe
purchasers can benefit by the' parenes patriae right to sue
contained in the bill and generally support that concept.
DISCUSSION OF SENATE PROPOSALS
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STATUTE OF LINZTATZOIIS
Tha SmntLtm Bill would, lik« tlw othmr bills, aiMiid tha
linitations period. Although it recognises the problesi of the
purchaser whose rights presently Msy be out off by the assigmMnt
of the sales agreesmut, as the AdminiDtratlon bill does, the aajor
problesi of tine would be 'oosipounded by an absolute reswdy cut-
off of three years after the purchaser signs the contract.
The land sales industry nakes extensive use of long-tem
land installment sales contracts which provide that title will
not be vested in purchasers until after the last contract payswnt
is Bade. In nany cases, sid^ivision iaprevenents (aaenities and
utilities) are not scheduled for cosipletion until two, three or
■ore years in the future. Therefore, large tiae periods elapse
before a purchaser may realise dasuige frosi the developer's failure
to conplete. That is why the Administration's bill, except for
the overall cap for non-fraud, proposes in its smsnAment to the
statute of linitations section to neasure the linitations period
fron discovery of the violation. A purchaser could pay thousands
of dollars for a piece of proper t y under a contract with a tern
of 5, 7, or coBBonly, even 10 years but would be foreclosed fron
legal redress if inprovenents scheduled for oonpletion five
years— or even three— fron the tine the contract is signed were
never oonpleted. Moreover, even if a clearcut case of fraud
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ifere established, the finality of the Senate proposal would
preclude the application of equitable doctrines to allow the
action if the suit were filed 37 sonths after the oontract.
ADHmiSmATIVE PROCXOCJBBS
The Senate bill proposes to esMnd the Act by adding
two clauses dealing with itaiitlni«tratlv« procedures, the first of
which states present agency practice. Although the Act does not
so require, rulenaking does in fact conform with the AdBinistrative
Procedure Act. 24 CFR 1720.15, 1720.20 and 1720.25 of the corrwit
Regulations do in fact follow the language of the AdministrAtive
Procedure Act. All a^ljudicatlve bearings required by the Act aze
conducted in accordance with all the reqnlrsswnf of the APA«
including hearings on deficiency letters as a result of the
examination of reglatrationB.
The second clause apparently requires the Secretary to
promulgate rules of procedure for all adjudicative prooeedings
not required by law to be determined on the record after notioe
and opportunity for hearing. The rules provide that pr omp t
notice must be given of any adverse action or final dlspoeltioa,
such notice or the entry of any order to be accompanied by a
statement of legal authority "and other written reasons.*
This appears to apply to exemption decisions, which might fall -
within the APA definition of adjudication, but are not required
by statute to be determined on the record.
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In •xemption request cases OILSR does give proapt
notice of adverse actions or other final dispositions to the
affected party, along with a written statement of legal authority
or other reasons for the disposition. Codification of these
procedures would not be difficult and we do not oppose such a
proposal. If the proposal is meant to extend beyond exemption
determinations, clarification is needed because — frankly —
%fe cannot discern its objective.
PATENT RESERVATIONS
The Senate Bill proposes to amend the "on-site"
exemption to exclude from the meaning of " liens » encumbrances
and adverse clains" United States land patents or Federal grants
and reservations similar to United States land patents.
Because of the controversy that has arisen over this matter,
it is important to focus on the obstacle sought to be overcome.
First, a land patent is a grant, in this context usually an
instrument conveying title to public land from the Federal
Government to a private party. When the government conveyed
land in most of the western states, it reserved the right to
construct ditches and canals on that land. This patent reserva-
tion prevented a number of iiestem subdivisions from qualifying
for this exemption.
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We, therefore, recoamend that any new legislation in
this area be limited to correcting the problem at hand. For
example, land that is subject to a flooding reservation in
the Army Corps of Engineers, may not be suitable for building.
That kind of reservation is not the type of interest that
should be permitted in the offering of an exempt subdivision.
It might well not be, but the question is whether that kind of
encumbrance would qualify as a Federal grant or reservation
"similar to United States land patents." There can be no
definitive answer irnder the proposed language. HUD agrees
that the actual effect of land patent reservations for ditches
and canals upon individual lot purchasers is negligible. We
support repeal of this exemption entirely, but if it is
retained, the Department would prefer a well-defined
amendment .
INTRASTATE AND 100 MILE EXEMPTIONS
The main purpose of the Senate bill, as we understand it#
is to address the problems experienced by small developers with
essentially local operations in meeting the requirements of thm
Interstate Land Sales Full Disclosure Act. This Departaent is
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sympathetic to that purpose. In addition to recomnending
legislation to double the minimum size of a subdivision covered
by the Act from 50 to 100 lots, we are taking steps administratively
to alleviate the problems. We do not, however, consider it
desirable to do this in a manner which could sacrifice the larger
consumer protection aspects of the existing law.
It is our opinion that the proposed amendments do not in
fact accomplish what they seek to accomplish. The bill is aimed
at exempting small intrastate developers, yet %rould exempt
subdivisions where all of the sales are made out of state.
Further, the bill provides no numerical lot ceiling and would,
therefore, allow exemptions for subdivisions of thousands of
lots. The Department is engaged in litigation right now in
Texas in an injunction case involving severe consumer abuses
including fraud and failure to build roads and to give good
title to the land, in the sale of over 3,500 lots near Dallas.
In our reading, that subdivision %rould be exempt under this
proposal .
There is, incidentally, a technical problem in that the
proposed exemptions do not reflect the recent floor amendments
Introduced by Senator Sparkman changing the definition of liens,
encixmbrances and adverse claims in the on-site exemption
(■715(a)(2) of the Senate Bill).
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Features coanon to both exwnptions mxm their self-
determining nature and their provisions— 'liai ted la oae oeee— for
on-site inspections and lien-free sales.
on-site
inspections The Act already contains an exemption. based in part npon
a purchaser's on-site inspection of a lot similar to the Senate
proposal. While HUD recognizes that an on-site inspection has
value to prospective lot purchasers, many complaints reoeived hf
OILSR cause us to doubt seriously that inspections afford
consumers the disclosure protection intended by the Aet. At least
one-third of all purchasers who complain to HDD made on-site
inspections prior to signing a contract.
Few lot purchasers are familiar with local land use lews,
nor are they so knew I eag cable as to be able to see that the
ground won't allow sufficient percolation to be suitable for
septic systems, or that the water supply is inadequate or
perhaps irnfit for consumption, or that roads are i m p r operly
constructed or have no provision for maintenance i that the
utility companies cannot supply service at a reasonable cost,
or that the land is prone to flooding. Lend subject to
flooding, for example, might be dry at the time of
inspection. These inspections, by the way, usually arm
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It
uadar th% slOllad qaidmnam of Htm mmXmmmma, runiMr^ «i en-sit*
inspootlon xwvsals nothing of a davolopor's ability or int—tiow
to cany tlixoo^ on porfonanoa of Ilia proaiaaa and gapcaa ant ati o n a .
Noraovar, it ia not olaar whattoar ttoa on-aita inapactiona
•at oat aa a aafaguard fox tha pcoftoaad awaaminw ara intandad
to taka plaoa bafora tha tiaa of aala or at aoaa othar
unapaoifiad tiaw. HDD aXaaya adviaaa that paopla ahould not taqr
land aigbt noaaan undar any ciroM— t ane a a » but «a do not baliawa
that, a aita impaction banafita porchaaara to tha astant that
tiiay no longar naad diaeloanxa.
Aa far back aa 1964, thia point waa addraaaad fcy an
official of tiia tiian Florida Znatallaant Land Salaa Board bafora
a Sanata aubcoamittaa haaring to datamina tha naad for a land
aalaa law. Z quotas
*It haa baan onr aacparianea that p aep l a liio aaa
tha property ara tha ooaa that axa dafrandad tha
graataat. Ihay ara aubjactad to tha hard aall. Siiy
ara aubjactad to a aalaaaan in a cloaad rooai whara
tiiara ia no regulation of ill at the aalaaean haa to
say, other than fcy oooplaint aada againat hia later.*
Hearings on Interstate Nail Order Land Salaa Before the Siilinri— Ittae
on Frauds and Mis raprea ante tiona affecting the Elderly of the
Senate Special Conadttee on Aging, 88th Cong., 2nd Seaaion.,
pt. at 165 (1964).
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Obviously, the sane types of misrepresentation can be
acoooplished in a telephone sales operation. Ilie point is,
however, that an on-site inspection is not a panaoea for the
problems created by certain elements in the industry.
Self de- *^*^ ■■ ^■^^'^tantly, the free and clear requi r sms n t of
termining^^ exemptions in the Senate bill pertains to a self-detendalag
exemption. HUD's experience with the existing free and dear
exemption provision in Section 1403 (a) (10). of the Aet whioh jreqoiv
a HUD determination is that many developers do not qualify for
the exemption upon their initial subadssion because the land
is not free and clear of liens, encumbrances or adverse claias
as specified in the statute. Furthermore, of those subdivisions
which do qualify for the exemption, a disturbing percentage
do not operate subsequently as required by the statute for
continuing qualification for the exemption. An exemption basod
upon voluntary compliance with a free and clear reqoi r ems n t
is fraught with peril for both developers and ooosuBsrs.
The proposed exemptions, even though self-detarminiag*
would require the developer to file a form with BOD affizaing that
the developer had complied with the requirements for the awesy 1 1 nn
in the case of nonresidents and giving the developer's naae and
address, a legal description of the subdivision and the dovaloper'a
signature. It appears that the exemptions are oonditiooad
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this written form. BoMrnvrnx, HDD is given no authority to grant
or withhold oxafliption approval so the paporwoidc roquirasMnt
%rould ba froitlass. Practically spaaking* thara aay ba
nothing BUD can do avan if problaa^ surfaca later on, since the
purchasers' cooiplaints often do not surface until two or Bore
years after their purchase, when their rights under the Act
probably will have expired « and the developer aay be in default
of his obligations or possibly in bankruptcy. Neither injunctive
action nor criminal prosecution could serve as a raoMdy for the
aggrieved purchaser.
substantive
provisions One proposed exemption is for transactions with purehasers
who live within 100 miles of the subdivision where the pur^iaser
resides in a state other than where the subdivision is located.
The other exemption is for intrastate subdivisions » defined as
a subdivision where during the year no more than five percent
of the total lots sold, or a maximum of five lots, whichever
is greater, were sold to non-residents of the State where the
subdivision is located. Any number of sales could
be made to non-residents who lived withn 100 miles of the
subdivision, and these %rould not be counted toward the five
percent or five lots. Although non-residents would receive
some information through a written statement of reservations,
taxes and assessments, residents will have no such safeguards.
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Sal«s can be made to resident purchasers wlio do xiot sake
on-site inspections, and the land can be heavily enctiHbkred by
liens, encumbrances and adverse claims, even to the extent that
the resident purchasers have no chance of ever rt>taining clear
title.
A fundamental problem with the 100-mile provision is its
lack of a realistic rationale. It has nothing to do with the
size of the subdivision, the abuses that may have occurred, the
character of the subdivision or the manner in which it was
promoted. This provision could exempt many large sobdi visions
fraught with chicanery such as those encountered by the Department
in the Poconos which are marketed in New Jersey, New Tork and
Pennsylvania, and Virginia subdivisions marketed in
the Washington, D.C. metropolitan area. Por exemple.
Captain's Cove, a 3,000 lot subdivision was marketed using
direct mail, telephone solicitation, free gifts and dinners
generally within a 100-mile area in Virginia, Maryland and the
District of Columbia. The developer was convicted for mall
fraud, and we received hundreds
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of cooplaints fron purchasers about tha davalopar's failure to
build promised facilities and to disclose lack of dredging permits
necessary to make the land buildable. Under the proposals,
these sales could be exempt and purchasers would receive no
disclosures. We would be happy to supply the Coonittee with
other exan^les.
The exemptions proposed contain several pitfalls for
the developer as %rell as for the potential purchasers. For
example, a purchaser may say that he lives in a town which is
his mailing address when he in fact lives outside the town and
105 miles away from the subdivision. Moreover, the Department's
present regulations contain a five percent provision, and we have
foirnd that developers often fail to stay within that limitation
during the year. Even if the developer inadvertently fails to
comply with these criteria, he might expose himself to civil
liability to past and future purchasers.
HXJD's experience in adninlAtvrlng the Act
indicates that the more complicated an exemption provision, the
more subject it is to ml ft Interpretation, it is not fair to
developers to make an exemption available when it contains
potential pitfalls %rhich could result in that developer's
unintentional violation of Federal law. It follows that a
primary goal for exemptions should be simplicity, particularly
in the case of self -determining exemptions.
33-716 O - 78 - 32
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HOMESITE EXEMPTION
We do not oppose the concept of an exeiiq>tlon for fully
improved lots where all local codes and standards are aet
prior to initiating sales. We have proposed an exemption in
in our regulations. similar to that In the Senate bill. However,
we recommend there be some firming-up of the language.
This exemption %rould be somewhat novel to the Act, and we
%#ould expect fairly broad usage. Consequently, we prefer that
it be initiated on a regulatory instead of a statutory basis so
that we may exercise some oversight on its progress.
PROPOSED REGULATIONS
On Jiine 1, 1978, we republished for conanent conprehenslve
amendments to the land registration and exemption regulations. For
the reasons stated a moment ago, though some of the regulatory
exemptions are self -determining, the complex ones require sufaBission
to HUD. In developing these regulations we have kept the siaall
developer and the specialized developer in mind. The results
are, in t«uidem with the Administration's proposals, eminently
workable .
We have structured the regulatory exemptions towards the
character of the subdivision rather than some arbitrary mileage
or location or percentage of sales factor. As such, the regulations
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are easier for a developer to use in determining if he is
exempt and are such more meaningful in protecting the prospective
purchaser.
Specifically, the regulations would exempt scattered sites.
A developer selling lots in various locations may be entitled to
an exemption if there are less than 50 lots per site* even though
the total number of lots in all sites exceed 50. This exemption
would cover brokers and sales of parts of subdivisions.
Our primary homes ite exemption would be available when
not more than 300 lots were offered in the subdivision or scattered
site and if there were assurances of completion of various
improvements. A third exemption %rould apply to small subdivisions
offered to a local market » where there was limited p romo t ion.
This exemption would allow small developers lodated near state
borders to sell without the cumbersome five percent out-of-state
restriction found in our present regulations.
Another proposed exemption that was originally issued
to ease the problem for builders
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selling left-over lots has been liberalised to inorease froa
five to ten percent the number of lots in the subdivision thet mmf
be sold as raw lots without registration. We have also
recognised the burdens that registration can plaoe upon very
SBMll operations. An exeaption has been proposed that would
allow a developer to nake up to 12 lot sales per 12-«oath p ri od
without registration.
In all of these regulatory exenptions, the privilege
of exemption would be from the registration requiresMats only.
Fraud and misrepresentation occurring in the sale of lota in
these exempted subdivisions could still be enjoined, and developers
could still be subject to prosecution and purchasers would still
have legal remedies for siadlar unlawful oonduot.
CONCLUSION
In conclusion, I would like to express again ay onncMn to
the Comnittee that the Administration's land sales proposals hevo
been delated from the ROD Bill, We feel that our reeomsMadatlon to
raise the threshold of the Act from 50 to 100 lots in oonjimotioB
with our proposal of new regulatory exemptions will meet the
concerns of both the industry and the Congress with respect to
the small developer. In our regulatory proposals, the
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placas utaiost iaportance on the character of the subdivision
and identifying thove circumstances where oonsumers are
adequately protected or where registration would be an unneeded
burden on the developer.
We extend our availability and willingness to work with
the Coimittee to assist in preparing legislation that meets
both the needs of the consumers and developers and the concerns
of the Congress.
At this time we would be pleased to ans%»er any of your
questions •
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Neighborhoods, Voluntary Associations and Consumer ProCection
Office of Interstate Land Sales. Registration
Number of Subdivisions by Lot Size As of June 30, 1978
STATEMENT OF RECORD FIlTlNGS
Subdivisions
Number X of TotaT
0-50 455 8.99Z
51-100 648 12.79Z
101-200 1,004 19.83Z
201-300 485 9.58Z
301-400 455 8.982
401-500 272 5.37Z
501-1000 782 15.442
1001-2000 485 9.572
2001-3000 203 4.012
3001-4000 134 2.652
4001-5000 41 .802
5001-25,000 90 1.772
25,001-50,000 6 .112
50,000 + 6 .112
TOTALS 5,066 100.002
Number
16,112
58,006
174,554
142,329
193,352
146,626
653,639
790,059
596,707
556,425
241,153
814,229
262,100
725,609
Lots
Z of Tof I
.302
1.082
3.252
2.652
3.602
2.732
12.172
14.712
11.112
10.362
4.492
15.162
4.882
13.512
5,370,900
100.002
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Chairman Ashley. Thank you, Ms. Worthy. Since the passage of
the act in 1968, you referred several cases to the Justice I>epartment
for prosecution. Could you give the number referrals and prosecution (
Ms. Worthy. This comes in two areas. We have 21 cases referred to
the Justice Department; 19 of those cases were initiated by OILSB;
2 were initiated by the U.S. attorney. Of those 21 cases, there were
16 indictments; 5 of those cases were declined prosecution by the
U.S. attorney.
Chairman Ashley. There were 16 indictments?
Ms. Worthy. That is correct.
Chairman Ashley. And what was the disposition on trial?
Ms. Worthy. There were 16 indictments. And I am sorry I did not
hear the second part of your question.
Chairman Ashley. What was the outcome of the indictments?
Ms. Worthy. We have two pending. Two were acquittals. And the
rest were convictions.
Of those 16 indictments, in terms of principles, there were 95 in-
dividuals that were indicted.
Chairman Ashley. How many companies?
Ms. Worthy. We can give you that information and submit it for
the record. We do not have that at this time.
Chairman Ashijiy. Yes, that would be good, because I do not think
it makes a whole lot of difference how many individuals there were^ I
am not overwhelmed by the record here in terms of enforcement. If
this situation is as worthy of congressional attention as witnesses
insist it is, then I am at somewhat of a loss to understand why practi-
cally two cases per year on the average have been referred to the Justice
Department for prosecution.
[In response to the above question of Chairman Ashley, Ms. Worthy
submitted the following answer for inclusion in the record :]
Response Fbom Ms. Wcatht
Since 1971 when the Office's first criminal indictment was returned 25 com-
panies have been indicted under the Interstate Land Sales Full Disclosure Act
Ms. Worthy. Mr. Chairman, in addition to those cases that we
directly referred to the U.S. attorney's office, there were an additional
27 cases that we have referred to the Inspector (jeneraPs office over in
the Department of Housing and Urban Development.
Of those 27 cases, 12 were declined by the U.S. attorney, and 15 of
those cases are presently active.
Now, in addition to those 15, we have another 14 cai^s active pres-
ently that our Office is specificallj^ working on. There was a period of
time, which I was going to explain, where we handled our investiga-
tions directly and then refered them to the U.S. attorney. That was the
first number we gave you.
In 1975, we entered into an interagency agreement with our In-
spector General's office, so now we refer all our cases to them, and they,
in fact, do the investigating and refer them to the U.S. attorney's
office, so that, in addition to those 16 indictments that we mentioned to
you, we have presently 29 active cases under investigation.
Cliairman Ashley. So that the 16 indictments represented cases that
were referred by OII^SR without going through your Inspector Gten-
eral's office?
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Ms. Worthy. That is correct.
Chairman Ashley. And so that the 21 cases were referred between
1969 and 1976?
Ms. Worthy. Between 1971 and 1975 OILSR referred 21 cases for
possible prosecution.
Chairman Ashley. And how many cases have been referred by the
Inspector Greneral since 1975 ?
Ms. Worthy. We have referred 12 of the 27 cases that were referred
by the Inspector General that went over to the U.S. attomev, have
been declined; and, therefore, we have presently 15 cases that are
active.
Chairman Ashley. Why were the 12 declined?
Ms. Worthy. Well, there are various reasons, Mr. Chairman. We
could give the specific rationale that we have received on all of those
declinations. But they were declined. Either the U.S. attorney was
overburdened or did not find
Chairman Ashley. I think the subcommittee would like to know
why they were declined.
Ms. Worthy. Then we will get that information and submit it.
[In response to the above question of Chairman Ashley, the follow-
ing answer was furnished for the record by Ms. Worthy :]
Response Fbom Ms. Worthy
I have prepared a brief summary of the respective U.S. Attorney's conclusions
in each of these twelve cases. They are as follows :
i. Sherwood Forest (Pennsylvania) . — The United States Attorney in Newark
declined to prosecute because the case lacked Jury appeal since, according to
the United States Attorney, principals did not personally profit by fund« im-
properly diverted from improvement escrow accounts.
2, Trailwood Lakes (Kentucky).— The United States Attorney in Louisville
decUned to prosecute because sales were made four years previously and con-
sumers were seeking civil remedies under State statutes.
S. Stony Point (Oklahoma) .—The United States Attorney in Tulsa decUned
to prosecute because the principal in the matter was shot to death and civil
remedies were being pursued imder State laws.
4. Lake of the Pines (Pennsylvania) .—^The United States Attorney in Newark
declined to prosecute because the matter lacked jury appeal.
5. SpHng Valley (Oklahoma) .—The United States Attorney in Oklahoma City
decUned to prosecute because sales were four years old and the principal mis-
representation concerning improvements lacked appeaL
6. Lake Chaparral (Kansas). — The United States Attorney in Topeka de-
cUned to prosecute because he felt a forged document submitted to OILSR re-
sulted in no harm to the Government or to purchasers.
7. Hickory Hills (Ohio).— The United States Attorney in Cincinnati declined
to prosecute because the matter lacked Jury appeal.
8. Heritage Shores (South Carolina). — ^The United States Attorney in Columbia
declined to prosecute because in his opinion there was not sufficient evidence of
fraud.
9. Ally son Acres (Oklahoma^) .—The United States Attorney in Tulsa declined
to prosecute since in his opinion the testimony of purchasers who bought lots two
years previously would be somewhat stale and because in his opinion misrepre-
sentation concerning the investment potential of the land and promised improve-
ments lacked Jury appeal.
10. Aspen Hills ( Utah).— The United States Attorney in Salt Lake City dropped
the prosecution when the developer took steps to fulfill promised representations
concerning improvements.
11. Consolidated Mortgage Corporation (Arizona), — ^The Inspector General
dropped the criminal investigation when that Office learned that the subject com-
pany was under investigation by the Department of Justice Arlaona Strike Force,
and was indicted under securities fraud but was later acquitted.
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12. Renegade Resort (Tenneaaee). — ^The United States Attorney in NashTille
investigated under the Land Sales Act, but the principals were indicted under
Small Business Loan fraud.
Ms. Worthy. In addition to those cases, Mr. Chairman, as indicated
in our testimony, we have also had some 90 noncriminal actions, 20 of
which were injunctions and the remaining being in subpena enforce-
ment cases, and we also initiated 11,000 administrative proceedings
within the Department, all of which fall under the category of enforce-
ment activity.
Chairman Ashley. What is the allocation of personnel within
OILSB with respect to the primary functions on the administratis?
That is to say, you have registration, field investigations, and enforce-
ment ; is that right ?
Ms. Worthy. That is correct. We have four divisions, we have pres-
ently. Our ceiling is 106. We have in the examination division 24; in
the policy division 20 ; in our enforcement division 28 ; and in our field
review division 31.
As I am sure you know, Mr. Chairman, there is a proposed
Chairman Ashley. Give me those numbers again, please.
Ms. Worthy. In the examination division 24; in our policy division,
which handles our filings, that is 20; in the enforcement division that
is 28 ; and in the field review division, we have 31.
Chairman Ashley. Has there been a shift in this allocation, or has
that been fairly steady ? Has there been any shift, for example, since
1973 or 1974?
Mr. EIaffeler. Mr. Chairman, there have been small shifts between
enforcement and the examination division. In 1973 the examination
staff probably approximated 28 people, and we switched a few people
because we had some reduction in new filings coming into the Office
since 1973.
Chairman. Ashl>:y. What do the field review offices do?
Ms. Worthy. Those are individuals, Mr. Chairman, who, in fact* go
out on the road and do the on-site inspections and check the local fiiles.
They do approximately 1,000 on-site inspections a year.
In addition to that, they do approximately about 3,000 visits or
trips to subdivision?. And that comprises about what thejr do, but they
are ^nerally responsible for pulling together information from the
subdivisions themselves and reporting that information back to the
respective divisions in Wasliington.
Chairman Ashley. Well, T can understand your concern. I have been
discussing with counsel the action by the Appropriations Committee
tliat would result in a diminution of personnel by some 20 or there-
abouts.
Ms. Worthy. That is coiTect, Mr. Chairman.
Chairman Ashley. And that, of course, I suspect, would be felt in
each of your primary functions.
Ms. Worthy. Yos. As you know, Mr. Chairman, we are required by
the law to review registrations within a 30-day time period, which
means that we have to at least maintain that division who handles
registrations intact, so we would have to substantially take a cut frrai
the enf oivx»mcnt and the field review divisions.
Chairman Asih^ey. If the exemption wore lifted from 51 to 100, how
would that affect your personnel requirements?
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Ms. Worthy. You are saying the number of filings ?
Chairman Ashley. Yes.
Ms. Worthy. It would be difficult to determine right now how it
would affect the number of filings.
Chairman Ashley. Well, the need for personnel presumably be
somewhat less, at least in the registration operations.
Ms. Worthy. That is correct.
Chairman Ashley. But not 20.
Ms. Worthy. No.
Chairman Ashley. Is there any reason why any land developer
should be exempt from the fraud provisions oi the statute ?
Ms. Worthy. Mr. Chairman, I would not want to see anyone exempt
from fraud provisions. That is one of the concerns we have with one
of the Senate proposals, is that because of the various exemptions and
the numbers of people affected by tlie exemptions, more specifically
the 100-mile radius, that large numbers of individuals who are buying
land would, if at a later date it was determined that fraud had been
perpetrated against them, would not have any remedies available under
the act.
Chairman Ashley. Under the Senate proposal, it is my understand-
ing, that they are exempt only from the registration and not from the
fraud.
Ms. Worthy. Yes, there has been a change apparently in the lan-
guage. That is correct.
Chairman Ashley. Under the HUD proposal, you would exempt
them, even from the fraud provisions, subdivisions of less than 100
lots. Is that correct ?
Ms. Worthy. Yes, Mr. Chairman.
Chairman Ashley. What about those poor souls that mi^ht get
bilked ? Why should that developer escape from the fraud provisions ?
I can see why, for a variety of reasons, it might not be necessary for
registration, but why do we say that they have carte blanche to do
anything they want ?
Ms. Worthy. Mr. Chairman, in our decision to request an increase
of the threshold to 100 lots, we did make — we went through a very soul-
searching experience because we understand very much the needs of
those individuals who buy land, even if they buy in a small subdivision.
The decision to come forward with that recommendation was based
purely on the fact that we have limited resources and that we felt
that in order to better utilize what we do have available, which is the
28 people in enforcement
Chairman Ashley. That is a terrible rationale, it seems to me.
Why don't you leave the developers guessing as to where your re-
sources are going to be directed ? In other words, include all developers
of subdivisions of any size and let the developer wonder where your in-
vestigatory and your prosecution resources are going to be directed.
Doesn't that make better sense? To play a sort of shell game out
there ? You see my point ?
Ms. Worthy. Yes, I do, Mr. Chairman.
Chairman Ashley. What is your response?
Ms. Worthy. The only response we have to that is that — ^two
things: We have attempted to eliminate some of the problems and
potential fraud problems by requesting or proposing the elimination
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of the exemption of the onsite inspection, because in those particular
sales situations, those purchasers who buy and inspect onsite do not
have the benefit of the fraud provisions, so that where we have taken
it awav from some we have ^ven at least that protection to others.
With respect to the increasing of the threshold to 100, the answer
to that is that we again have made that policy determination that we
want to direct our attention to the larger subdivisions, and, I must
admit
Chairman Ashley. But can't vou do that without this proposed
change, as far as the application of the fraud provisions are ooncemed ?
Ms. Worthy. Well, Mr. Chairman, if that is possible, we would be
more than willing to work with the committee to develop language
that would assure us of that, as well as afford the protections of the
fraud provisions to all purchasers. We would be more than willing
to sit down and discuss it.
Chairman Ashley. Many complaints, I understand, have been re-
ceived about the way OILSR has applied the principle of comnion
promotional plan in the past.
I wonder if you would be good enough to explain your interpreta-
tion of that statutory language and ju^ what ^'common promotional
Slan" means and how this principle has been applied in tne past and
ow the proposed regulatory change dealing with the scattered-site
test subdivisions would conform with the statutorjr intent.
Ms. Worthy. The wav the statute reads, Mr. Chairman, is that if,
in fact, you are selling lots in more than one site or subdivision and
you have been using a common facility — for example, the same per-
sonnel, the same realtor handles it, it is advertised together — ^that we
are assuming it all falls into one common promotion.
Then, we require that you register all of those lots, and we add up
all of those lots to determine whether or not you come within the juris-
diction of the act.
One of our proposed regulations is the ''scattered-site regulation" «
exemption that says that if you have these sites and the lots on these
sites are less than 50, then we will not add all of these lots up, these
sites, if these sites are named differently, even though you might per-
haps have the same salesperson handling the selling of tneae
properties.
Cnairman Ashley. If they are named differently ?
Ms. Worthy. Yes. For example, if you have a subdivision A and a
subdivision B, and, of course, they are not contiguous, and each of
these subdivisions have less than 50 lots, then we will not now put
them all together and add them up, and we will not require you to
register.
Chairman Ashley. They could have, though, a common sales staff
and common advertising?
Ms. Worthy. Yes, they could have a common sales staff; that is
correct, Mr. Chairman.
Chairman Ashley. The only thing is they would be named
differently?
Ms. Worthy. That is correct. And may not be contiguous.
Chairman Ashley. I do not understand this. Why do you say that!
If they go to the trouble of naming — which they are bound to do—
these scattered sites witli different names, why should that make all
the difference?
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Ms. Worthy. Mr. Chairman, again, the purpose of the act and the
Congress setting a threshold of 60 lots, it is our understanding from
the mandate of Congress, that you wanted us to look at those situa-
tions where we felt that if it was a small offering, something of less
than 50 lots, and we determined it was not in the public interest, that
we had the responsibility and the authority under the law to promul-
gate regulations that would eliminate or exempt these particular
developers from ccnning imder the requirements of the act in our
r^ulations.
And it was our determination that if, on each of these particular
sites, they were selling less than the 60 lots that you had, CongPMS
had, imposed in the act, that they, in fact, were a small offering in
the intent of the legislation, and that, therefore, it was our opinion
that these individual developers should be exempt.
Chairman Ashlet. Mr. Brown?
Mr. Brown. Thank you, Mr. Chairman.
Ms. Worthy, what is the purpose of the Interstate Land Sales
Registration Act ? Is it intends that an out-of -State purchaser should,
in effect, be put in a better position than an in-State purchaser?
Ms. Worthy. It is our understanding that the purpose of the act is
to make sure that individuals who buy undeveloped land, when that
land is being sold in a subdivision of more than 60 lots, that we niust
provide that information, that purchaser with enough information to
allow him to make an intelligent decision about that land.
Mr. Brown. But, now, it does not cover all purchasers. It only
involves purchasers that in some way have become aware of the proj-
ect or the development through use of the vehicle of interstate com*
merce ; is that not correct ?
Ms. Worthy. The act says that if the developer is selling more than
60 lots and he is using the mail
Mr. Brown. Well, that is the point rij^ht there. I am saying that it
does not apply if you do not use a vehicle of interstate commerce —
the mail, the phones, et cetera.
Now, if those things are n<^ used for an in-State purchaser and
the developer does not engage in interstate commerce, that purchaser
does not have the benefit of the act ; does he ?
Ms. Worthy. I am sorry ?
Mr. Brown. If the vehicles of interstate commerce are not used, the
purchaser does not have the protection of the act.
Ms. Worthy. Use of the vehicles of interstate commerce is not an
exclusive variable in determining jurisdiction. The lan^age of the act
also states that any use of the mails whether directly or indirectly, may
bring about Federal coverage under the act.
Mr. Brown. And the act is primarily a disclosure statute; is that
not correct ?
Ms. Worthy. That is correct, sir.
Mr. Brown. Why do we, then, go into many things such as the per-
formance of the developer with respect to promises made, and estab-
lish different recourses for a purchaser covered by the act ?
Why does that person have additional remedies that an instate pur-
chaser or a purchaser of an intrastate development does not have?
Throughout your testimony, you talk about promises not kept, about
facilities to be installed, and all of those kindbs of things. Now, if the
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504
proiect was not in interstate commerce, this statute would not apply
to those promises ; would it ?
Ms. Worthy. What I talked about in my testimony was one of the
proposed legislative changes that the administration has put forward
because of the fact that we get a great many complaints — it seems to
be one of the worst problems — is the fact that developers fail to
complete.
Now, if you are asking me the question as to whether or not or is it
fair that one group of individuals receive that benefit and another
group not, I can only say it was the wisdom of this Congress to enact
that act, and if they, in fact, want that benefit for all purchasers, then
we would be more than willing to attempt to carry out that mandate
of Congress.
Mr. Brown. Have you received any complaints that really are not
covered by the act or that where basically interstate commerce is not
used?
Ms. Worthy. Yes, we do. And we can supply the subcommittee with
examples of that.
Mr. Brown. Percentagewise, how many?
Ms. Worthy. For clarification, are you talking about individuals
who are within the State involved in a development that is intrastate,
or are you talking about purchasers who do not even fall within the
act at all ?
Mr. Brown. Well, ^ou have to make a determination as to whether
or not you fall within the act. I mean, are those occasions where
basically the nexus for coverage bjr the act is not there t Where there
is no utilization of interstate vehicles that bring that develofMnent
under the act.
Ms. Worthy. There would be no way that we would have any
record of purchasers who have bought tHat were not under the act
Mr. Brown. Well, Ms. Worthy, what I am saying is I think that
anyone that feels that he has been had in connection with the purchase
of real estate would probably look for Federal solutions, oo, I am
sure that probably everyone would contact your Office and see if they
were not covered by the protections of this act, even though they were
not protected because it was purely an intrastate transaction.
Ms. Worthy. We liave many cases where purchasers have written
and complained, and we have had to advise them that that particular
subdivision in which he has bought did not have to register with our
Office. Yes, we have instances of those.
I do not have the exact numbers of those. I could not even give you
a guesstimation on that.
Mr. Brown. You see, the only point I am making is that we started
this out primarily as a disclosure act, and it just seems to me we are
getting into, in effect, a Federal law covering real estate transactions.
Ms. Worthy. I must agree that, because the threshold of the act is
50 lots and because you said any use of the mail, directly or indirectly,
yes, we do cover a large number of subdivisions and sales transactions.
And that is why we have proposed that the threshold be increased to
100 lots, and we have promulgated new regulations that provide sub-
stantial exemptions.
But I can only say that we are attempting to carry out what we per-
ceive to be the clear mandate of Congress.
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[In response to the above question of Congressman Brown, Ms.
Worthy furnished the following answer for inclusion in the record :]
Response From Mb. Worthy
From time to time, OILSR receives complaints from consumers where their
particular purchase of land is not covered by the act. In virtually each of these
instances, the subdivision or the transaction has been specifically exempted by
Sections 1403 (a) (I)-(IO) of the Act. Earlier in OILSR's history, we received
many complaints from consumers who purchased land prior to the statute's
enactment. Now, 9 years later these prior purchaser complaints are much less
frequent However in aU cases, even though the particular transaction is not
covered, OILSR wiU make inquiry to the developer in case more recent buyers
are affected by the alleged problem.
Our experience has shown that nearly 100 percent of the developers offering
50 or more lots who seU land primarily to residents of that same State are covered
by the provisions of the act This interpretation of the act's Jurisdiction and Its
legislative history has been consistently supported by Federal Court opinions. In
Wiggins v. Lynn (406 Sui^. 338), it was held that with respect to subdivisions
in each of which there were more than 299 lots located entirely within Texas and
as to which less than 5 percent of sales in any 1 year were made to nonresidents
of the State of Texas, the developer would be enjoined . . . from selling or leasing
lots without satisfying the requirements of the Interstate Land Sales Full Dis-
closure Act In Qaudet v. Woodlake (399 F. Supp. 1005), the court ruled that
"the statute contains no exemption for sales to resident of the State where the
land is located. It does not turn on the residence of the buyer or the seller, but
makes it unlawful for any developer, or agent, directly or indirectly, to make
use of any means or instruments of transportation or communicaticm in interstate
commerce, or of the mails to sell or lease any lot in any subdivision unless a State-
ment of Record with respect to such lot is in effect . . ." Further, the opinion
reads that "The Act itself provides 10 exemptions in 15 USC 1702, and these are
amplified in the regulations 24 CFR 1700 et seq., but nowhere is there a statutory
exemption because the land is sold solely to residents of the State in which it is
located." In McCoum v. Heidler (527F. 2nd 204), a court ruled that "The general
purpose of the Land Act was, of course, to prohibit and punish fraud in such land
development enterprises as we here consider and the Act should be interpreted
to attain that end. Such an act should be construed not technically and restric-
tively, but fiexibly to effectuate its remedial purposes."
In this regard for the record, I am enclosing samples of these cases involving
this issue. As a result, there have been very few. if any, "in-State" complaints
that have not been covered by the protections of the act
As to the number of the complaints that OILSR receives where the buyer and
the property are located in the same State, I can provide the Committee with the
following information. Approximately 00 percent of OILSR's Indictments have
involved land sales where the vast majority of buyers were local or in-State resi-
dents. In approximately 55 percent of the cases currently under investigation by
OILSR because of complaints from purchasers, nearly aU lot buyers are in-State
or local residents. Further, just recently, OILSR initiated a computer profile sys-
tem of consumer complaints. Findings from the first 100 complaints collected
have shown that approximately 05 percent of them were from purchasers who
bought property in the State in which they reside. The average size of the sub-
division involved in these "in-State" transactions is approximately 1844 lots.
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Bonnie Maud WIGGINS, Individiially,
and as Administratrix and Substitute
T^stee of the EsUte of Barney Wig-
fin% Deceased
James T. LYNN, Individuallj, and in his
capadty as Seeretary of the Depart-
ment of Housins: and Urban Develop-
ment, and Georgre K. Bernstein, Indi-
Tidually, and in his capacity as Inter-
state Land Sales Administrator of the
Department of Housing and Urban
Dcirelopment
No. B-74-M-CA.
United States District Court,
E. D. Texas,
Beaumont Division.
April 25, 1975.
Order July 81, 1975. *
Suit was brought against Secretary
of Department of Housing and Urban
Development and against interstate land
sales administrator of the Department
for injunctive relief restraining the en-
forcement of regulation governing re-
quests for exemption order. The Dis-
trict Court, Joe J. Fisher, Chief Judge,
held that with respect to subdivisions in
each of which there were more than 299
lots located entirely within Texas and in
which less than five percent of the sales
in the subdivisions in any one year were
made to nonresidents, developer would
be enjoined from selling or leasing lots
and from using any means or instru-
ments of transportation or communica-
tion in interstate commerce to sell or
lease lots without satisfying require-
ments of Interstate Laml Sales Full Dis-
elosure Act, and that as to subdivisions
each of which had less than 299 lots and
in which sales were limited to less than
five percent in any one year to nonresi-
dents, developer would be required to
eomply with re^nstration nM|uirements of
the Act and rule and rcKulations issued
pursuant thereto where the lots were
sold collectively ;i& |)art of a C(»mmon
promotional plan cuntainint; rhore than
900 lots ami develo|ier did not xeek ex-
emption onler.
(inkT Hcronlingly.
L TVade Regulatioa c»864
With respect to subdivision in eadi
of which there were more than 299 lota
located entirely within Texas and as to
which less than five percent of tha sale*
in any one year were made to nonrett-
dents of the state of Texas, developer
would be enjoined from selling or leasii^
lots, from using any means or inttm-
ments of transportation or communica-
tion in interstate comroeroe, and from
selling or leasing lots without satisfying
requirements of Interstate Land &ilei
Full Disclosure Act IntenUte Land
Sales Full Disclosure Act, f 1402 et scq^
15 U^OA. f 1701 et seq.; 28 UJ3.GJL
f 188L
2. Ttade flegulation <»861
With respect to subdivisions each bt
which had less then 299 lots and with
respect to which sales were limited to
less than five percent in any one year to
nonresidents of the state of Texas, davel*
oper would be required to comply with
registration requirements of Intmvtate
Land Sales Full Disclosure Act whtn the
lots were sold collectively as part of a
common promotional plan containing more
than 800 lots and developer did not seek
exemption order. Interstate Land Sales
Full Disclosure Act, f 1402 et seq.. 15
U.S.CA. f 1701 et eeq.; 28 UAOA. f
188L
Richard R. Morrison, III, Daniel, Mor^
risen & Strahan, Liberty, Tex^ for plain*
tiff.
Roby Hadden, U. S. Atty., Dennis R.
Lewis, Asst. U. S. Atty^ Beaumont, Tex.,
for defendants.'
FINDINGS OF FACT AND
CONCLUSIONS OF LAW
JOE J. FISHER, Chief Judge.
FINDINGS OP FACT
L
Plaintiff. Bonnie Maud Wiggins, Indi-
vidually, and as Administratrix ami Suli-
stitutc Trustee of the Estate of Barney
Wiggins, Deceaited, is a ciUicn of the
Sute of Texas and originatuil this action
on March 27, 1974, against James T.
Lynn. Indivi<lually, and in his «i|inrily as
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Secretary of tho l)i*|iarifiicnl of IlouMinff
ami UHiun l)c!vd(>|>nM:nt, un<l u^ruiast
Gcorf^* K. lk:raHU:in, IrwiivHlually, and in
hb capacity as Interstate I«itn<l Sitlcx Ad-
minbtrator of the De|Kirtnu*nt of Houh-
ing and Urimn IX^velofiment, lK>ih of
whom arc citizens of Washin^^n, D. C.
This action is ha.HC<l ufion diversity of
dtizcnship and involves a fe<lcral ques-
tion, and the Plaintiff sucks injunctive
relief a|i:ainst Defendants, restraining
the enforcement of Section 1710.14, (24
C.F.R 1710.1, et scq.). issued by the De-
fendants effective March 81, 1972.
2.
On April 26, 1974, Defendants answer-
ed Plaintiffs complaint and by way of
eounterclaim filed on May 13, 1974. seek
a permanent injunction restraining
Plaintiff from continuing to operate in
violation of the Act
On August 29, 1974, Plaintiff answer-
ed Defendants' counterclaim and by way
of a supplemental petition, seeks a decla-
ration that Plaintiffs subdivisions made
the subject of thb lawsuit are exempt
from regbtration requirements under
the Act
&
plaintiff b the widow of Barney F.
Wiggins of Polk County, Texas, who
died on November 19, 1970, leaving
Plaintiff and four minor children surviv-
ing. During the lifetime of the said
Barney F. Wiggins and about 1960, he
began purchasing and developing tracts
of undeveloped real estate in several
Southeast Texas Counties, namely, Polk,
Liberty, San Jacinto, Tyler and Hardin,
that were within easy driving distance of
the heavily populated metropolitan area
of the Texas Gulf Coast, namely, Hous-
ton, Beaumont, Baytown and Pasadena.
Plaintiffs subdivisions vary in size from
25 lots in Corrigan Heights to over 3,000
lots in Lake Run-A-Muck. The lots av-
erage in size about 50 feet by 125 feet,
and the average price range is Three
Hundred Ninety-Nine and No/100
(1399.00) Dollars to Five Hundred Nine-
ty-Nine and No/100 ($599.00) Dollars per
lot
4.
The Defendant, James T. I^ynn, is the
Secretary, of Housing ami Uriian Devel-
opment; the Defemlant, George K.
Bernstein, b the Administrator of the
Office of Interstate I^and Sales Registra-
tion, Department of Housing and Uriian
Development
5.
The following described tracts of land
are situated in the State of Texas, are
owned by the Plaintiff, and are "subdivi-
sions," as that term b defined by 15
U.S.C. § 1701(3):
(1) Putman's Landing
(2) Wild 0>untry Lake Estates
(8) Thunder Mountain
(4) Nugent's Cove
(5) Crystal Lakes
(6) Eagles Nest
(7) Town Bluff
(8) Wayward Wind Oasb
(9) (Kerrigan Heights
(10) Hoot OWl Hollow
(11) Hardin's Hideout
(12) Old Stag Ridge
(18) Weaver's Cove
(14) Horseshoe Lakes Estates
(15) Sam Houston L^es Estates
(16) Old Snake River Lakes Estates
(17) Lake Run-a-Muck
(18) Natasha Heights*
All of the lota in all of Plaintiffs sub-
divisions are offered for sale as a part of
a common promotional plan under the
name of Wiggins Land (Company, an as-
sumed name under which Plaintiff does
business. Plaintiff employs approxi-
mately seven (7) clerical personnel and
currently uses the services of approxi-
mately five (5) or six (6) salesmen who
work on a commission basis.
7.
All lots in all subdivbions are sold only
after an on-site personal inspection by
the prospective purchaser. The salesmen
• A CorporaUoii in which 100% of the stock is owned by the PkOntifr.
33-718 O - 78 - 33
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508
have been instructed not to sell lots to
anyone having an address outside the
State of Texas.
8.
The advertising brochures of Plaintiff
were directed entirely to the surrounding
local market and were distributed either
at the Livingston office of Plaintiff or
by mailing in response to telephone re-
quest From the records of Plaintiff
only one telephone call was received
from outside the State of Texas requests
ing an advertising brochure of Plaintiff
for the period of 1969 to the middle part
of 1978.
9.
Plaintiff has never engaged in any di-
rect mail advertising schemos to sell lots,
never engaged in any scheme or plan
using -the telephone for lot sales and nev-
er transported prospective purchasers to
subdivisions by any means for the pur-
pose of selling lots.
10.
All of Plaintiffs subdivisions are
wooded, have dirt and some oil streets,
and small lakes suitable only for fishing.
There are no marinas on any of the
lakes, there are no concrete swimming
pools, no golf courses or tennis courts, or
other such attractions normally associat-
ed with large subdivision offerings de-
signed to attract prospective purchasers
from great distances and across state
lines.
11.
Plaintiffs advertising, consisting of an
occasional use of radio ads over Houston
station KIKK and small classified ads in
the Houston Post and Houston Chronicle,
was concentrated in the northeastern
section of Houston. As a result "90% or
better** of all lot sales in all subdivisions
were to Houston residents. Plaintiff has
also advertised in the East Texas Eye, a
ncw8|Ki|)cr ownL'il by Plaintiff with some
interstate circulation.
12.
Since 19C0 thoro have l)ecn 5451 lots
sold in riaintiffs KulNlivi.si<ms, of which
only three lot8 have Inien Mold to two
individual purchasers who were rending
out of the State of Texaa.
la
The IntersUte Land Sales Pull DItdo*
sure Act was passed by Congress on Au-
gust 1, 1968, and its effective date was
April 28, 1969. On April 28, 1969, all of
Plaintiffs subdivisions listed in the stip>
ulations filed herein, with the exception
of Natasha Heights, were developed and
sales were well under way.
14.
On March 29, 1969, the first set of
Federal Rules and Regulations was is->
sued by DefendanU and Section 1710J0
thereof stated as follows:
1710.10 Exemption. Unless a method
of sale, lease or other disposition of
land or an interest in land is adopted
for the purpose of evasion of the Act,
the rules and regulations of this pert
shall not apply to the following tnai>
actions.
(1) The sale or lease of lots whtn
the offering is entirely or almost en-
tirely .intrastate.
16.
Plaintiff received a letter dated Ifareh
23, 1971, from Defendants signed by Mr.
Herbert H. George, Director, Admini^
trative Proceedings Division, Office of
IntersUte Land Sales Registration,
wherein Plaintiff was asked to dct8r>
mine whether or not their lot sales pr^
gram was within the purview of the Ad.
Plaintiff replied to the tetter dated
March 23, 1971, by letter dated April 29.
1971, signed by Price Daniel, Jr., Attor-
ney, wherein he stated that the Inter*
state Land Sales Full Disclosure Act was
not applicable to Plaintiffs sale of lots
in its various subdivisions because the
offering of lots for sale is intrastate and,
therefore, exempt under the Act and.
more s|)ecifk:ally, under Sectfon 17W.*
10(1) of the Rules and Regulations. Fur-
ther, in the reply letter datoil A|iril .29.
1971, from Price Daniel. Jr., he inquin-d
of Defendants if they miedeil any fur-
ther information regnnling Plaintiff'
exemption to let plaintiff know.
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509
17.
Defendants did not contact the Plain-
tiff in any further manner after March
28. 1971, until February 28, 1973, a peri-
od of almost two (2) years. Further,
during the period between March 23,
1971, and February 28, 1973, the Defend-
ants did not dispute or contest the intra-
state exemption claimed by Plaintiff in
Plaintiffs letter of April 29, 1971.
18.
During the period of Ume from March
23, 1971, to February 28, 1973, Plaintiff
eofiducted its subdivisions operations
based upon a reasonably gopd faith be-
lief that the Government's failure to
eontest or question Plaintiffs claim of
an intrastate exemption in its letter of
April 29, 1971, amounted to the granting
of or acquiescence in the claim to such
intrastate exemption.
19.
On March 81, 1972, the Federal Rules
and Regulations were amended by De-
fendants, and Section 1710.14 was added
as follows: -
Section 1710.14 Regulatory exemp-
tions—exemption order required — lim-
ited offering
(a) The Secretary may exempt from
the provisions of this part any subdivi-
sion or any lots in a subdivision which
otherwise would be covered by the
provisions of this part, by issuing an
exemption order in writing to the ef-
fect that the enforcement of this part
with respect to such subdivision or lots
Is not necessary in the public interest
and for the protection of purchasers
by reason of the small amount in-
volved or the limited character of the
public offering, if he determines that:
(1) The request for the exemption
order is limited to a single transaction;
or
(2) All of the following criteria are
met:
(i) There are less than 300 lots in
the subdivision.*
(ii) The subdivision is located entire-
ly within one State.
(iii) The offering of lots in the sub-
division is entirely or almost entirely
limited to the State in which the sub-
division is located.
(iv) The use of all advertising and
other promotional means, the distribu-
tion of which is within control of the
developer or his agents, is confined to
the State in which the subdivision is
located. All use of billboards and sim-
ilar signs, telephonic methods of com-'
munication and direct mail shall be
presumed to be within the control of
the developer or his agents.
(v) No more than 5 per cent of the
sales in the subdivision in any one year
will be made to nonresidents of the
State in which the subdivision is locat-
ed.
The March 81, 1972, Federal Rules and
Regulations amounted to a substantial
change in the method and procedure
whereby regulatory exemptions were
obtained.
^ 20.
The Plaintiff received a letter dated
February 28, 1973, from Defendants
signed by John R. McDowell, Deputy Ad-
ministrator of the Office of Intersute
Land Sales Registration, which stat^. in
part, as follows:
"Until the subdivisions are effectively
filed as required by Section 1404(aXl)
of the Act, it would be advisable that
you cease all lot sales in the noted
subdivisions."
This was the first official notice of
any type that Plaintiff was not in com-
pliance with the Act since its effective
date on April 28, 1969.
21.
In March of 1973 and until about No-
vember of 1973, Plaintiff, separately and
in conjunction with others, made filinirs
pursuant to the Act on the following
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subdivisions, which filings beeanae effec-
tive:
SUBDIVISION
CD Wi99ins Villagt ^l
C2) Wi99hn VUlagt #2
O) RcliyiVliteg*
14) RcUyi Landing
Partnership
(5) BaHowUites
EiUtes
(M WMtff Tali Ridgt
a) Nataiha Htights
Corporation
(S) Ukt Run-A-Muci(
19) Indian Spring
fl2flUl£ESliie
Partntrship— Tht Plaintiff
and D. RtiUr
Partnership— Tht Plaintiff
and D. RtiUr
Partntrship— Tht Plaintiff
and M. 6. Roily
Tht Plainttff and D. Roily
Partnorship— Tht Plaintiff
and M. 6. Rtlly
No longor owntd by tho
Plaintiff
lOOV. of tht stock owntd
by tht Plaintiff
Tht Plaintiff
Corporation— siV; of tht
stKk owntd by tht
Plaintiff and 50% by
D. Rtlly
During said period from March of 1973
until November of 1973 the Plaintiff has,
in conjunction with others, filed with the
Office of Interstate Land Sales Registra-
tion the following subdivisions, which
registrations have not become effective:
I
OVyNERSHlP
(1) Horsfshot Lakts EsUtes
Tht Plaintiff
(2) Sam Houston Lakts Estatts
Tht Plaintiff
») Old Snakt River Lakt
EsUtts
ThtPlainUff
M) Mont Ntchts
Partntrship— Tht
Plaintiff and
M.6.Rti|y
23.
Hardin's Hideout, a subdivision located
in Polk County, Texas, was effectively
registered with the Secretary when
owned by Jobc Wifrfrins, and it is now
owned by the Plaintiff.
24.
Plaintiff received a Idler daUnl Sep-
icmlK:r 7, 1973, fmm DefcmlanLs sijrninl
by John It Mcl><>wcll, Dt-puly A<lminis-
trator of the Off lire of Inlerslalo I-;in<l
Salt's lUrpstnition, rt'^^inlin)? Haniin's
Hi<k*<>ul which sUites in |Kirt :i.s follows:
•This offiw acYirpLs your sUilcmi'iit
that tlic salt's o|K«nili<»n.s of the ca|H
tioned subdivisimis wss probmUy intra-
state during that period."
25.
The Plaintiff received a letter dated
November 7, 1978, from Defendants
signed by John R. McDowell, Deputy Ad-
ministrator of the Office of Interstate
Land Sales Registration, which states In
part as follows:
"We request that you send a letter to
all those persons who purchased lots at
the subject subdivision prior to the. ef-
fective date of its Aling and subs^
quent to Biarch 81, 1972, the date the
Act became applicable to the subjaet
subdivision."
28.
Plaintiff was selling or offering to sdl
lots in Lake Run-A-Muck, Old Snake
River, Wayward Wind and Natasha
Heights Subdivisions on March 81, 197%
without an effective registration with
Defendant Lynn, Secretary of Housing
and Urban Development Said Subdivi-
sions of Lake Run-A-Muck, Old Sr.akt
River, Wayward Wind and Natneha
Heights, each with more than 299 lots
were k>cated entirely within Texas and
less than five (5%) per cent of the sales
in said subdivisions in any one year were
made to nonreskients of the SUte of
Texas.
27.
The Plaintiff, her attorneys, agints,
officers, emfUoyees, succe s sors, assigns
and any and all persons acting din.'dly
or indirectly in concert with her sh«iuld
be restrained and enjoined from selling
or leasinfT lots in Lake Run-A-Muck, Okl
Snake River, Wayv^'ard Wind and Nata^
sha Heights Subdivisions and from using
any means or instnimento of transpmla-
tk>n or communication in intursUte rom-
mercc, or the mails, to sc*ll or lease hiU
in Lake Run-A-Muck, Old Smdie River,
WaywanI Wimi ami Nataicha HvtghU
SuUlivisions without satisfying the re*
(|uiremenls of the Interstate Lund Sak*s
Full DiscUisure Act
2B.
I^aintiff was selling or offvring to m-ll
lots in Corrigsin llfightx, (Vyiital Ijnkrs,
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Es|rk9« NcHi, limit Owl Hollow, Hwnus-
bImic Uikc tliitaloss Nuf^int's Cove, Old
Siai; RkIkc, Putmim's I^iimlinic, ^m
HcNJStun, Thun«l(!r Mounljun, Town
Bluff, Wcavur's Covu, Wild 0>untry and
Hanlin's llidof>ul SulNlivisions on March
SI, 1972, without an effective rei^ittra-
lion with Defendant Lynn, Secretary of
Housing Urban Development Said subr
divisions were <ftcempt under all statuto-
ry and regulatory exemptions prior to
ICsroh 81, 1972.
29.
On March 81, 1972, said Subdivisions
of Corrigan Heights, Crystal Lakes, Ea-
gles Nest, Hoot Owl Hollow, Horseshoe
Lake Estates, Nugent's Cove, Old Stag
Ridge, Putnam's Landing, Sam Houston,
Thunder Mountain, Town Bluff, Weav-
er's Cove, Wild Country and Hardin's
Hideout each had less than 299 lots, and
tales were limited to less than five (5%)
per cent in any one year to nonresidents
of the State of Texas.
80.
Plaintiff, her attorneys, agents, offi-
cers, employees, successors and assigns
should be required to comply with the
registration requirements of the Act and
the Rules and Regulations issued pur-
suant thereto with regard to Corrigan
Heights, Crystal Lakes, Eagles Nest,
Hoot Owl Hollow, Horseshoe Lake E#s-
Utes, Nugent's Cove, Old SUg Ridge,
Putnam's Landing, Sam Houston, Thun-
der Mountain, Town Bluff, Weaver's
Cove, Wild Country and Hardin's Hide-
out Subdivisions.
CONCLUSIONS OF LAW
This CouK has jurisdiction over the
subject matter and the parties because
of diversity of citizenship between the
parties and a federal question has been
raised pursuant to 28 U.S.C. Section
1331.
2.
At all times pertinent to this action
there was in full force and effect an act
of the Congress of the United States
referred to as the Interstate Land Sales
Full DiHcloGiurc Act. 15 U.S.C., SecCion
1701 e( acq,, which Act lioeamc uffocUve
on April 28, 1969.
8.
The Act provides that it shall lio un-
lawful for any devclo|ier or agent, di-
rectly or indirectly, to nuiko use of any
means or inHtn\mcnts of transportation
or eommunication in intcmtato com*
merce, or of the mails, to sell or lease
any lot in any subdivision unless a state-
ment of reeorti with respect to such k>t it
in effect in accordance with provbions of
the Act, and a printed property report,
meeting requirements set forth in the
Act, it furnished to the purchaser in ad-
vance of the signing of any contract or
agreement for sale or lease by the pur-
chaser.
4.
The Act permits the Secretary of
Housing and Urban Development Cthe
Secretary") from time to time, pursuant
to rules and regulations made by him, to
exempt from any of the provisions of the
Act any subdivision or any lots in a tub-
division, if the Secretary finds that the
enforcement of the Act with respect to
such subdivision or lots is not necessary
in the public interest and for the protec-
tion of purchasers by reason of the small
amount involved or the limited character
of the public offering.
5.
The Act permits the Secretary, from
time to time, to make, issue, amend, and
rescind such rules and regulations and
such orders aa are necessary or appropri-
ate to 'the exercise of the functions and
powers conferred upon him by the Act
e.
In 1969, pursuant to the authority of
Section 1702(b), the Secretary issued cer-
tain regulations referred to as Section
1710.10(1), TiUe 24, Code of Federal Reg-
ulations which exempted from the opera-
tion of the Act the sale or lease of lota
where the offering was entirely or al-
most entirely intrastate.
7.
On January 27, 1972, the Secretary is-
sued new regulatk>ns deleting the old
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512
Section 1710.10(1) and creating a new
Section 1710.14 exemption pursuant to
his discretionary authority under Section
1702(b), which Section 1710.14 became
effective March 31, 1972.
8.
Prior to March 31. 1972, Lake Run-A-
Muck, Old Snake River, Wayward Wind,
Natasha Heights, Corrigan Heights,
CrysUl Lakes, Eagles Nest, Hoot Owl
Hollow, Horseshoe Lake Estates, Nu-
gent's Cove, Old SUg Ridge, Putnam's
Landing, Sam Houston, Thunder Moun-
tain, Town Bluff, Weaver's Cove, Wild
Country and Hardin's Hideout Subdivi-
sions were exempt from the provisions of
the Act because the enforcement of the
Act with respect to such Subdivisionsr
was not necessary in the public interest
and for the protection of purchasers by
reason of the small amount involved or
the limited character of the public offer-
ing.
9.
Subsequent to March 31, 1972, 0>rri-
gan Heights, Crystal Lakes. Eagles Nest,
Hoot Owl Hollow, Horseshoe Lakes Es-
tates. Nugent's C^ove. Old SUg Ridge.
Putnam's Landing. Sam Houston. Thun-
der Mountain, Town Bluff, Weaver's
Cove, Wild Country and Hardin's Hide-
out Subdivisions should be exempted
from the provisions of the Act pursuant
to the regulations issued by the Secre-
tary referred to as Section 1710.14. Title
24, Code of Federal Regulations, under
his discretionary authority set forth in
Section 1702(b) of the Act.
10.
[1] The Plaintiff.s. her atl<»me>-s.
agents, officers, employees, successors,
assigns and uny and all })crsons acting
directly or imiirectly in concert with her
are rt'stniincil un<l enj«>in(."<i from selling
or leasting lots in I,:ike Run-A-Muck. Old
Snake River, WaywanI Wind and Nata-
sha Heights SulNiivisions. and fmm using
any means or instruim-nls of tnins|x>rta-
tion or communication in intorstiitc com-
merce, or the mails, to sell or Ivma* lots
in l^ike Kun-A-Muck. OUl Snake Kivcr.
WaywanI Wmd and Natasha Heights
Subdivisions without saUsfyinif thm n-
quircments of the Interstate Land Sales
Full DisckMure Act
11.
[2] Plaintiff, her attorneys, agaots,
officers, employees, successors and as-
signs should not be required to comply
with the registration requirements of the
Act and the Rules and^ Regulations is-
sued pursuant thereto with regard to
Corrigan Heights, Co'stal Lakes, Eagles
Nest, Hoot Owl Hollow, Horseshoe Lake
Estates, Nugent's Cove, Old Stag Ridge,
Putnam's Landing, Sam Houston, Thun-
der Mountain, Town Bluff, Weaver^
Cove, Wild Country and Hardin's Hida-
out Subdivisk>ns.
ORDER MODIFYING CONCLUSIONS
OF LAW AND JUDGMENT
On this date, came for oonaideFation
the Motion for Modificatk>n of the Con-
clusions of Law and Judgment, filed
jointly by the Plaintiff and the Defend-
ants herein, and after considering i
the Court is of the opinion the
should be granted. It b therefore.
Ordered, adjudged and decreed that
the -Conclusions of Law and Judgment of
this Court entered in this cause on April
25, 1975, be modified as follows:
1. Paragraph 9 of the Conclusions fii
Law will read as follows: "Subsequent
to March 31, 1972, Corrigan Heights,
Crystal Lakes, Eagles Nest, Hoot Owl
Hollow, Horseshoe Lakes Bstaics, Nu-
gent's Cove, Old Stag Rkigc, PutnamV
Landing, Sam Houston, Thunder Moun-
tain, Town Bluff, Weaver's Cove, Wihl
Country and Hjurtlin's Hi<ieout Subilivi-
sions may lie exempted from the rcgiH'
tration provisionK of the Act imrauanl lo
the regulatioiM iimucd by the SGcn*taO'
refernMl to us Section 1710.14, Title 31.
C^Mle uf Fe<leral Regulations, under hu*
discretionary authority set forth in Sec-
tion 17(r4(b) of the AcL"
2. Parugniph 11 or the Conelusionjt ai
Law will rejul -m follows: "Thiintiff, hef
attorneys, ;igents, offkrens em| !!«»>"»'«'*•
successors and CLssigas sh«Hdd lie ni|iiin^l
to comply with all tliv exempt km fv-
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513
quircmenU of S<'<aion 1710.14, TilU* *M,
OkIc of Kcflcral l<4;^ilulH)nK, or Ihe nv
btration ref|uirt:mc'nLs of the* Act ami
the Kulcs amJ lCi;frulalion.s insuod pursu-
ant thcrtflo with ro^irvl to Oirri^n
IliM^tH, Crystal Uikus, tla^li^ Nust,
Hoot Owl Hollow, Horseshoe I^ku Es»-
Utcs, Nuffunt's Cove, Old Sla(( Iwidgv,
Putnam's Landin^^ Sam HousU>n, Thun-
ilcr Mountain. Town Bluff, Weaver's
0>vc Wild Country and Hardin's Hide-
out Subdivisions."
3. The first full iiaraipraph on the 4th
l>agc of the Judgment will rcafl as fol-
lows: "The Court further finds that
Plaintiff was selling or offering to sell
lots in Corrigan Heights, Crystal Lakes,
Eagles Nest, Hoot Owl Hollow, Horse-
shoe Lake EsUtes, Nugent's Cove, Old
Stag Ridge, Putnam's -Landing, Sam
Houston, Thunder Mountain, Town
Bluff, Weaver's Cove, Wild Country and
Hardin's Hideout Subdivisions on March
31, 1972, without having an effective
registration with the Secretary of Hous-
ing and Urban Development pursuant to
said Act. On said date of March 31,
1972, said Subdivisions of Corrigan
Heights, Crystal Lakes, Eagles Nest,
Hoot Owl Hollow, Horseshoe Lake E^
tates, Nugent's Cove, Old Stag Ridge,
Putnam's Landing, Sam Houston, Thun-
der Mountain, Town Bluff, Weaver's
Cove, Wild Country and Hardin's Hide-
out each had less than two hundred nine-
ty-nine (299) lots, each of said subdivi-
sions was located entirely within Texas,
the offering of lots in each of said subdi-
visions was entirely or almost entirely
limited to Texas, that the advertising
and promoting each of said subdivisions
was confined to Texas, and less than five
(5%) per cent of the sales in each of said
subdivision in any one year was made to
nonresidents of Texas. However, the
lots were sold collectively as part of a
common promotional plan containing
more than 300 lots and the Plaintiff did
not seek an exemption order pursuant to
Section 1710.14. Title 24, C<xle of Federal
Regulations."
4. The second full |xiragraph on Pi«ge
4 of the Judgment will read as follows:
**It 18, therufurc, onlere<|, luljudged and
docrecd that Plaintiff, her attorneys,
agents, officeni, empk>yees, successors
and assigns should lie reciuirec^ to c«>m|>ly
with all the rcc|uirementM of Section
1710.14. Title 24, Code of Fc^ksral Regu-
lations or the registration requirements
of the Act and the Rules and Regula-
tions issued pursuant thereto with re-
gard to Corrigan Heights, Crystal Lakes,
Eagles Nest, Hoot Owl Hollow, Horse-
shoe Lake Estates, Nugent's Cove, Okl
Stag Ridge, Putnam's Landing, Sam
Houston, Thunder Mountain, Town
Bluff, Weaver's Cove, Wild Country and
Hardin's Hideout Subdivisions."
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514
' SUnlqr J. GAUDET, Jr^ and Aodny
C. Gawlct
V.
WOODLAKE DEVELOPBIENT Ca
Civ. A. No. 75-1217.
United SUtcs District Court,
E. D. LouisUuMU
Mmh 5, 197e. ' :
Purchasers brought action against ven-
dors to recover damages and to obtain n>>
scission of land sales under the Interstate
Land Sales Full Disclosure Act TJw Dis-
trict Court, Alvin B. Rubin, J., held that
where the purchasers signed agreement to
purchase on April 18, 1973, where vendor^
representative signed the agreement on
April 19, 1978, and where the acts of sale
were executed on May 8, 1974, and October
21, 1974, purchasers' action which was fDcd
on April 22, 1975, was timely; that purchas-
ers would be granted leave to amend their
complaint to seek resdssion; and that pur-
chasers were entitled to either rescission or
damages but not to both.
Judgment for plaintiffk
L Trade ReguUtlon •*8C1
If a property report is not furnished,
execution of an agreement to sell is a viola-
tion of the IntersUte Land Sales Pull Dis-
closure Act IntersUte Land Sales PUII
Disclosure Act, § 1402 et seq^ 15 U.&CA.
§ 1701 et seq.
2. Trade Regulation •»864
Statute of limitations for action to re-
scind interstate land sale begins to run
when the agreement is completed. Inter-
sUte Land Sales Full Disdoeure Act, § 1402
et seqn 15 U.S.CA. § 1701 et seq.
1 Trade ReguUtlon ^SM
Where purchasers of land signed agree-
ment to purchase on April 18, 1973, where
vendor's represenUtive signed the agree-
ment to sell on April 19, 1973, whm the
executed purchase agreemenU wore re-
ceived»by the purchasers on or about April
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515
23, 1973, and where the aets of sales were
exeeuted on May 8, 1974 and October 21,
1974, action for damages and rescission un-
der the IntcrsUte Land Sales Full Disdo-
flure Act which was filed on April 22, 1975,
tnd which was based on failure of sellers to
pcvvide purchasers with propeKy reports,
waa timely. IntersUte Land Sales Full
Dtselosure Act, §§ 1402 et seq., 1404(aXl).
1412. 15 U.S.aA. f f 1701 et seq., 1703(aXl),
1711.
4. Trade ReguUtkm ^861
The execution of a deed, or an act of
tale translative of title, is itself a violation
of the IntersUte Land Sales Pull Disclosure
Act if no property report has been fur-
nished. IntersUte Land Sales Full Disclo-
sure Act. §§ 1404(aXl). 1410(a), jbXl, 2), 15
VS.CJL. §§ 1703(aXl). 1709(a)ra0(l. 2).
5. Trade Regulation «=»861
Failure of vendor to furnish a report is
not a continuing violation of the IntersUte
Land Sales Full Disclosure Act IntersUte
Und Sales Full Disclosure Act, § 1404(aXl),
15 U.S.C.A. § 1703(aXl).
$. Trade Regulation <»864
If vendors had not furnished property
report before execution of purchase agree-
ments, but had furnished a property report
before signing the acts of sale, no action to
rescind the acts of sale would lie under
provision of the IntersUte Land Sales Full
Disclosure Act to the effect that any con-
tract covered by the Act is voidable at the
option of the purchaser when the property
report has not been received prior to sigii-
ing of the agreement IntersUte Land
Sales Full Disclosure Act, § 1404(b), 15 U.S.
CJl. $ 1703(b).
7. Federal Civil Procedure «»843
Where purchasers of property had
sought rescission, in the alternative, from
the sUK of their action under the InUr-
sUtc Land Sales Full Disclosure Act, and
where vendor was aware that rescission
was the primary desire, although court was
not, purchasers would be given leave to
I. Prior to the trial of this action, the defendant
moved to dismiss this action based upon its
contention that the Act did not permit resds-
amend their complaint to seek rescission.
Ped.Rules Civ.Proc rule 15, 28 U.S.aA.;
IntersUte Land Sales Full Disclosure Act,
§ 1402 et seq., 15 U.S.CJI. § 1701 et seq.
8. Trade Regulation ^864
Purchaser may have either of two rem-
edies, damages or rescission, under the In-
tersUte Land Sales Full Disclosure Act, but
not both. IntersUte Land Sales Full Dis-
closure Act, § 1410(c e), 15 U.S.CJL
§ 1709(c e).
Wiley G. Lastrapes, Jr., G. Phillip Shuter,
III, New Orleans, La., for plaintiffs.
Donald A. Meyer, New Orleans, La., for
defendant
ALVIN B. RUBIN, District Judge:
The plaintiffs purchased real esUte from
the defendant in a transaction subject to
the IntersUte Land Sales Full DisdosuHe
Act, 15 U.S.C. § 1701 et seq. The transac-
tion took place in two sUges. First, the
parties entered into an agreement to buy
and sell. Such an executory contract is
customary in Louisiana. Lat^, title to the
property was conveyed in separate instru-
menU, called acU of sale in Louisiana.
These are analogous to a warranty deed at
common law.' The defendant did not at
any time provide plaintiffs with a property
report as required by § 1703(aXl) of the
Act The plaintiffs seek to rescind their
purchases of three lots that are unim-
proved. They contended at the outset of
the suit that they are entitled to damages
with respect to a fourth lot where they had
constructed their home, or alternatively to
rescission of that transaction as well. Now
they express a preference for rescission and
seek to amend their complaint accordingly.
The defendant was not surprised by this
development because it had assumed all
along that this was plaintiffs' preference.
The defendant contends that the sUtute
of limiUtions contained in the I.LS.F.D.
siOQ of the completed sales. The Court denied
the motion. See GMudet v. WoodlMke Develop-
meat Comptuay, E.DXa.1975. 389 F.Supp. 1005.
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Act BtarlcHl to run when tlic purchnso
a||;n!cnK!nl was Kifcncd and that the action
was not timely liecuuau it was not com-
moncctl within two years of the signing of
the purchiute agreements.
I.
Plaintiffs signed the agreement to pur-
chase on April 18, 1973. The defendant's
representative was not present at the time.
He signed it later, and his signature is
dated April 19, 1973. The executed pur-
chase agreements were mailed to plaintiffs
and received by them on or about April 23,
1973. Plaintiffs commenced this action on
April 22, 1975.
The acts of sale of the lots were executed
at different times, the first on May 8, 1974,
and the last two on October 21, 1974.'
[1-3] While the sUtutc was not drafted
with Louisiana practice in mind, its prinei- ^
pies appear easy to apply. If a property^
report is not furnished, the execution of an
agreement to sell is a violation of the Act
It gives rise to a cause of action to rescind
the agreement The statute of limitations
for this action begins to run when the
agreement is completed. But the purchaser
may decide not to bring this action. Indeed
be might later be furnbhed with a property
report and elect not to do so.
[4, 5] The execution of a deed, or an act
of sale translative of title, is itself a viola-
tion of the act if no property report has
been furnished. This violation gives rise to
a cause of action under section 1709. Thus,
the failure to furnish a report is not a
continuing violation of the statute, but the
statute may be violated on two occasions by
two distinct acts, each of which is a discrete
statutory violation. Of course the statute
does not recite this primer of remedies.
' But its pattern is not obscure. Let us spell
out how the statute requires this interpre-
tation:
2. It b likely that at the time the acU of tale
were executed the purchase agreements had
lapsed because the agreements required the
acts of sale to be executed on or prior to thirty
(30) days after acceptance of the streets, and
the sales were, in local Jargon, "passed,** (i. e.
First, as was pointed out in tho Mrlior
opinion in thb ease,' lectioii 1709(b) pro-
vi<les, **Any contract or agreement . .
covered by this chapter . . . riiatl b«
voidable at the option of tho piirehiiaer*
(emphasis supplied) when the property ro-
port has not been reecivod prior to the
signing of the agreement The statute flow
not imply that there may bo only one viobi-
tion per lot Section 1708 providct for i
cation "until, midnight of the third I
day following tho coiisumiiMilioa of the
transaction, where he hat roteivod the prop*
erty report less than forty-eight hours b^
fore he signed tho contract or agree m ent
. . . " Thb sentence not on(y oxtende.
the purchaser's right to rescind to one tittt»-
tion where he has in fact reecivod the re-
port before the transaction (e. g^ where he
has received it less than 48 hours before the
sale); it further indicates by use of the
word ''oonsummation" that Coogrem fai-
tended to allow the purchaser to rmdnd
completed sales. The Act neither statci nor
implies that a purduoer who has not elect-
ed to rescind his initial agreement weivee
his right to relief with reepeet to the Inter
contract
Section 1703(aXl) requires that the prop-
erty report be "furnished to the purefaeeer
in advance of the signing of an/ eontmet or
agreement /or sals . . . Iqr the porw
chaser" (emphasis supplied). An *'aet of
sale" is certainly a contract "for sale.* Had
the defendant provided a property rqxwt to
plaintiffs prior to the signing of the pur-
chase agreements, it would have cowpUed
with the statute with reepeet to whatever
came thereafter, the acts of sale as weD ai
the executory agreements, because It would
have thereby furnished the pr operty report
"in advance of the signing."
[6] Or, to put another case, if the de-
fendant had not furnished a property i
before execution of the purdiaee
executed) at a later ttane. But that tect doss
DOC appear to be oontroUiic. No |
port was furnished at cither time.
9. See fboCnoCe I. sapra.'
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517
ments, but had furnished one before the
•igning of the acta of sale, no action to
rescind the acts of sale would He under
section 1703(b). The defendant would
thereby have cured the prior violation. See
BissetU V, Colonial Mortgage Corp, of D.
C; 1974, 155 U.&App.p.C. 360, 477 F.2d
1245, for a similar holding under the Truth
in Lending Act (15 U.S.C. §§ 1601 et seq.).
The buyer of property certainly would not
have an action to void a purchase agree-
ment when he had no action to void the sale
itself.
. 'Nothing in this interpretation of the Act
b inconsistent with Judge Smith's decision
in J. fi. Hester v. Hidden Valley Lakes, Inc.,
N.Di!iss.l975, 404 F.Supp. 580, and now
pending on appeal, Fifth Circuit Docket No.
76>1031. That case involve^^ree groups
of designated plaintiffs, each of whom en-
tered into a separate transaction:
(1) On August 7, 1970, the Baileys agreed
to purchase by executing a condition-
al sales contract After they had
made ten payments, a warranty deed
was delivered to them.
(2) On September 20, 1970, the Ronzas
agreed to purchase by executing a
conditional sales contract No war-
ranty deed had been delivered when
suit was filed.
(3) On April 30, 1971, and on April 9,
1972, the Hesters agreed to purchase
by executing two conditional sales
contracts. No warranty deed of the
property covered by either contract
had been delivered when suit was
filed.
In connection with the Bailey and Ronza
transactions, the court held that the three
year "umbrella'* limitation of section 1711
applied.^
Some of the Hesters' claims related to
untrue reports or reports containing omis-
4. 15U.S.C. S 1711 provides:
No action shall be maintained to enforce any
liability created under section 1709(a) or (b)(2)
of this title unless brought within one year
after the discovery of the untrue statement or
the omission, or after such discovery should
have been made by the exercise of reasonable
sions, as set forth in Sections 1709(a) and
(bX2). Section 1711 sets forth a aUtutory
limitation of "one year after the discovery
of the untrue statement or the omission.
. . . " The court held that the Hesters
could maintain this claim as, "they have
complied with the one-year statute of limi-
Ution. ..."
In connection with the Hesters' claim for
rescission brought under section 1709(bXl)t
which imposes liability upon a developer
gelling subdivision lots where no property
report has been furnished, the court held
the action time barred because it was not
brought "within two years after the viola-
tion upon which it [was] based," saying:
The court is of the opinion that this lan-
guage, in the context of a suit for rescis-
sion because of the developer's failure to
furnish a property report at or before the
time of sale, refers to the date of contract
or agreement to purchase. Since all of
the purchases by the named plaintiffs,
the Hesters included, predate April 24,
1972 (two years prior to the date of the
filing of the complaint), the plaintiffs'
claims under 15 U.S.C. § 1703 are barred
by the two-year statute of limitations."
(Emphasis supplied.)
As to the Hesters, there was no warranty
deed to rescind; the rescission could have
been granted only with respect to the con-
tract that had been signed, the agreement
to purchase. Apparently a warranty deed
had been delivered only to the Baileys, and
this deed antedated the action by two years.
II.
[7] We now consider the matter of rem-
edy. The plaintiffs sought rescission in the
alternative from the start of the suit The
defendant was aware that this was their
primary desire although the court was not
The amendment would merely ask the court
diligence, or. If the action Is to enforce a liabili-
ty created under section 1709(bKl) of this Utle,
unless brought within two years after the viola-
tion upon which it is based. In no event shall
any such action be brought by a purchaser
more than three years after the tale or lease to
such purchaser.
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to rccoflfnizo what tho pariict knew
throughout
Aooonlin(>:Iy, the plaintiffs contend no
amendment is necessary. Nonetheless, if
that were not enou{^h, plaintiffs made an
oral motion to amend the complaint to re-
quest rescission on Lot 28, Square "A" at
the trial. Rule 15, FRCP provides ample
authority for this amendment, and it is
granted.
III.
But the right to amend to claim a remedy
does not mean the remedy may or should be
granted. As pointed out both in this opin-
ion and in the earlier opinion in this case,
reseission is a proper remedy. Further-
more, § 170d(c) clearly provides that dam-
ages are available in an action based on a
violation of § 1703. Whether these reme-
dies may be cumulated, i. e., whether thciT
purchaser may both rescind the sale and
claim the damages specified in § 1709(c), is,
however, another question.
Section 1709(e) provides:
In no case shall the amount recoverable
under this section exceed the sum of the
purchase price of the lot, the reasonable
cost of improvements, and reasonable
court costs.
This does not imply that the plaintiff should
be able to cumulate remedies until he
reaches this maximum amount Congress
did set a maximum recovery, but this does
not indicate that the maximum amount
should be allowed.
Reference to the Securities Act, the con-
ceptual ancestor of the ILSFDA, is not
helpful. The value of securities is not en-
hanced by "improvements." Nor does the
legislative history provide guidance. There
is no mention o'f cumulation of the reme-
dies.
[8] In the absence of any authority,
then, it seems that the better view b that
the purchaser may have either of two reme-
died, but not both. He may sue to rescind
the sale, and simply recover the purchase
price paid; or he may seek the damages set
forth in § 1709(c).
If counsel for the plaintiffa dcaim to dta
further authority bearing on this pfoblooi,
he may do so hy filing an appropriato mo-
tkm to roeonsidor.
Accordingly, the Clerk is diroctod to ealer
judgment in favor of the pUintiffs and
against the defendant rcsdncUng the ukn
of Lots 6 and 7, Square N and Lota 27, 29
and 30 of Square A. The matter is referred
to the Magistrate to act as Spodal Itoior
to determine damages incurred in
tk>n with Lot. 28, Square A, hi
with 15 U.S.a § 1709(e).
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519
Leslie W. McCOWN et aL.
rUiniirfii-Appellaiiti^
James W. IIEIDLER et aL,
Dcfendanta-Appellcefli
Leslie W. McCOWN et aL,
Pbintiffs-Appeilees»
Joseph C. CALDWELL et aL,
Defendants-Croos-Appellaiita.
Nos. 74-17S5, 74-1756.
United States Court of Appeals
Tent^ Circuit
Dec 22, 1975.
Purchasers of undeveloped lots in
real estate development project brought
class action against officers of the corpo-
rate developers to recover for alleged
common-law fraud as well as for viola-
tions of the Interstate Land Sales Full
Disclosure Act In addition, plaintiffs
sought leave to file amended complaint
asserting violations of federal securities
laws. The United SUtes District Court
for the Northern District of Oklahoma,
FVederick A. Daugherty, Chief Judge,
rendered summary judgment for defend-
ants, and plaintiffs appealed. The Court
of Appeals, Lewis, Chief Judge, held
that fact that corporate officers, di-
rectors or any participating planners do
not literally come within the provisions
of the IntersUte Land Sales Full Disclo-
sure Act defining a ''developer" and an
"agent" does not excuse them from lia-
bility under the Act, notwithstanding
that the Act contains no controlling per-
sons clause and that since, among other
things, lots were touted as having invest-
ment value the plaintiffs should have
been allowed to amend to assert a cause
of action under the securities laws.
Remanded.
1. Trade Regulation «»861
Officers or directors of corporate de-
velopers of real estate project as well as
any |iartici|»atini; filanncni could Iks held
liable for vtoliiUons of IntcrsUito Land
Sales Full DisclcKturc Act, notwithstand-
ing that they di4l not fall within statuto-
ry definition of dovclo|icrs or selling
agents. Interstate Laml Sales Full Dis-
closure Act, § 1402 et soq., 16 U.S.aA.
§1701ctsoq.
2. Trade Regulation ^»96l
General punwoc of Interstate Land
Sales Full Disclosure Act was to prohibit
and punish fraud in land development
enterprises. Interstate Land Sales Full
Disclosure Act, § 1402 et scq., 15 U.S.
CJi. i 1701 et seq.
Z. Trade Regulation *»861
IntersUte Land Sales Full Disclo-
sure Act is to be liberally interpreted to
achieve its goal of prohibiting and pun-
ishing fraud in land development enter-
prises. Interstate Land Sales Full Dis-
closure Act, § 1402 et seq., 15 U.S.C.A.
§ 1701 et seq.
4. Trade Regulation *»861
To be meaningful, basic protections
of Interstate Land Sales Full Disclosure-
Act must be leveled against the fraudu-
lent planners and profit makers since,
otherwise, the Act would be pragmatical-
ly barren. Interstate Land Sales Full
Disclosure Act, § 1402 et seq., 15 UJ3.
C.A. § 1701 et seq.
5. SUtutes *»174
No legislative enactment should be
rendered ineffective to attain its purpose
if such a construction can be avoided.
6. Trade ReguUtion *»861
Fact that Congress rejected a pro-
posed amendment which would have
added a controlling person clause to the
Interstate Land Sales Full Disclosure
Act was not dispositive evidence that the
legislature intended to restrict liability
to ''selling agents'*; in any event, di-
rectors and officers who participate with
a corporation or its "selling agents" in
fraud in violation of the Act are guflty
of aiding and abetting. Interstate Land
Sales Full Disckwure Act, § 1402 et seq.,
15 U.S.C.A. § 1701 et seq.
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520
7. Securities Regulation *»18, 43
Although land, as such, b not a se-
curity within meaning of the federal Se-
curities Acts, and although a land pur-
chase contract does not automatically
fall within the confines of such Act sim-
ply because the purchaser expects or
hopes that the value of the land pur-
chased will increase, it docs not necessar-
ily follow that land or its purchase ne-
gates application of the Securities Acts.
Securities Act of 1933, § 2(1), 15 U.S.
CA. § 77b(l); Securities Exchange Act
of -1934, § 8(aX10), 15 U.S.CJL
§78c(aX10).
8. Securities Regulation «»I3, 42
Interests in real property can consti-
tute "investment contracts"^ within the
definition of a ''security" forj>urposes of
the Securities Act and the Securities Ex-
Change Act Securities Act of 1933,
§ 2(1), 16 U.S.CA. f TTIKI); SecuriUes
Exchange Act of 1934, § 3(aX10), 15 U.S.
CA. § 78c(aX10).
See publicaticn Words snd Phrases
for other Judidal constructions and
definitions.
9. Securities Regulation e=»12, 42
Characterization of a particular in-
vestment as a security within the pur-
view of the Securities Acts should de-
pend not on the form but on the sub-
stance and economic reality of the trans-
action. Securities Act of 1933, § 2(1), 15
U.S.C.A. § 77b(l); Securities Exchange
Act of 1934, § 3(aX10). 15 U.S.CA.
§ 78c(aX10).
10. Securities Regulation e=»13» 42
Utilization of purchase money accu-
mulated from sales of undeveloped lot to
build promised improvements in real es-
tate development projects was a scheme
within the "common enterprise" defini-
tion of "investment contract," as that
term is used in defining a "security" for
purposes of federal securities laws. Se-
curities Act of 1933, § 2(1), 15 U.S.C.A.
§ T7b(l); Securities Exchange Act of
1934, § 3(aX10), 15 U.S.C.A. § 78c(aX10).
See publicstton Words and Phrases
for other judiciaJ constructions and
definitions.
IL Secttritica RcgolatiMi «»ia^ 42
Reliance of an investor on a promoU
er need not be total before a scheme
constitutes an ''investment eontraet" at
that term is used in defining a "aeairi-
ty" for purpose of Securities Act and
Securities Exchange Act Securities Act
of 1933, § 2(1), 15 UJ5.CJL f 77b(l);
Securities Exchange Act of IMli
§ 3(aX10), 16 U^OA. § TOc(aX10).
12. Federal CivU Pioccdurc. «»839
C^m that sale of undeveloped lot»
in real estate project constituted an 'in-
vestment contract" as that term is used
in federal securitieB law was not wholly
frivolous and purchasers should have
been allowed to amend complaint to al-
lege securities 4aws violations where de-
veloper touted project as having substan-
tial investment potential on the 282
agreements for deed some 108 purchas-
ers indicated that th^ did not expect to
reside on their lots and without the sub-
stantial improvements pledged by the
developers the lots would not have a 'val-
ue consistent with the purohaee ptice.
Securities Act of 1938, § 2(1)» 16 U.S.
CA. § 77b(l); Securities Exchange Act
of 1934, § 8(aX10), 16 VS.CJi. f 78c(a)
(10).
13. Federal ChfU Procedure eB»l81
Determination that action seeking
recovery for common-law fraud mad lor
alleged violations of Interstate Land
Sales Full Disclosure Act in ooonedion
with sale of undeveloped lots in reel es-
tate development project could preKmi-
narily be treated as class action was not
abuse of discretion. Interstate Land
Sales Full Disclosure Act, § 1402 et aeq^
15 U.S.CA. § 1701 et seq.; FlsdJluka
Civ.Proc rule 23, 28 VS.CJL
Frederic Dorwart, Tulsa, Okl, for ap-
pellants.
James C. Lang, Tiilsa, Okl., for appd-
Ice-cross-appellant, Joseph C CakiwelL
Hawley C. Kerr and Paul P. McBride,
Tulsa, Okl., for other appellees and cross-
appellants (Fred S. Nelson, Brian S. (Sas-
kill, Irvine E. Ungerman, Robert S. Ria-
ley and William D. Hunt, Tulsa, OkL, on
the briefs for appellees-cross-appellanta).
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521
Bcforo Mr. Justice CLARK/ LEWIS,
Chief Judge, and HILL, Circuit Judge.
LEWIS, Chief Judge.
The plaintiffs, purporting to represent
a class of land purchasers, brought suit
against the defendants alleging common-
law fraud and violations of the Inter-
atate Land Sales Full Disclosure Act, 15
UJ3.C. § 1701 et scq. The defendants
were officers and members of the board
of directors of Timberlake, Inc. or Hei-
dler Corporation, the parent corporation.
The plaintiffs purchased lots in Tim-
berlake, a large real estate development
promoted by Heidler Corporation and
Timberlake, Inc. The developers were
obligated to include a large lake, 18-hole
golf course, swimming pools, clubhouse,
roads, etc Subsequent to the sales to
plaintiffs, both Timberlake, Inc. and Heid-
ler Corporation were adjudicated bank-
rupt by the district court and receivers
were appointed.
The plaintiffs alleged that the two
corporations and individual defendants
knowingly mbrepresented their corpo-
rate capacity to complete the develop-
ment obligations, which misrepresenta-
tions operated as a fraud and deceit on
lot purchasers in violation of the Inter-
state Land Sales Full Disclosure Act
(Und Act), 15 U.S.C. § 1709(bXl). The
plaintiffs idleged that the Statement of
Record and Property Report Hied by de-
fendants pursuant to the requirements
of the Land Act contained omissions and
untrue statements of material facts in
violaUon of 15 U.S.C. §§ 1709(a), (bX2).
The defendants were also alleged to
have committed common-law fraud.
Subsequently, the plaintiffs filed an Ap-
plication for Leave to Amend Complaint
to allege defendants' violation of the Se-
curities Act of 1933 and the Securities
and Exchange Act of 1934 (Securities
Acts) and Oklahoma securities laws.
The defendants individually filed mo-
tions resisting plaintiffs' certification as
a class. Defendants requested dismissal
for failure to state a claim upon which
relief could be granted, lack of diversity
or federal question jurisdiction and fail-
ure to join indisi)cn!iablc paKies, Heidler
Corporation and Timberlake, Inc. Sub-
sequently, the defendants also objected
to plaintiffs' attempts to amend their
complaint to allege security law viola-
tions.
Defendants Larkin Bailey, Paul V.
Hartman and Jerald M. Schuman moved •
that the court enter summary judgment
in their favor; the plaintiffs asked the
court for summary judgment against
those same defendants. The court con-
fronted with the plaintiffs' complaint,
plaintiffs' request for class certification
and plaintiffs' motion for leave to amend
and with defendants' motions to dismiss
and with motions for summary judgment
as to defendants Bailey, Hartman and
Schuman entered an order granting sum-
mary judgment for all defendants and
dismissing plaintiffs' action.
[l-4(] The trial court in granting the
benefits of summary judgment to the
defendants under the Land Act held that
the undisputed facts indicated that de-
fendants were neither developers (Tim-
berlake and Heidler corporations) nor
selling agents but were simply officers
or directors of the corporate developer.
In so doing the trial court interpreted 15
U.S.C. § 1701:
(4) "developer" means any person
who, directly or indirectly, sells or
leases, or offers to sell or lease, or
advertises for sale or lease any lota in
a subdivision;
(5) ''agent" means any person who
represents, or acts for or on behalf of,
a developer in selling or leasing, or
offering to sell or lease, any lot or lots
in a subdivision; but shall not include
any attorney at law whose representa-
tion of another person consbta solely
of rendering legal services;
as limiting liability under the Land Act
to the two extremities of most complex
land development enterprises. The court
noted the absence of a "common control''
•Asiodate Justice. United Sutes Supfeme Coortf Retired, littiiig by designation^
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522
provision in the Land Act and concluded
that Congress intended this Act to have
a very limited "target of suit" We con-
clude that the court erred in imposing
such narrow limits to liability under the
Act
As Mr.. Chief Justice Burger recently
observed, new areas of fraud are being
constantly conceived, one of which is
fraud "connected with the burgeoning
sale of undeveloped real estate, until
Congress could examine the problems of
the land sales industry and pass into law
the Interstate Land Sales Full Disclosure
Act". United SUtes v. Maze, 414 U.S.
895, 406, 94 S.Ct 645, 651, 88 L.Ed.2d
603 (dictum in dissenting opinion). The
general purpose of the Land Act was, of
course, to prohibit and punish fraud in
such land development enterprises as we
here consider and the Act shpukf be in-
terpreted to attain that end. Such an
act should be construed ''not technically
and restrictively, but flexibly to effectu-
ate its remedial purposes." SEC v. CMpi-
ImI Gains Research Bureau, Inc., 875 U.S.
180, 195, 84 S.Ct 275, 285, 11 L.Ed.2d
237. The "developer" of a land sale plan
is usually a corporate entity which, in a
fraudulent scheme as here alleged, ends
up defunct and offers no reserve for re-
covery to those persons defrauded; so,
too, the end selling agent, when the de-
velopment collapses financially, is often
long gone or cannot respond pecuniarily.
Indeed the actual selling agent may well
be a creditor of the developer and an
indirect victim of the fraud himself.
The basic protection of the Act, to be
meaningful, must be leveled against the
fraudulent planners and profit makers
for otherwise the Act would be pragmat-
ically barren. No legislative enactment
should be rendered ineffective to attain
its purpose if such a construction can be
avoided. SEX) v. C. M. Joiner Leasing
Corp,, 320 U.S. 344, 350-51, 64 S.Ct 120,
88 L.Ed. 88.
•The fact that Congress rejected a pro-
' posed amendment which would have
added a controlling persons clause is not
dispositive evidence that the legislature
intended to restrict liability to "selling
agents." It aKould bo notad that di-
rectors and officers are routinely held
liable under the Securities Act apart
from the controlling person clause. K
g.. Kerbs v. Fall River loduairieB, Ijml,
10 Cir., 502 F.2d 73|. In any event di-
rectors and officers who participate with
a corporation or its "selling agoats" in
fraud in violation of the hnd Act am
guilty of aiding and abetting. TUs
court has specifically recognised the civfl
liability of an aider and abettpr* ufader
the securities . antifraud ' provisions ia-
Kerbs v. Fall River IndusUiea, /ac:
Under § 10(b) and Rule lOb-6 know-
ing assistance of or partidpation ia a
fraudulent scheme gives rise to liabfli-.
ty equal to that of the perpetrators
themselves. . . . Moreover, one
who aids and abets a franduleat
scheme may be held accountable avaa
though his assistance consists of mere
silence or inaction.
502 FJ2d 781, 740 (ciUtions omitted).
We hold, therefore, that plaintiffs' al-
leged cause of action may proper ly be
leveled against the individual defendants
in this case be they officers, dbectors, or
participating planners. Such a constme-
tion of the Act althou|^ not specifically
so stated, seems to have been taken for
granted by other courts, for nnmeroiis
courts have entertained action under the
Act leveled at "contrdling stockhokJers,
officers and directors." Adolpbua r. 2b^
be/man, 8 Cir., 486 P.2d 1828, 1325. See
e. g,, Kamm v. CalifomiM City Devdo/h
ment Co,, 9 Cir., 509 P.2d 206, 206; Sw-
bert V. Great Northern Dev^^^Hneat Ooi,
5 Cir., 494 FJ2d 510; United SUtm r.
Del Rio Springs, /no, DJlrit., 892
F.Supp. 226; United SUtea r. Awooo
International Corp,, S.D.N.Y., 818
F.Supp. 1265.
It follows that the trial court'a refusal
to exercise pendent jurisdiction over the
nonfederal cause of action for common-
law fraud, while not erroneous in light
of that court's disposition of the fodml
complaint, should now bo reconsidered.
[71 The trial court rejected plaintiffs'
efforts to amend the complaint to allege
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523
a cause of action under the Securities
Acts terminic the effort to be "wholly
without merit" The trial court in so
holding note<l that real proiicrty and
land purchase contracts are not securi-
ties as defined in 15 U.S.C. § 771)(1). We
agree that land, as such, is not a security
and that a land purchase contract, sim-
ply because the purchaser expects or
hopes that the value of the land pur-
chased will increase, does not fall auto-
matically within the confines of the Se-
curities Acts. However, we do not agree
that land or its purchase necessarily ne-
gates the application of the Securities
Acts.
[8] The Securities Act of 1983 and
the Securities and Exchange Act of 1934
specifically include "investment con-
tracts" within the definition of "securi-
ty." 16 U.S.C. §§ T7b(l), 78c(aX10). In
SEC V, W, J, Howey Ca, the Suprenu^
Court set forth a broad deifinition of "in-
vestment contract":
The test b whether the scheme in-
volves an investment of money in a
common enterprise with profits to
come solely from the efforts of others.
828 U.S. 293, 301, 66 S.Ct 1100, 1104, 90
L.Ed. 1244. This definition of an invest-
ment contract can include interests in
real property. SEC- v, C. M. Joiner Leas-
ing Corp., 820 U.S. 344, 64 S.Ct 120, 88
L.Ed. 88; Andrews v. Blue, 10 Cir., 489
F.2d 367, 374-75; GilbeH v. Nixon, 10
Cir., 429 F.2d 348, 354. A federal dis-
trict court has held that a cause of ac-
tion for fraud under the Securities Acts
and the Land Act exists against the pro-
moter of recreational or investment lots.
Tober v. Chamita, Inc, M.D.Pa., 58
P.R.D. 74.
[9] The characterizaUon of a particu-
lar investment as a security within the
purview of securities regulation should
depend, not upon the form, but upon the
substance and economic reality of the
transaction in question. United Housing
Foundation, Inc v. Forman, 421 U.S.
837, 95 S.Ct 2051, 44 L.Ed.2d 621; Vin-
cent V. ifoejich, 10 Cir., 473 F.2d 430,
435. In following thb flexible approach
interests in a real estate ventun*, frac-
tional interests in oil and gas leases, ami
even contracts for the purchase and
maintenance of live beavers have been
held, in particuhu* factual contexts, to bo
securities. Andrews v. Blue, 10 Cir., 489
FAl 367; Gilbert v, Nixon, 10 Cir., 429
F.2d 348; Continental Marketing Corp,
y. SEC, 10 Cir., 387 F.2d 466, cert
denied, 391 U.S. 905, 88 S.Ct 1655, 20
L.EdJ2d 419. In characterizing the pur-
chase of Timberlake lots, the standard
set out in SEC v, C M, Joiner Leasing
Corp,, must be applied:
In applying acts of this general pur*
pose, the courts have not been guided
by the nature of the assets back of a
particular document or offering. The
test rather b what character the in-
strument b given in commerce by the
terms of the offer, the jilan of dbtri-
bution, and the economic inducements
hekl out to the prospect In the en-
forcement of an act such as {the Secu-
rities Act of 1933] it b not inappropri-
ate that promoters' offerings be
judged as bdng what they were repre-*
sented to be.
820 U.S. 344, 352-53, 64 S.Ct 120, 124,
88 L.Ed. 88 (footnotes omitted). We also
note thb court's application of that test
in hokling the purdiase of live beavers
and their maintenance to be securities.
Continental Marketing Corp, v. SEC:
' Investment hy members of the pub-
lic was a profit-making venture in^a
common enterprise, the success of
which was inescapably tied to the ef-
forts of the ranchers and the other
defendants and not to the efforts of
the investors. "[T]he royal road to
riches," of which appellant spoke,
coukl be traveled, if at all, only
through the structure which had de-
veloped from the embryonic state of
the Weaver oi^nization of the eariy
1950's. . . . If the structure col-
lapsed then the purchasers would have
little more than a bad investment
Certainly the beavers as mere animab
and not as part of the enterprise did
not have value conststent with the
price many of the purchasers paid.
33-716 O - 78 - 34
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524
The economic inducement was the
faith or hope in the success of the
enterprise— the domestic beaver indus-
■ try— as a whole, and not the value of
the animals alone.
887 FStd 4G6, 470^71, cert denied, 891
U^. 905, 88 S.Ct 1655, 20 L.Ed2d 419
(footnotes omitted).
In light of the trial court's refusal to
allow plaintiffs to amend their com-
plaint, it appears appropriate to consider
on appeal the evidence as to the security
law violations in the light most favorable
to plaintiffs. The proposed amendment
■ought to add an allegation that:
The lots in the Timberlake Develop-
, ment were represented as, and sold as,
investments. The lots were vacant
and the Timberlake Development was
' substantially undeveloped. «1ffie vacant
lots were of little value unless, by the
sole efforts of Heidler and Timberlake,
the development obligations of Heidler
and Timberlake were fulfilled. Elach
of the purchasers of a Timberlake lot
invested his money in a common
acheme which depended solely upon
the efforts of Heidler and Timberlake.
The plaintiff offered to prove the follow-
ing facts:
The offer and sale of lots in the Tim-
berlake Development was not only the
offer and sale of subdivision lots in a
real estate development, but the sale
of a contractual promise by Heidler
Corporation to improve the project, in-
eluding the construction of a country
dub, an 18-hole championship golf
course, stables, equestrian center, ten-
nis courts, clubhouses and swimming
pools.
The lot purchasers had no control over,
or participation in the improvement of
the project, but entrusted their monies
solely to the management of Heidler
Corporation. The lots, absent fulfill-
ment of Heidler Corporation's prom-
• ises to improve them, had little or no
value. Substantial purchase prices
were paid for the promised improve-
ments. The lots were purchased in ex-
pectation that fulfillment of the prom-
ise to improve them by Heidler Corpo-
ration would result in a substantial in-
crease in the value of the lota.
The lota were sokl as, and parehaaed
for, investment
We note that affidavits of several lot
purchasers indicated that they porehaied
Iota as an investment
the plaintiffs presented evidence
which could show that the sale of ^Tim-
berlake lots constituted niore' than the
mere sale of real estate! During 1970,
Heidler, the organizing genius behind
Heidler Corporation and Timberlake, had
employees and salesmen attend four-
week training sessions by Revae in Den-
ver, Colorado. The defendants in tUa
action, Caldwell .and Boggeas, also at-
tended. The Revac conc^t was to mar-
ket and sell real estate to the poblie aa
an investment Many of the offioeri
• and directors of Timberlake and Heidler
Corporation reviewed or became familiar
with those concepts. For example, Sdiu-
man reviewed the Revac Group Invent-
ing Manual which set forth the Revae
concept:
There can be no doubt in anyone^
mind that the main emphasia of REr
VAC ia on investment • Most brokers
across the country have felt that other
real estate brokers have been their
main competition. This ia not so, bow-
ever, in the field of investment Tlie
main compctitran the REVAC Aaaoci-
ate has for the investment dollar b
Wall Street, the stock broker, mutual
fund salesman, and insurance sales-
men. If we are to pick up the gaunt-
lets hurled by these investment areaa,
and face their competition, we are go-
ing to have a solid program to preeent
which will enable the public to eaafly
make investments in real estate. We
will need to present a more solid and
professional front than that offered bj
the securities or insurance fielda, aa
competition is highly organised.
Because the field of investments haa
been heretofore considerably neglected
by real esUtc brokers, REVAC haa «a-
tablishcd and field-tested many pro-
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gramii that will help the Associate ob-
tain a fbolhokl and, indeed, an out-
stamling reputation in the field of in-
vestment Prolwbly no other endeavor
in the fickl of investment real estate
offers so much potential for the client
and the broker as does real estate syn-
dication. . . .
There are millions and millions of
people in the United States ready,
willing, and able to invest small
amounts of money. These small
amounts of money, once pooled, can
become an important factor in the
over-all fmancial field. In order to
appeal to these masses, the REV AC
Anociate should take a very strong
look at Group Investing and imple-
ment the procedures outlined in this
Manual.
In June of 1970, Heidler CorporaUon^-"
the Tulsa franchise of Revac, held public
seminars using the Revac methods, bro-
chures and films to show the advantages
of real estate investment These semi-
nars were advertised to explain real es-
tate investment, "How fortunes are
made in real estate," "How to get rich
while sleeping," "Why real estate is the
one safe, sure, successful investment,"
etc Defendants in this case are alleged
to have participated in advertising these
seminars and lectured at them. The
seminars were allegedly used not only to
sell real estate through limited partner-
ships but also to promote the sale of
Timberlake lots. Persons attending sem-
inars signed their names and addresses,
these were later given to Timberlake lot
salesmen.
The General Form For Registration of
Securities (Form 10) filed by Heidler
Corporation with the S.E.C. states that
' "Timberlake, Inc., is selling lots to indi-
viduals for investment purposes and ulti-
mately for individuals to construct a
home and retire, all in a scenic and rec-
reation area." The written instructions
to Timberlake salesmen contain passages
such as the following:
INVESTMENT PRIVILEGES. Home-
site owners will also be given first op-
portuiiitiea for investment on a joint
venture or limited imrtncrship buMs for
all oommerdal enterprises at Timber^
lake. This includes commercial |iarcol8»
restaurants, service stations and shop-
ping centers, as they are planned and
become available.
RAW, UNDEVELOPED LAND.
Some potential clients will s«y, "But
we can buy 40 acres of land near here
for the price of a lot at Timberlake**
. . . What security will they have
on that 40 acres? Will they hire a
private policeman to keep out k)oters
when they aren't home, or will they
never leave? What about their insur-
ance rates? What about streeU»
water, swimming pool, golf, country
club?
We, the management of the Heidler
Corporation have provided you with
the finest investment/ownership pack-
age in the nation to sell.
That some Timberlake lot purchasers in-
tended to invest their money rather than
reside on the lots b evidenced by the
fact that in 1971 on the 262 Timberlake
Agreements for Deed, 108 purchasers in-
dicated they did not expect to reside on
their lots. The Timberlake brochures,
provided prospective purchasers, dis-
cussed or presented duplicated items cov-
ering such topics as "the secret in specu-
lating in raw land," capital gain and real
estate and "fortunes, large and small are
being made in land." The brochures
touted Timberlake as a "prime invest-
ment in a natural setting," an "outstand-
ing investment opportunity" and pos-
s^oed with recreational assets "to aki
your investment [to] grow in value each
day." Purchasers received letters from
Heidler Corporation complimenting them
on their "wise investment" and encour-
aging them to partkipate in "many op-
portunities for future investments."
Purchasers also received invitations to
"investment seminars" which were ad-
vertised to be possibly the "moat prodae-
tive hour" of their lives.
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[10.11] We note that without the
substantial improvements pledged by
Heidler Corporation and Timberlake the
lots would not have a value consistent
with the price which purchasers paid.
See Continental Marketing Corp, v. SEC,
10 Cir., 387 FJ2d 4G6, 470-71. cert denied
891 U.S. 905, 88 S.Ct 1655, 20 L.Ed.2d
419. The utilization of purchase money
accumulated from lot sales to build the
promised improvements brings the
scheme within the ''common enterprise"
definition. We also note that in apply-
ing the second test of the Howey case,
"reliance of the investor solely upon the
efforts of the promoter," it has been
widely held that this reliance of the in-
vestor on the promoter heed not be total.
The Ninth Circuit in SEC v. Glenn W.
Tuner Enterprises, Inc., held the test to
be:
[W]hether the efforts made-b/ those
other than the investor are the undeni-
'ably significant ones, those essential
managerial efforts which affect the
failure or success of the enterprise.
474 F2d 476, 482, cert denied 414 U.S.
821. 94 S.Ct 117, 38 L.Ed.2d 53. The
Ninth Circuit reaffirmed this standard in
Bitter v. Hoby's International, Inc., 498
F.2d 183; other circuits have utilized this
same standard. SEC v. Koscot Inter-
planetary, Inc., 5 Cir., 497 T3A 473, 477-
78; Lino v. City Investing Co., 3 Cir.,
487 F.2d 689, 692-93. It may be. in the
instant case, that an investor who pur-
chased a Timberlake lot, not to build
thereon but to hold solely as an invest-
ment, could be relying upon the manage-
rial efforts of Heidler Corporation and
Timberlake for the management and ap-
preciation of his investment. That other
lot purchasers may be interested solely
in obtaining a site on which to build
their home merely indicates the duality
of this "investment/ownership package."
[12] Considering the evidence proce-
durally presented, the defendants' claim
does not appear frivolous or wholly lack-
ing in merit Weighing this evidence in
the light most favorable to defendants in
conjunction with the definitions and ap-
plications of "investment contract" in C.
M. Joiner Leasing Corp, and ContineatMl
Marketing Corp.,- we hold there b a fae-
tual question as to whether the sale of
Timberlake lots constitutes sales of secu-
rities. The amendment to allege securi-
ty law violations must be allowed.
[13] By way of cross-appeal, the de-
fendants urge that the trial court erred
in indicating that this action could prel-
iminarily be treated as a class action un-
der Rule 23. Since this question doea
not reach us in isolation, we bold that
there is nothing in this record which in-
dicates that the trial court 'abused its
discretion in such regard. However, we
in no way foreclose the trial court's con-
tinuing exercise of discretion on this is-
sue.
Other contentions made by the parties
are deemed to be without merit or moot-
ed by our decision.
The case is remanded for further pro-
ceedings.
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JII>r.Mi:,\T ox DKCISIOX IIV tut fOL'RT CIV n (1-«S)
DEC15^.9T5
nnitcit Stairs Sisiriri. Qlourf
FOR THC
WESTER W DISTRICT O F WASHING T OM AT TAC OHA
CIVIL ACTION FILE NO. C75-1^8T
ASSOCIATION or OUTDOOR RECREATION CLUBS,
INC. et al
JUDGMENT
SECRETARY, HOUSING AJ4D URBAJJ DEVELOPMENT,
an agency of the United States of America
and DIRECTOR, DEPARTMENT OF KOTOR VEHICLES,
an ajjcncy of the State of Washington
This action cnmc on for t<i»lx(hcarinR) before the Court, Honorable William N. Goodwin
. United .States District Judge, presiding, and the issues having been dulyKVMMx
())card) and a decision havin«» been duly rendered,
It is Ordered and Adjudged Plaintiffs' Motidn for Injunctive relief denied. Secretary* a
w ^ion to dismiss is granted. Action is dismissed.
^">
^ ^^\^-^
v#^ '
••».il.-.l ill TiCvHui, WoL.l.ii.i'Jon ^ ii,is 11th j^y
r)(Ctinl>cr , ID 75 .
EDGAR SCOFIEi.D
Clirl: of Court
l.y
iM-puly
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UNITED STATES DISTRICT COURT
WKSTKRN DISTRICT OF WASHINGTON
AT TACOMA
ASSOCIATION OF OUTDOOR RECREATION
CLUllS, INC., a corporation, OCEAN
SHOkES OUTDOOR RECREATION CLUB, a
non-profit corporation,. LEISURE.. .
PARKS, INC., a corporation, PERRY-
COOPER, INC., a corporation, LAKE
MERWIN DEVELOPMENT CO. , a corpora-
tion, TIMBER TRAILS, INC., a cor-
poration, GOLDDAR DEVEIX)PERS, a
limited partnership, CRESCENT BAR
OUTDOOR RECREATION CLUB, a non-
profit corporation, et al..
Plaintiffs,
SECRETARY, HOUSING AND URBAN
DL'VKLOl'MENT, nn ngency of the
United States of America, and
DIRECTOR, DEPARTMENT OF MOTOR
VKinCLES, an agency of the State
of Washington,
Defendants.
CIVIL ACTION
NO. C75-198T
MEMORANDUM DECISION
For a number of years last past, the Courts of the
nnil«Ml St a tor; nnd of the several states have been inundated
with trl.iims by puirlmr.ors of land that they have been
defrauded by dovclf)por5 and promoters who have allegedly
induced invoslmonts in rights in land through fraudulent and
deceptive jM .ict ici'::. It. is cot "tn knowledge that the trend
toward i i>«:i ••.il i om.tI dtvcl opinent r; lias inustirooinod no that city
dwiOlfi:: ]\.\vr 1mi(<iiu« .i luci.il ivc :;nnrco for iiromotion of
r«'f:) (M t Jonnl land.
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!
.... The Congress of the United States and several states
enacted legislation aimed at controlling these sales to
prevent frauds in the inducement and to guarantee to the
purchasers that developers %rould comply with promises oiade at
the time of the purchase.
The Interstate Land Sales Act, 15 U.S.C. S 1701 et seqi. ,
makes it unlawful for developers to employ any means of j
transportation or communication in interstate commerce, or of*
the mails, "to sell or lease any lot in any subdivision unless
a statement of record with respect to such lot is in effect" j
and a printed property report is furnished to the purchaser !
before he obligates himself in writing. Failure to provide*
the purchaser with a copy of the property report in advance I
of his signing a sale or lease agreement renders the contract
voidable at his option.-- 15 O.S^C. S 1703*- Noncomplying t'**.'
developers may also bo subject .to both civil (S 1709) and
criminal (S 1717) liabilities.
The plaintiffs in this action are developers of what
are generally termed camping clubs. The clubs are non-profit
associations which purchase tracts of recreational propertyi
the bulk of each tract is subdivided- 'into individual canpsiteii
for assignment to members, the remainder i-s employed for"
common recreational and sanitary facilities. The division
into individual campsites is accomplished by a simple survey
«ind the use of markers. No plat is filed and. title to the~
entire tract remains in the association.
The plaintiffs filed this action seeking to enjoin the|
defendant Carla A. Hills, Secretary of Housing and Urban
novclopiiiont, from nttnmpting to enforce provisions of the
TntorsLntc Land Sales Act against them.
They seek a declaration that the Secretary has no
jtjrir.diction over their activ4 tics and that any -rcgul ations —
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promulgated by th« Secratary %#hich purport to grant such —
jurisdiction are invalid.
The Secretary opposed the plaintiffs' notion for H
preliminary injunction on the grounds that the action was
prematurely brought, that there is no likelihood the plalntif
will prevail on the merits and that plaintiffs can show no
irreparable harm. At the hearing on plaintiffs* notion, it
was decided that the parties should submit the case for final!
disposition on the merits, since it ultimately presents a
rather narrow issue of law.
The Secretary has contended throughout that 'this actio^i
was prematurely brought because the plaintiffs hava navar
sought an exemption order or advisory opinion pursuant to
24 c.F.R. SS 1710.14 and 1710.15. (The Act also provides a
specific procedure for review of the Secretary's- dataminatio^,
at first instance, in the Courts of Appeals. 15 U.S.C.
S 1711.) On the other hand, the plaintiffs wish to avoid, if
it is unnecessary, the burdensome preparation incidantal to a
request for an advisory detemlTiation. Too/ it appears froai
tlie documents on file with the Court that most, if not all,
of the plaintiffs' developments are either too .larg^zoctoo
widely advertised to qualify under the available exanptions.
Since the basis of the plaintiffs' claim is that sales
of Lho particular form of property represented by menbarship
in thoir nssoriaMons .»rc not subject to regulation under the
Land Sales Act, .the Court finds thatthe controvariyia actual -
and ripe Tor determination under the Declaratory Judgment Act r
22 U.S.C. S 2201.
.".til.t.l.inl iv.'ly, lho question prcucntcd ia whether a
c.iinpinfj clnl) inoinhc-rnhi p c?onstitutcs a "lot in any subdivision^
within S IVOKa). Thai :;oct.ion provides:
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"It oh«ll be unlawful for any dawloper or agmt, • •-
• directly or indirectly tc nakc use of any iMans
or instruments of trariEportation in interstate
cwnmcrcEp oe at the jnails (l) to sell or lease
Any lot in atiy subdivision unleea a statemeiit of
record with raapoct to such lot is in affect in
accordance vLth | 1706.. ••*
The Act defines the tern "subdivision" in S 1701(3) to mians
"...any land, located Iti sny state or In any
foreign country which is divided or proposed to
be \..-j,l^j. inlo fifty or more lets, whether
contiguous or not, for tho purpose of sale or
lease ai paaft of a cownon proamtional scheae...."
The tern -lot "appears in both the statute referring to juris-
diction granted to the Secretary and in the definition of
subdivision, but is not itself defined within the Act. • The
Secretary, in 1973, ^adopted a rule defining "lot" to include
•any portion, piece, division, unit, or undivided
interest in land if such interests include the
right to exclusive use of a specific portion of
land.- .24 C.F.R. S 1710.1(h).
The plaintiffs contend, .first, that the Secretary's
definition of "lot" is broader than the traditional scope of
that tern. and extends her regulatory poifers into areas not
contemplated by Congress.
So far as the Court can see, the traditional definition
of the word is not a confining one .-. Black ' s Law Dictionary
terms it "Any portion, piece, division or parcel of land."
S 1718 of Chapter 42 provides,
"The Secretary shall have authority from time to
time to make, issue, amend, and rescind such,
rules and regulations and such orders -as are
necessary or appropriate to the exercise of the
functions and powers, conferred .upon. (her), else-.,
where in this chapter,"
When the administrator's empowering provision is so phrased,
the v..1idity of a regulation will bo sustainod so long as it
j.': roor.onnbly rol.iLcd to the puri>ones of tho enabling
loijitilotion. Wlien Ihe statutory language indicates a
connror.oionnl intent Ih.it the 'Act should liA enforced no no to
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curtail attempts at evasion, courts should show sven grsatsr
deference to the infonned experience and judgment of the
agency. Mourning v. Family Publications Service , Inc. ,
411 U.S. 356 (1973). This law contains no general stat«Mnt
of purpose. However, the preamble to S 1702(a) demonstrates
that Congress did not intend the Act to be read so restrictiv<^3
as to render it inoperable:
"Unless the method of disposition is adopted for
the purpose of evasion of this chapter, the
provisions of this chapter shall not apply to
[certain enumerated exemptions]."
The Court is satisfied that the Secretary's definition
of "lot" to include undivided interests in land only when
such interests include the right to exclusive use of.e specific
plot of land was reasonable in light of the Act's remedial *
purpose and the Secretary's expressed desire to avoid evasion^.
See 38 F.R. 23866 (1973).
It further appears that the plaintiffs' activities
fall within the scope of the definition. . There can be no .
dispute that membership in a camping club carries with-it, at
least indirectly, an undivided interest in'real property.
owned by tlic nnnociation. But the plaintiffs argue that, . '.
under the terms of membership, members acquire 'no right tO"
exclusive use of a specific portion of land.
• Examination of the exhibits discloses -one- parasKHmt-
fact: F.Ach inomborship in all these clubs is tied .to a . .
p.irticulor campsite with, defined bounds. Some of the.offerli^
i-i J rnl .nr. :;i><-ci Ti tr.Tl ly mention that members acquire, with*
specified limitations, "exclusive" rights to "perpetually"
occupy the site which is assigned under the membership agree-
ment; others do not go so far. But any doubt as to the
intent of thu:;c acjrccmcnts is dispelled by the fact that, ill
ovtry inrM.inco, the nuMnlti^rshi p- contract -dcsignates-a - ~
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particular site for the use of the purchasing member, and the
price of a membership varies according to the desirability and
size of the designated site. Moreover, memberships are in
all cases freely alienable, subject at most to the approval
of an association board or committee, and the sale of one's
membership effects a transfer of the accompanying campsite.
Apart from the shared access and common facilities ~ which
today accompany many forms of land development — the whole
focus of a membership is upon the member's rights in a specif l
piece of land.
Of course, the Court is aware that the plaintiffs'
disclosure statements and membership agreements include .
restrictive terms. Membership agreements subject all the
privileges of membership to potential change through amendment
of the by-laws, a factupon which the plaintiffs 'specially rely
to show the absence of exclusivity. But that condition in
reality seems to serve no purpose except, perhaps, a cosmetic
one. The expectation that members would agree to amend the
by-laws -to deprive themselves'of control 'over thelf-'sites is
dubious. No instance was cited .in which that actually .
transpired. -To the contrary ,-• a* perusal- of the -by-laws -shows.
frequent references to "purchasers" of "sites." ilf anything,
such language serves to reassure prospective members that
they are acquiring rights -in the land.
Other provisions hedge the members' use of- their
c.im[)r. i tos with i-cstrai nts , .o.g . , .forbidding permanent —
iiiipi f)v«in(^nl :-. , 1 i mi I i n(| t ho nuinbor of connocutivc days a
iticmbor may occupy thin site, denying the right to lease one's
camp:; i It; (.illhoiujh lu'imitting the dou i ynation of a "guest"
v.'Ikj iii.iy u:.r' it). Thusjt! 1 lini t.it.ioim opponr aimed at prescrvin j
I ho ch.ii.icti'L- ol iho cl\iba and assuring that their facilities
.nc not ovri .ixtnl. A!, -nfrli, Vhcy ri^pror.ont moroly 'an ndaptntio
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of traditional restrictions associated with condosiiiilua
ownership.
It is not the province of this Court to defina what
is the "exclusive use" of a specific portion of land %#hich
confers jurisdiction upon the Secretary to supervise the sale
of what would otherwise constitute merely an undivided
interest in land. It suffices to say that in this case there
are sufficient indicators of an intended exclusivity — • most
notably the presence of price discrimination tied to a
member's assigned campsite — that the Secretary's exercise
of jurisdiction over these plaintiffs would not be an
unreasonable application of her powers undar- the Interstate
Land Sales Act.
In view of the Court's finding on the issue of
jurisdiction, it can proceed no further., but must raiMnd tha
plaintiffs to resolve the terms of regulation within tha - -r
framework provided by the Act.
This disposition renders it unnecessary to entertain
the plaintiffs' further request, that the Court quash cartaii
orders made by the second named defendant, the Director of
the Department of Motor Vehicles of the State of Washington.
Since the claim was founded upon the alleged-abeenco of
jurisdiction in the Department of Housing and Urban
Development, it too must be denied.
It is, TllRRKPORE, ORDERED that the plaintiffs* ■otion
for injunctive relief be DENIED, and the Secretary's aotion
to clir.mir.j; bo r.KAWTKO.
DONE DY THE COURT this 10th day of Decenber, 1975.
llNlTi:n ST ATKS DISTRICT JUI)GB
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Jcih
cl; !..i
NOT FOR nOUTIH F. PUBIJCATIOM
UNITED STATES COUHT OF APPEALS
TENTH CIRCUIT
No. 75-1695
COORS PARK, IMC, a New
Mexico Corporation,
Appellant,
UNITED STATES C? .SJ^ZRICA,
UNITED STATES DZ?^.?:.:-\Zyii: Or
HOUSING a:d u?3a:i develcfme:it,
CARLA A. HILLS, SECRETARY C?
HOUSIMG A'lD UREAM DEVELCPMEMT,
and JOH^' R. McDOV.'ELL, Acting
Administrator of the Office
of Interstate Lar.l Sales
Registration,
Appellees .
Appeal Fror. The
United States District Ccur
For The District of Mew Me:ci
(D.C. # 75-391)
Henry G. Cocrs, Albuquerc.ue, Mew Mexico (John A. Myers, Rcb
N. Singer, and Cccrs,* Singer i Eroullire, Albuquerque, Nev;
Mexico, with hi.-n on the Brief), for Appellant.*
Eleanor Roberts Lewis, Attorney, land Sales Insurance and
Disaster Assistance Branch, Department of Housing and Urban
Developnient (Victor R. Ortega, United States Attorney, and
Lyman G. Sandy, Assistant United States Attorney, en the
Brief), for Appclicfs.
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Before SETH and HOLLOWAY, Circuit Judges, and STANLEY^ District
Judge . »
PER CURIAM.
The appellant has taken this appeal from an order of
the United States District Court for the District of New
Mexico which denied Its motion for a preliminary Injunction
against the defendants. The appellant sought to prevent
the defendants from sending notices to those who had bought
lots from appellant that they might have a right to rescind
their purchase contracts and to have their payments refunded.
The record shows that appellant was the developer of
a mobile home park consisting of some fifty-three fully
Improved lots. The federal agency (OILSR) made an Investi-
gation of the development and concluded that there was a
violation of the Interstate Land Sales Act In that there was
no statement of record and no HUD report had been given to
purchasers. There Is no allegation of fraud. The developer-
* Of the District of Kansas,
Sitting by Designation.
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appellant. In this declaratory Judgment action, sought to
have Issued the Injunction here In contention.
Ill Continental Oil Co. v. Frontier Refining Co., 338
P. 2d 780 (10th Clr.), we said:
"... The function of a preliminary Injunc-
tion Is to preserve the status o.uo pending a final
determination of the rights of the parties. It
should be issued only where the plaintiff makes
out a prima facie case showing a reasonable pro-
bability that he will ultimately be entitled to
the relief sought and that irreparable damage
will possibly result if the relief is not granted
pendente lite." (Footnotes omitted).
Also In the cited case we set forth the following standard
of review:
"At the outset, we recognize that our review
of an order granting or denying a preliminary in-
junction is limited to determining whether the
trial court abused its discretion and, in maicing
such a determinaticn, the merits of the case may
be considered only insofar as they have a bearing,
if any, upon the question of sound Judicial dis-
cretion." (Footncce emitted).
See also ?enn v. San Juan Hospital, Inc., 528 F.2d ll5l(10th
Clr.); Securities & Exchange Common v. Thermodynamics, Inc.,
^S^ F.2d ^57 (10th Clr.); Atomic Oil Co. v. Bardahl Oil Co.,
^19 F.2d 1097 (10th Clr.); Crowther v. Seaborg, 415 F.2d U37
(10th Cir.);
The Supreme Court in Granny Goose Foods, Inc. v. Tear.-
sters, 415 U.S. 423, considered the nature of the trial
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court's hearing and stated:
"At such hearing, as In any other hearing In
which a preliminary injunction is s^ought , the
V^irty seeking the injunction would bear the burden
of demonstrating the various factors Justifying
preliminary injunctive relief, such as the like-
lihood of irreparable injury to it if an injunc-
tion is denied and its likelihood of success on
the merits." (Footnote omitted).
Thus it is apparent that our review here is a limited
one. The argunents advanced by the appellant on the merits
will be considered within the above doctrine. Thus consi-
deration is given to whether a showing was made of a rea-
sonable probability of entitlement to the particular relief
sought, and a showing of irreparable damage. This is then
considered on the "sound Judicial discretion" standard of
review. • . *
The record shows the developer advertised the lots to
be for sale in the Albuquerque Journal and the Albuquerque
Tribune. These papers were shown to have a considerable cir-
culation by mail within New Mexico, and outside the State.
The lots were also advertised on a local radio station.
Certain maps and a statement of restrictions were sent by
mail to prospective purchasers. There was sufficient basis
in fact at the hearing on the preliminary injunction to bring
the matter within the language cf the Land Sales Act, -15
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589
U.S.C, S 1703(a)(1), which triggers tht nonregistration con-
sequences. The "offering" language In section 1703(a)(2),
compared to the "sale" language In section 1703(a)(1), is
not of great significance in this review. Ve must hold that
the ads and the mailings indicated are sufficient to combine
the Jurisdictional eleisents with the nonregistration aspects
to support the exercise of the trial court's discretion.
The "to sell" language in the Act must be construed for these
purposes to include more than the act of signing the sales
documents as the appellant argues. We do not consider on
this appeal the other mailings, such as the lot payments,
and post-contract-signing correspondence.
As to the authority of the Secretary to inform the pur-
chasers that the contracts may be voidable, the trial court
found on the preliminary injunction hearing that there was
such authority under section 1714(b) of the Land Sales Ac;;
as it relates to the failure to give a purchaser. In advance
of the signing, a property report. The Act, as the trial
court indicates, does not require a showing of fraud in order
for the voidable option to arise. The authority of the
Secretary to give notice is not dependent upon the existence
of fraud, and it may reasonably be derived from the general
authority and powers under section 171t(b).
SS-7ie O - 78 - 95
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540
Thus again we must hold that the trial court acted well
within its discretion as to the failure of the appellant to
meet ti.^^ required showing ^ quoted above , as to the particular
purpose sought by the preliminary injunction.
APPIRI4ED.
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541
IN THH in.svjucT couuT 01' Tiiii uwiTKD statk;; '^^'^'"-'w*.
rOU TJJK niflTKlCT OF NKW MIJXICO '^^ f-
COOHS PARK, INC., ^'^
PlaiiiLil^l,
-vs- No. 75-391 CIVIL
UNTTKU .'jTATKS OF AJUJJUCA, ol. il. ,
DefenclunUs.
g ft D K U
Tliis iuat!:er hf.vincj come on for consideration
of plainV.iCf's application for vJ^Gii'^i'^^iry injunction,
and a ))earinri on tliis matter hpvlnr been hold on
July Xl>, 19V5,. and the Court havincj filed ita Findings
of Pact: and Conclusions of Law; Now, Therefore,
IT IS Uy THE COUHT OUDPUKD that plaintiff 'fci
application for preliminary injunction is dcnio<l«
,^j^.^.^J-^_f 1 _
'^UNITKD fJTATii-j bli;TJaCT JUDGE
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542
F M F F3
JN Tin-: Di.:;'JKi(:'r coukt (n* 'J'Uk UijiTKi) •''^''»''**Ar Al lUJOurui^iJE
i*OJ< 'J'iij; J)J5;tkic:t oi* ni;w mkxico AUS 1 'i 197*1
rnnw- PAP.' TMr JcSSH CASAUSf/
COOKS l*AI:K/ INC., CLCRJC D
-V!;- No. 7S :1«IJ (!tV.ll.
UNiTiJi) :;tatks oi.' amkklca, cl ai.,
Dcfdnclantfj.
1. Tlia pIc«.iMt.l/:.C 'v^ ctr.c'CrCid ?.♦: the foJJlow-
iiKj j ii.'.l €-inc(!:: of i'.;.c? c.\'. Vlio . u. . :: t^rif oC ;.ni*.'. ri'iacnl i;
oJ: coianmnical-iroji in inLiiri;Lcr:c co'nmcvco:
(a) Advcrl-.ifiincj in iiuwripapers whiqh
arc inailcid to some .subscribers and have
culJiilitijiLial inl c:rj;Lal-C! circulation;
(b) Maijjricj of plats and liuts of rcs7
tricl.ive covLinantc of the uubdiviaion to
pel cnl-ial purchiiLier:;;
(c) Mailincj by purchaser:; of their
inonDiJy payments to the escrow account
e.sl.a))] i sliud jn th(j conlr.ict of !;ale between
Coori; l\\)i; and the purchasers;
(d) IJ.iilinij lo Mi:. I'eJurettl of Umk
staL(}iiK;nts which nc:tiri(:d him of the failure
of i)ur(:ha.'icrf; lo r.M ku Viieir required monthly
• .. . .............. . • .
nayjuc.'iU.'i . and his .'^liT i '^cj of notice to thcuc
' " , . . . : . . II . I .
peo[>lu of their failure to pay; and
((;) U.so ol thi! telt^phone to deal with
pui i-h.i:>(*r:. ainl prd inil i .1 1 p\ir(rha!:c*rs;. • *
t
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543
2. A puircha.stir can ti&.a advjnlicifjc of
11> U.r..C.A. f;l7U!i(l») v/illi(jul any alliijal .U)ii or t;lU)W.i luj
of I:j:au«l. 'l'\u) rciiu-cly is avdJlabli! v/lif»i»ciVi!r n dovulopcr
lailj; i.o £;iipi)Ty.i rcijuirc'tl proi)Uj:Ly rci»orL. 11> U.ii.C.A.
<;l7a3(a) (1).
3. IMaJiiLJ. f i. * Ji iippJ icalJ.on lor preliminary
injuacL.ion clioulcl be denic'd atj it liar, failed to !>liov;
a liLolihoud Ojl .succoiiij on tlie luorits.
ui.]iti.:d'S'J'atj:s ni.sTiUCT judci-:
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544
IN THE UNITED STATES DISTRICT OOUR^
FOR THE EASTERN DISTRICT OF TEXAS
.BEAUMONT DIVISION
BONNIE MAUD WIGGINS, Individually
and as Administratrix and Substi-
tute Trustee of the Estate of Barney
Wiggins, Deceased,
Plaintiff
FILED .
MMRN OSIMa or IIMI
n BEATRICT w ^^^^
NO. B-74-90-CA
VS.
JAMES T. LYNN, ET AL,
Defendants
O R.D E R
CORRECflNG JUDGMENT
ON THIS DATE, cane on for consideration the Motion
for Correction in Judgment filed by the Defendants herein,
and after having considered same, the Court is of the opinion
that same should be granted. It is, therefore,
ORDERED, ADJUDGED AND DECREED that* the Judgment
of this Court entered in thi^ cause on- April 25, 1975, be
corrected in that all restraints and orders in said Judgment
applying to Lake Run-A-Muck, Old Snake River« Wayward Wind
and Natasha Heights shall also be made applicable to
Plaintiff *.s subdivision Hardin's Hideout.
It is further ORDERED that Plaintiff shall be re-
quired to send notification to purchasers of recision rights
on or before UuJ^ w J^. /9Z^ »
ENTERED
n... .f^ /C7r-
MiCiNAL SJGNEO BV
JOC J.FISHEW
UNITED STATES DISTRICT JUDGE
4>
A IKS com aiimr
lumr L fm&. eux
BL 1 MsincT fxua
ttSK»LnS11KI. HMS /
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545
IN THE UNITED STATES DISTRICT COVK^
FOR THE EASTERN DISTRICT OF TEXAS
BEAUMONT DIVISION
BONNIE MAUD WIGGINS, Individually
and as Administratrix and Substi-
tute Trustee of the Estate of Barney
Wiggins, Deceased,
Plaintiff
FILED
MsniN osma or nxAS
v'Uiia 1975
mm^JMRlCEjl. BRYAW
MO. B-74-90-CA
VS.
JAMES T. LYNN, ET AL,
Defendants
O R,D E R
CbRRECfiNG JUDGMENT
ON THIS DATE, cane on for consideration the Motion
for Correction in Judgment, filed by the Defendants herein,
and after having considered same, the Court is of the opinion
that same should be granted. It is, therefore,
ORDERED, ADJUDGED AND DECREED that* the Judgment
of this Court entered in this^ cause on* April 25, 1975, be
corrected in that all restraints and orders in said Judgment
applying to Lake Run-A-Muck, Old Snake River, Wayward Wind
and Natasha Heights shall also be made applicable to
Plaintiff *.s subdivision Hardin's Hideout.
It is further ORDERED that Plaintiff shall be re-
quired to send notification to purchasers of recision rights
on or before VLJ ^ J'. /9?y *
re^L^M^
(^.^ ^-^ /?7J-
ENTERED
ORIGINAL SKMCO BT
JOC i. nSHER
UNITED STATES DISTRICT JUDGE
^>
A 1iRI£ com aMITT
UlMAT L HARRIS. aERX
UL 1 OISIKKT CWRT
rASuxiLPisiKicr, tuas /
i^^O
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546
Mr. Browx. But you also are advocating year after year an eztensicNO
of that mandate and the Conirress has responded in most cases. So, I
do not think you can hold yourself faultless in that regard.
You want to change the definition of '^le" to, in effect, a continuing
sale. In many States, of course, under a land contract, an executoiy
contract, the purchaser can have immediate possession and that con-
tract can extend for many years, as you have indicated in your testi-
mony. Still, even though the purchaser had been (Hi site for many,
many years under an executory contract, you would still have all of the
provisions, relative to even rescission and all of those things, extend
bevond the end of the contract ?
Ms. Worthy. No, that is not correct.
Mr. Brown. As you define it, I have forgotten exactly how it is used,
and I did not carefully research this, but I thought that when you
changed the definition of ^^sale," you, in effect, made all of the provi-
sions applicable to the sale.
Ms. Worthy. That definition of ''sale" that you are referring to is in
the proposed regulations, and they do not refer to any of the other
statutoiy provisions. It is a regulatory change, cmly.
Mr. Brown. But what are you changing? Are you chanfi[ing the
definition ? If you change the aefinition, it applies in every pmce that
that term is used in the act.
Ms. Worthy. No, this is a proposed change of regulations, and it
only relates to that section or the regulations, not to the act at all.
Mr. Brown. Just to digress for a second. When you were taUdng
about the indictments, do you have any idea how many HUD em-
ployees have been indicted in the same period that you were talking
about?
Ms. Worthy. No, I do not, sir.
Mr. Brown. Well, for your information, you said there have been
91 indictments under the Interstate Land Ssles Act. There were 96
HUD employees indicted over the same period.
Ms. Worthy. For violation of the Interstate Land Sales Act, sirt
Mr. Brown. No, just HUD employees. Maybe HUD employees are
more fraudulent and deceptive and everything else than devedopers.
At least there have been more indictments.
Well, we were just discussing here the problem of statute of limits^
tions running out, and imder tnis language you would propose to ex-
tend the opportunity for recourse much oeyond that which is normally
provided m the law, and that gets back into this w!hole issue*
It seems that we are almost establishing a preferred ^roup of pur-
chasers under the act than would normally be the case under otatelaw,
which, absent this legislation, would be applicable.
Mr. Race. Well, Mr. Brown, I think tliere is a confusion with the
change in the definition of "sale." Primarily, that was put in the regu-
lation to deal with tlie present exemption that allows for no liens,
oncuniborances, or adverse claims, that exemption.
And what our problem and concern was was that a developer quali-
f vinji^ for tliat exemption would have no liens at the time of the actual
signing of the contract but since there was a long-terra installment
contract involved, that he could encumber the property during the
whole term of that installment contract and, therefore, nullify the real
thrust of that exemption by putting liens on after the day of signing
I contract.
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647
So, for the long-term installment contracts, the agency is taking the
pjosition tSiat any liens put on during that period would be during the
time of sale.
There is no change in the statute of limitations with regard to the
right of a purchaser to void his contract. That — ^there have been a
number of cases on that, and they have held a strict 2 years after the
signing of the contract.
The statute says that the violation for voidability is nondelivery of
the property report at the time of the signing of the contract. That is
already in the statute. So, the right to void goes specifically to the sign-
ing of the contract and does not continue during the installment
contract.
Our concern with what the Nelson provisions have done is : They
have put an absolute 3-year cap on any right to bring any kind of
action under this statute. And our experience has been
Mr. Brown. Let me stop you there.
Under this statute, the cap certainly has not preempted bringing
actions that are permitted under that State's laws.
Mr. Race. It does not affect the State's laws at all.
Mr. Brown. So that there is an absolute cap. All it says is if you are
looking to this act for your remedy, there is an absolute cap.
Mr. Race. The statute of limitations only applies to this act.
Mr. Brown. All of the tilings applicable under that State's laws still
can be brought.
Mr. Race. That is right. But the problem is, under the Nelson pro-
visions, the right for fraud actions under the Federal law are cut off
at 3 years, absolutely. And the problem is that many of the contracts
in this industry are for 7, 10, 15 years, and many of tJie promises are
way down the road : "We will put in the swimming pools and facilities
5 years, 6 years, and so forth, down the road." And purchasers do not
know about the fraud or misrepresentation at 3 years ; they only learn
of it at 5 years, and at that point, under the Nelson bill, they are abso-
lutely cut off from any rights under the Federal law.
Mr. Brown. But tfie thing that concerns me is, there is a remedy,
I would presume, under that State's laws with respect to real estate
transactions. It seems to me that this statute was intended to make sure
that there was not fraud, and so forth, in the representations that are
made by vehicles of interstate commerce — ^the mails, the phones, and
so fortJi. If someone promised or held out, agreed, covenanted to do
certain things and then did not do them, that would be covered.
It does not seem that that is a thing we should stress as much as we
do in a disclosure statute.
Mr. Race. Well, the frauds actually do take place, in many cases, in
the vehicles of interstate commerce in the use of the advertising
through the mails, in the use of the property report.
The problem is that those promises that are made in those vehicles
do not often take place until more than 3 years down the road, and the
purchasers are cut off so they cannot exercise their rights to bring
fraud actions under the Federal statute.
Mr. Brown. Well, it just seems to me we are throwing into one big
bag breach of contract, failure to carry out certain contractual duties
incorporated in the contract, fraud and the misrepresentation of the
property. It just seems we are putting them all in the same bag, and
I do not think they belong there.
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548
I have no further questions, Mr. Chairman.
Chairman Ashley. Mr. Gonzalez.
Mr. Gonzalez. Thank you, Mr. Chairman.
And thank you, Ms. Worthy, and your colleagues, for the time you
have taken here and your cooperation with the subcommittee.
Would any of the developers that are involved in these 91 indict-
ments on criminal charges, I believe, would any of them be exempt
imder the Nelson provisions ?
Ms. Worthy. Mr. Gonzalez, we have reviewed those indictments and
the Nelson provisions, and we feel, based on our information and read-
ing of the proposed changes, that of the 16, probably 10 of those cases
would have been exempt.
Mr. Gonzalez. Ten of the sixteen ?
Ms. Worthy. That is correct.
Mr. Gonzalez. And a while ago, following along the line that Mr.
Brown was questioning on, on this 3-jjrear statute of limitations pro-
vision in the Nelson bill, my impression had been all along that the
main thrust of the Nelson bill was to deal in the enlargement of the
area of exemptions, and was not really invading the other Federal
statutes with respect to fraud.
But, apparently, that is not tlie case. And if I understood correctly
a while ago — and this is what I wanted to anchor down — it would, the
3-year limitation, would extend to tlie other provisions of the fraud
statutes of the code. It would cut them off, too; would it not?
Mr. Race. That is correct, Mr. Gonzalez. They have made it an abso-
lute prohibition of bringing any action, including a fraud action, more
than 3 years after signing the contract.
Mr. Gonzalez. I have a very^ intense interest in all of this because
I am identified, from the beginning of the effort^s on the House side,
going back to possibly more than 10 years ago, and I believe it was
with Mrs. Ignore Sullivan's Subcommittee on Consumer Affairs of
this same committee, and we had then the main initiative carried out
by Representative Mo TJdall of Arizona. And so I am intensely inter-
ested because I think several things are reflected in this history, includ-
ing the pending questions that we are trying to resolve, a classic demon-
stration of the legislative process of good intentions and how, through
a combination of both legislative as well as administratve hocus-pocus,
you actually end up with some injustices in the name of enforcement
and in the name of protecting the consumer.
For example, all the testimony we heard in those hearings — and I do
not think a bill resulted on the House side at the time — ^but we did have
considerable hours spent on hearings. Most of the cases were very
dramatic. They were tliesc rather sophisticated promoters with ample
means and who were, indeed, involved in interstate traffic. None of the
cases that were obviously and demonstrably abuses that were presented
to us ever had a case that could be defined as a purely "intrastate"
operator.
So that I can tell you that other than the definition of size, I do not
think there was any intent on the part of Congress to have the main
thrust on the enforcement side eventually translated over to the smaller
or the purely intrastate developer or homebuilder or seller, and had
never demonstrated any intention of going into intra^^ate transactions.
So that I am interested in knowing, because I think that it is the
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549
focal point we have got to address ourselves to — it would be very hard
for me to answer negatively the question that our associate, Congress-
man Kelly, has been asking, and that is: Suppose you did away with
this law and this bureau, would it still not be possible to prosecute these
cases of fraud under tlie jurisdiction of the other statutory provisions
and through the enforcement agencies of the FTC or the SEC ?
And it is very hard for me to answer that question now negatively,
even though I have been one of the enthusiastic proponents, in view
of the tendency in the last few years to concentrate more and more on
the developer, and involvinsr, really, time after time, purely intrastate
operators who did not advertise interstate, who are not seeking cus-
tomers outside of the State but who found themselves subject to the law
and the interpretation of "50 lots or more," and the fact that if they
have a phone that they use for any purpose in the transaction of busi-
ness, I understand, that that would cause them to be defined as com-
ing under the jurisdiction of the act.
So that in my own district, for example, I have a case of a home-
builder who found himself — and still finds himself — in the predica-
ment of trying to sell, I believe, a colonel stationed in the San Antonio
area. San Antonio has quite a number of military bases, and so a lot of
retirees after they finish their service period retire there in San
Antonio.
Now, in this case, I know the homebuilder, and I know the developer,
even though he is not my own constituent. As far as I can tell and as far
as anybody can show, he has never shown any intention of going out-
side of the purely local jurisdiction. I am sure he is not even well
known at all in other Texas areas outside of the San Antonio area.
His intention has never been to seek purchasers outside of the State
of Texas. Well, outside of Bexar County, much less outside of the State
of Texas. Yet, the mere fact that this was an Army personnel whose
domicile, official domicile, had been out of State, and the fact that he
apparently had more than 50 lots in a given development, brought him
under the jurisdiction of the act, which means a $20,000 fee.
And yet, it is harcf for me to explain how he could come imder our
congressional intent of covering interstate land transactions and regis-
tration thereof.
I just do not see how, under any normal definition, that man could
be defined as being in interstate commerce, other than the fact that if
he mails a letter or if he has a phone, I understand that meets your
definition.
Now, the homebuilders, yesterday, testified that the reason they were
up in arms was that this had turned out to be the main thrust of the
activity in this office.
Now, is that so ? And if that is so, then should we not concentrate on
defining what we thought we had in mind in the original consideration
of this act, as an "interstate speculator or promoter."?
Ms. Worthy. Mr. Gonzalez, you have asked me several questions.
I will attempt to respond to as many of them as I can recall.
Your first question was really the same as your last: Are we more
involved in fraud activity and enforcement activity than in what the
Consrress mandated us to do ?
The answer to that is, "No ; we are not."
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5S0
Mr. OoNZALEz. Excuse me. I also left out something, though — a
qualifying description — and that is, that in these cases I referred to—
and obviously, the Home Builders Association's spokesman, also, you
are talking about fully developed areas in which you have very strict
requirements on zoning, on building codes, and the like.
And this, I can tell you, we never heard about during the testi-
mony when we were considering the enactment of the bill.
Ms. Worthy. With respect to the intent of Congress and our Beinff
involved in an activity — ^the only enforcement of fraud activity — and
that the States could well do that, or other enforcement types of
agencies— the FTC and SEC.
The problem is, Mr. Gonzalez, that we are really in the business of
disclosure. That is something that SEC and the FTC do not do. It is a
disclosure statute.
We provide — or make sure the developers provide information
to consumers so they can make an intelligent decision about property
they are purchasing. That is not what the FTC or the SEC does. We
are mandated with that responsibility, and there are 27 States who
have no disclosure State laws. So that that would not be something
that the States could take on easily. They would have to enact disclo-
sure legislation, and set up agencies to, in fact, enforce that legislation.
So we are doing something that 27 States are not even about the
business of doing. Now that was the first part of your question.
The second one was : Are we in fact spending all of our time dealing
with those developments that are fully developed? And my answei;
to that is, "No; we are not." And in fact, we have proposed in our
regulations that the primary homesite, those developments that are
fully developed — they have the water; they have the streets; they have
the sewers — that they would be exempt under our regulations. And
that, we have already proposed.
Now you avsked me about an incident in a subdivision called Lake of
the Hills. Now in that particular instance, the developer admitted to us
that he in fact was using the mails, and he used them a great deal
Mr. Gonzalez. Well, everybody has to use the mails nowadays. And
if you are in business, how can you escape "using the mails"? But for
intrastate purposes?
You see, that is the question, as well as disclosure, Yes. I know that
the act is based on interst^ite land sales transactions disclosure. How-
ever, disclosure is an element leading to a prevention of fraud or T>ns-
siblo fraud. Therefore, where you do have fraud, the SEC and the FTC
of course can prosecute, and do have full jurisdiction under the statutes.
as T understand it.
But the "disclosure" that worries me is the thing that you would de-
fine as triggering off the jurisdiction of the Government to compel
registration of an individual who othenvise has no connecticms or asso-
ciations with interstate transact ions. "Disclosure," insofar as T can see,
is important if it bears upon interstate, regardless of whether the
St^itCxS are capable or not capable.
Ms. Worthy. Mr. Gonzalez, "disclosure" does not triiQser off the
fraud-provision situation. When we say "disclosure," what we mean
by ^hat is that the law says that we must — ^that developers must tell
l>eople infonnation alx>ut the land — not necessarily for purposes of
later making sure that fraud was there.
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651
For example, they have to tell individuals whether or not there is
water on the land, whether they can build a house, whether they are
goins^ to have electricity, whether or not it is flood prone, whether or
not tornadoes occur there every month, whether or not it is hurriceae
prone. That is the information that this Congress said that we
must
Mr. Gonzalez. That is true, Ms. Worthy, in those cases where you
have a legitimate jurisdictional purpose and ability.
My issue is about "jurisdiction."
Ms. Worthy. Then let me say this.
The law says, the act says that if it is more than 50 lots, and there is
use of the mails directly or indirectly, you pattern the act after the SEC
Act. And the case law says — and it has supported us in every instance
except for maybe a couple — ^that we are clearly and accurately carrying
out the mandate of this Congress in questions of jurisdiction.
We did not determine what the jurisdiction of the act would be; you
all did. And we can only go by
Mr. Gonzalez. But you are interpreting — ^you certainly do have the
oapwicity to interpret, in certain judgments, and make a decision
whether the law is not specifically telling you the Congress in its intent
defined it and limited it
It said "interstate." By your definition, anybody could be covered, if
you could find that they have 60 lots.
Ms. Worthy. Mr. Gonzalez, let me share this with you.
There were proposed provisions to the act when you all were cmi-
sidering enacting this statute for intrastate exemptions. There were two
proposed, and the Concfress chose not to include them.
So that Congress did not really mean to keep us out of the business
of intrastate activity. However, we have proposed regulations that
would exempt from our registration requirements those individuals
who are involved in sales, locally. We proposed seven new exemptions.
Mr. Gonzalez. I still think that you have not answered the question
of overstrained interpretations as to the definition of "intra- and inter-
state jurisdiction." Because, referring to attempts made to amend the
law Imsed on intrastate qualifications doesn't change the main thrust
of the intention of Conerress to make it a wholly interstate transaction.
And to limit jurisdiction of any Federal agency to what would be
otherwise clearly defined as an interstate promoter or transaction.
And I still don't think that we have gotten away from the fact that
you have had overstrained interpretations. You can have a strict inter-
pretation of the letter of the law and kill the spirit of the law.
In this case, the spirit obviously motivating the Congress was the
fact that, if there was an inability on the part of the State officials to
control a fraudulent situation — a fraudulent promotion — ^it was the
inability of the purely State officials to go into interstate jurisdictions;
and, therefore, the need for a Federal law.
But the need was based purely on interstate transactions, not on
moving over to where the main thrust is impacting an intrastate trans-
action. As to the ability of States to govern that, well I think that unless
we want to change our system, we could end up with what we have
now — which is not bad. You have some States that have far more
stringent provisions than the Federal requirements.
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552
California, for example. But even the deputy attorney general of
Nevada yesterday could find no reason whjr sach a hypothetical CBae
as I was giving you could be defined as coming under the jurisdicticm
of HUD.
I still fail to see it because, under your definition then, there is no
distinction between "interstate" and "intrastate," as long as you have
a phone, and as long as you write a letter. And everybody has to do
that, nowadays.
Ms. Worthy. Mr. Oonzalez, let me say this. I can understand where
Congress would have some concerns about interstate involvement. And
I cannot tell you other than we have attempted to eliminate the con-
cerns of the small developers in our proposed regulations.
And I would be more than willing to have our staff people sit down
with your staff people and show you now we have attempted to alleviata
some of these problems in the new proposed exemptions.
We have seven that we have proposed. But more than that, tiiougfa,
I would like to say to you that I would want Congress to look very
closely at the Senate proposal. Because even though Uie attempt at that
would on its face be to exempt intrastate sales transactions, that you
have in that Senate proposal the potential to exempt not only intra-
but thousands of States from sales to out-of -State residents, Decause
of the 100-mile radius.
I can't begin to tell you how concerned we are. Because, in many
geographical areas, that will bring into exemption large numbers of
sales transactions and thousands upon thousands of people who will
not benefit from the disclosure protections of this act.
But I can't seem to share with you now the fact that we are pr<q>os-
in^ exemptions that will eliminate some of the concerns you are
raising.
Mr. Gonzalez. Well, I am not on the Nelson bill; I am on the
Minish bill. Because I also happen to belong to the Minish subcom-
mittee, which has had hearings on this matlier. And so, therefore, I
share apprehension about some of the provisions of the Nelson bill,
and I have made reference to one — ^the 3-year limitation, which I think
will throw the baby out with the bath water.
But, on the other hand, I still think that there is a legitimacy to the
concern expressed by those most directly involved, as reflected in the
testimony presented by homebuilders, and in my own personal ex-
perience in my own district or surrounding district.
Chairman Ashley. The time of the gentleman has expired.
Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman.
I just happened to think of one thing I wanted to ask you and
forgot to. Are you still instructing the developer, when there has been
a violation of the act to send out the specific rescission letter that you
approve?
Ms. Worthy. Are we still sending out rescission letters?
Mr. Brown. Xo. Do you require the developer to send the letter to
the purchaser? As I recall, for a long time — and I dont know if it
still persists, you insisted that not just any letter be sent, but that a
certain letter be sent tliat you have approved.
Ts this still true?
Ms. Worthy. First of all, we don't require that the developer send
the letter out. We ask that he send the letter out; we dont require it.
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But we do have a rescission letter — a f onn letter that we do ask them
to use if they are going to send a letter out.
Mr. Brown. Well, then what if a developer does not send the letter
out?
Ms. Worthy. Then the Office exercises the rescission action.
Mr. Brown. You, in effect, notify the purchaser that they can rescind
the transaction ? Right ?
Ms. Worthy. Yes ; that they have certain rights. That is what we do
advise them. That is correct, Mr. Brown.
Mr. Brown. But the problem is that this rescission is authorized
even though there may not be a substantive problem. Isn't that correct 1
I mean, if there has been a technical violation of the act, the indi-
vidual purchaser has a right to rescind.
Ms. Worthy. That is correct.
Mr. Brown. I know that there was a case that came to my office
where this happened. There was a technical violation. The developer
had to send out the letter. He had to send it out to many purchasers,
and it j ust did not make any sense.
And I noticed in the Senate testimony, that Senator Nelson, in dis-
cussing this mat'er with you, pointed out that purchasers may decide
to go ahead and sell the lot back to get their purchase price paid back
by the developer. In the meantime uie value of the property has gone
up substantially and the developer, in effect, reaps the profit.
It just seems that, without some qualifying information, that you
are doing a disservice to the purchaser, rather than a service, in many
cases.
Why ? Are you afraid that there will be a supersell job again and
the person won't rescind? Is that why you insist upon a particular
letter going out from the developer? You don't permit enclosures; you
don't permit explanations ; you don't permit any of that.
Ms. Worthy. Mr. Brown, I did testify before Senator Nelson and
we did have discussions about the rescission letter. He made very posi-
tive criticisms and comments on the letter. And as a result of that, we
revised the letter, and we have submitted a copy of that revision to him,
and we have not heard anything, so we are assuming that he felt that
we have made the recommended or suggested changes.
If you have any suggestions or recommendations about how that
form letter is written, we would be more than willing to work again
on the letter.
We feel the purpose of the rescission letter is within the spirit of
that law, and we find that it has clear benefit. But if you feel that the
letter is not in fact saying what Congress wanted us to say, or you feel
it is not clear, or it does not give enough information, we would be more
than willing to work on it again.
Mr. Brown. One final thing, following on Mr. Gonzalez' conversa-
tion with you about stretching the jurii^ction or the application of
this legislation.
I noticed that the way you are defining "condominiums" to bring
them under the act is rather strained, too.
Ms. Worthy. Mr. Brown, those definitions are from court cases. We
are not referring to "buildings" now, we are referring to the real estate
itself. And that is a form of ownership.
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Mr. Brown. But in your regs, you don't say ^based upon the court
case," you say: A condominium is considered by OILSR as a
"subdivision."
Ms. Worthy. But we are not referring to "buildings," we are re-
ferring to the actual land itself that is bemg offered for condominium
ownership.
But is it your suggestion that we perhaps cite some cases along with
the regulations? Or at least refer to them!
Mr. Brown. No ; it just seemed that you are (Mice again stretching the
application of the act.
Ms. Worthy. Mr. Brown, that is a result of court decisions.
Mr. Brown. Thank you, Mr. Chairman.
Chairman Ashley. One final question and then we will vote and
return.
Ms. Worthy, your proposed statutory and regulatory changes vary
according to the development's size. The regulations propose raising
the 100-lot limit for the fundamental statutory exempti(m to a 150-Iot
limit, for the limited offering of the proposed exemption, and the 800-
lot limit for the primary homesite exemption.
Can you tell us what is the basis for establishing different develop-
ment sizes? Have different abuses occurred?
Why not exempt from disclosure requirem^its all developments of
under 300 lots?
Ms. Worthy. Mr. Chairman, I have talked to members of the staff
of the subcommittee about this. And as I indicated to them, we con-
ducted public hearings on the proposed regulations, specifically on the
exemptions and the lot numbers, and we are going to reconsider those
numbers, to attempt to come up with figures that we feel are reasonable
and comparable.
Chairman Ashij:y. One final question on enforcement.
Is there a backlog, either in your shop or in that of the Inspector
General? I am not, as you know,'overly impressed with the numbers
of referrals from the Inspector General to the Justice Department
over a 9-year period. It doesn't seem very many have occurred, when
we hear these lurid descriptions of fraud and deception that are
rampant.
And while I am aware of the fact that a good many administrative
actions have been taken short of referral, I am still led to wonder
whether there is a backlog; whether the dirth or the paucit}r of refer-
rals from the Inspector General to the Justice Department is because
of a backlog in the consideration of the workload ?
Ms. Worthy. Mr. Chairman, we have been apprised by the Inspector
Genorars office that they do have a backlog. But we dont know
specifically what those numbers would be.
Chairman Ashley. I think it would be a good idea if we found out
Give us some information on exactly what the enforeement situation
is, with a little clearer breakdown of the administrative actions that
have taken place.
I am a little curious to the number of ccHnplaints that you get,
and the disposii i of i o plaints, and how many have been
fi to t Are all of them lodced into!
iently meritorions to rel^r
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And then, what about the operations? Why do only a few seem to
be worthy of being bucked down to Justice, when your shop in fact
thought they were sufficiently serious for the attention of the Inspector
Greneral ?
That is the kind of thing I would like to get at.
Ms. Worthy. All right, Mr. Chairman, we will submit that for the
record.
[In response to the request of Chairman Ashley for additional in-
formation, Ms. Worthy furnished the following response for inclusion
in the record :]
Response Fbom Ms. Worthy
OILSR's Professional Enforcement Staff is smaU. When the Act became effec-
tive in 1960 the Professional Enforcement Staff was three individuals. In 1972
it had grown to eight professionals. Presently there are 16 professional enforce-
ment specialists. However, the proposed 20 person cut In OILSR's staff celling
will undoubtedly reduce the size of the Enforcement Division.
Since the intent of Congress in writing this law was to provide the land buying
public with meaning^ful consumer protection, we feel that enforcement remedies
in the best interests of the consumer should be sought. As a result, administra-
tive settlements of court-order remedies are given greatest consideration to effect
compUance under the law. Only after these areas are explored does an enforce-
ment case take on a criminal focus. The Enforcement Division with a staff of
professionals numbering 3 in 1969 and 16 In 1978 has taken action on over
93,000 pieces of correspondence relating to enforcement actions or potential
enforcement actions. In 1977, the Division's total correspondence approximated
19,000 items. Additionally, all in-person and telephone inquiries from consumers
are handled by that Division's professional staff. Since the Inception of the Act,
over 16,000 individual consumers have filed formal written complaints with
OILSR's Enforcement Division. Each complaint has been assigned to a particu-
lar professional for a thorough examination. Each respective developer has been
notified of the allegations in the consumer's complaint and asked to respond to
the charges. Many times the developer has voluntarily resolved the matter to the
satisfaction of the consumer. In every case, the consumer is fully apprised of our
efforts and advised if other recourse that may be available to him.
In 1972, OILSR issued its first formal Notice of Proceedings, its fl^st Sus-
pension Order and its first administrative subpoena. Since then, the Enforcement
Division has been responsible for the issuance of 1.450 Notices of Proceedings,
2,345 Suspension Orders, and 1,501 Subpoenas. AdditionaUy, 1,353 exemptions
have been terminated due to the developer's failure to adhere to the terms of
the exemption. Finally, in 3,504 cases, OILSR's Enforcement Division has nego-
tiated and entered into administrative settlements with developers who have
sold in non-compliance of the Act.
These 3,504 case resolutions might be considered consent orders, in the FTC
sense. To remedy this non-compUance, the developer agrees to notify lot buyers
of cancellation rights under Federal law and to make refunds to consumers when
requested. The total administrative activity exceeds 11,000 formal actions since
1972.
Additionally, the Enforcement Division develops cases, when warranted, for
civil litigation in conjunction with HUD's General Counsel and the Department
of Justice. There have been 19 injunctive cases initiated by the Enforcement
Division, 28 subpoena enforcement cases filed, and 43 cases filed by other parties
naming the Secretary as a Party. The total number of civil cases relating to
OILSR enforcement functions is 90.
Finally, the Enforcement Division is responsible for recommending through
the Administrator land cases where a criminal prosecution appears warranted.
These cases break down as follows :
A. Cases developed independently by OILSR :
37 Enforcement cases which involved direct referral of information to local
U.S. Attorneys recommending a criminal prosecution.
16 of the 37 cases have resulted in indictments; 92 Individuals and 25
companies.
7 of the 37 cases were formally declined for prosecution, or no action was
taken.
33-716 O - 78 - 36
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14 of the 37 cases remain under active investigation.
B. Cases developed by OILSR and referred to HUD's Inspector General under
an Agreement dated September 10, 1976.
27 Enforcement cases have been developed by OILSR and referred to the
Office of Inspector General recommending prosecution.
12 of the 27 have resulted in declinations or no action.
15 of the 27 remain in active investigation.
None have yet resulted in prosecution.
C. Other major enforcement cases: 34 major enforcement cases are being
developed within OILSR but have not reached a stage at which they might be
referred for possible civil or criminal litigation.
Should you wish further information it will be promptly furnished.
OILSR indictments
Number
PHnoipal •/«•«•
1. Parker Properties (North CaroUna) 000
2. Black Horse Acres (Maine) 350
3. Ann Scripa (Maine) 200
4. Lake Winnebago (Missouri) 1.006
5. Treasure Lake (Georgia) 2,182
6. Lake Ha vasu Estates (Arizona) 11,027
7. Hickory Run Forest (Pennsylvania) 022
8. Del Rio Springs (Arizona) 400
9. Belgrade Lakes Colony (Maine) 886
10. Hickory Hills (Indiana)^ 119
11. Whispering Pines (Mississippi) 510
12. Pocono Haven (Pennsylvania) 100
13. Rio Rancho Estates (New Mexico)* 106^214
14. Thornhurst Country Club (Pennsylvania) 1,210
15. Nevada Land Builders (Nevada) 400
16. Southern Properties (Mississippi) 000
^ Case was not directly Initiated by OILSR however, materials and manpower were pro-
vided to local prosecutors in a cooperative efforts.
1. U.8, V. Parker, No. CR-71-222, U.S. District Court, Middle District of North
Carolina.
Parties: Edward L. Parker. American Lakeshore Corporation.
Allegations : 5 counts of violating 15 U.S.C. 1708 and 1717.
Chronology :
Indictment returned August 21, 1071.
Parker entered a guilty plea to 1 count of violating 15 U.S.C. 1702 (others
dismissed) March 23, 1972.
Parker sentenced to 2 years probation and fined (5,000.00; American Lake-
shore Realty dismisse<l March 23, 1972.
2. U.S. v. Oeotis, No. CR-71-87, U.S. District Court, District of Maine
Parties :
Charles G. Geotis doing business as Charies Eindicott Development
Company.
Black Horse Acres, A Delaware Corporation.
Allegations : 8 counts of violating 15 U.S.C. 1703 and 1717.
Chronology :
IiMlictmont returned September 10, 1971.
Geotis entered a guilty plea (all counts) June 30. 1972.
Geotis sentenced to elght-2 year sentences (concurrent) ; Black Horse
Acres pleaded guilty to 5 counts and was fined $4,000.00 but payment was
remitted June 30, 1972.
3. U.S. v. Scripa. Case No. CR-71-110, U.S. District Court, District of Blaine.
Allegations: 1 count of violating 15 U.S.C. 1708(a) (2) (C) and 1717.
Chronology :
Indictment roturnod on December 9, 1971.
Anne Scripa pleaded guilty on June 4. 1976.*
Anne Scripa was sentenced to .3 years in jail, but execution of sentence was
suspended and she was placed on 'l years probation on June 4, 1978.
4. U.S. V. Steinhilher, No. CR-23761-2, U.S. District Court. Western District of
Missouri.
1 After being Indicted. Anne Scripa skipped bond and disappeared. She waa rabaeqiiently
located (j-ears later) in Minneapolis.
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Parties : Robert V. Steinhilber.
Allegations : 2 counts of violating 15 U.S.C. 1717 and 2 counts of violating 18
U.S.C 2.
Chronology :
Indictment returned March 29, 1972.
Steinhilber found guilty (jury trial) October 31, 1972.
On appeal, verdict of trial court was reversed by the U.S. Court of Appeals,
8th Circuit, August 29, 1973.*
5. U.S. V. Carcaise, No. A-27.933, U.S. District Court, Northern District of
Georgia.
Parties :
Frank A. Carcaise, James C. Dunbar, Jr., Robert A. Baker, George H. Ellis.
Phil Brown, Troy Phillips, Ed Hamada, Randy Angelossi, Roy Metcalf, Don
Bronston, James E. Zippay, Michael Gross!, Treasure Lake, Inc., Treasure
Lake of Georgia, Inc., and Greet Northern Development Company.
A,llefirations *
9 counts of violating 15 U.S.C. 1703 (a ) (1 ) .
10 counts of violating 15 U.S.C. 1703(a) (2).
1 count of violating 15 U.S.C. 1706(c) .
21 counts of violating 15 U.S.C. 1717.
1 count of violating 18 U.S.C. 371 (conspiracy) .
Chronology :
Indictment returned on October 19, 1972.
By agreement, indictment was dismissed as to all defendants except Frank
A. Carcaise, prior to trial.
Trial court entered a directed verdict finding Frank A. Carcaise, not guilty,
on October 13, 1974.
6. U.S. V. Lake Havasu Estates, No. CR-73-147, U.S. District Court, District of
Arizona.
Parties :
Lake Havasu Estates, an Arizona corporation, Kenneth R. Lavin, Ronald
D. Lavin, Patricia Lavin, Paul B. Maholchic, Robert C. Stevens, J. Lance
Sinclair a/k/a Victor Lockwood, Sr. aA/a Victor Winters, Victor Lockwood,
Edward C. Cass and Seymour Astern.
Allegations :
7 counts of violating 15 U.S.C. 1703(a) (1).
8 counts of violating 15 U.S.C. 1703(a) (2) .
15 counts of violating 15 U.S.C. 1717.
15 counts of violating 18 U.S.C. 2 (aiding and abetting) .
7 counts of violating 18 U.S.C. 1341 (postal fraud) .
Chronology :
Indictment returned March 1, 1973.
All defendants pleaded guilty to 1 count of mail fraud and 1 count of
aiding and abetting. Remaining counts were dismissed.
Kenneth R Lavin was sentenced to 2 years in prison and fined $5,000.00 ;
Edward Cass was sentenced to 1 year in prison and fined $1,000.00; and,
Ronald D. Lavin was sentenced to 6 months in prison and fined $1,000.00.
The remaining defendants received lesser sentences or fines.
7. U.S. v. Focono International Corporation and Charles Ooldberg, No. 73 CR-
630 U.S. District Court, Southern District of New York.
Parties :
Pocono International Corporation, Charles Goldberg, Sellamerica, Ltd., and
Heinz Ebenstein, a/k/a Ric of the Poconos.
Allegations :
12 counts of violating 15 U.S.C. 1703 (a ) ( 1 ) .
13 counts of violating 15 U.S.C. 1703(a) (2).
. 26 counts of violating 15 U.S.C. 1717.
25 counts of violating 18 U.S.C. 2 (aiding and abetting).
15 counts of violating 18 U.S.C. 1341 (postal fraud).
Chronology :
Indictment returned June 27, 1973.
Defendants convicted on 6 counts of nonregistration, 7 counts of land sales
fraud and 7 counts of postal fraud ; July 14, 1974.
On appeal by Charles Goldberg to the U.S. Court of Appeals for the Second
* Conviction was reversed on a questfon of evidentiary law. We requested the Solicitor
General of the U.S. to either ask for a rehearing or for a writ of certiorari, but the Solicitor
General declined to do either of those things.
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Circuit, the conviction was sustained ; November 26, 1975.
Charles Goldberg's petition for a writ of certiorari to the U.S. Supreme
Court was denied ; May 19, 1976.
Charles Goldberg was sentenced to 18 months in prison. Pocono Interna-
tional Corporation was fined $37,500.00.
8. U.8, V. Del Rio Springs, Inc.'et al, No. CB74-78 U.S. District Court, District
of Arizona.
Parties :
Del Rio Springs, Inc., an Arizona corporation, Howard N. Woodall, Rich-
ard S. Johnson, Richard L. Bates, Clifford G. Beebe, Eugene Dewitt, Saul O.
Schenker, Martin A. Clancey and William R. Ballen.
Allegations :
5 counts of violating 15 U.S.C. 1703 (a)(1).
5 counts of violating 15 U.S.C. 1703 (a) (2) .
10 counts of violating 15 U.S.C. 1717.
15 counts of violating 18 U.S.C. 2 (aiding and abetting).
5 counts of violating 18 U.S.C. 1341 (postal fraud) .
6 counts of violating 18 U.S.C. 2314 (transporting forged securities).
Chronology :
Indictment returned on February 7, 1974.
5 of the defendants pleaded guilty and the remaining 3 went to trial on
February 19, 1975. The corporation was dropped as a defendant since it was
in bankruptcy.
Trial resulted in a verdict of guilty on all counts, as to defendant Woodall,
the remaining 2 defendants were found not guilty.
Howard N. Woodall was sentenced to 5 years in prison and fined $15,000i00.
5 salesmen who pleaded guilty were given 5 years suspended sentences and
were fined from $1,000.00 to $3,000.00 each.
Howard N. Woodall appealed his convictions to the U.S. Court of Appeals;
Ninth Circuit, which affirmed the trial court on January 25, 1977.
9. U.S. v. Belgrade Lakes Colony, Inc., et al, No. CR 75-^lSD, U.S. District
Court, District of Maine, Southern Division.
Parties :
Belgrade Lakes Colony, Inc., a Maine Corporation, Belgrade Lakes Devel-
opment Company, a Maine Ck>rporation, Stephen I. Hershaff, David L. Winn
and Robert A. Keezer.
Allegations :
5 counts of violating 15 U.S.C. 1703(a) (1) .
9 counts of violating 15 U.S.C. 1703(a) (2).
14 counts of violaUng 15 U.S.C. 1717.
14 counts of violating 18 U.S.C. 2.
Chronology :
Indictment returned on April 2, 1975.
2 corporate defendants pleaded guilty to all counts, Decembtf 8, 1975.
Charges against Robert A. Keezer were dismissed on December 8, 1975.
Defendants agreed to set up a trust fund for the benefit of the property
owners. Funds consisted of $40,000.00 cash, plus unsold lots, plus installment
payments still due on contracts for sold lots. This settlement was accepted by
the United States and the Court on February 6, 1976.
Charges against Stephen I. Hershoff and David L. Winn were dropped on
February 6, 1976.
10. U.S. V. Jackson, et al, No. F-CR-75-IO, U.S. District Court. Northern Dis-
trict of Indiana. Fort Wayne Division.
Parties :
Kenneth L. Jackson, William C. Weaver, James C. Cox, Jr., Sallj L.
Haeoker, Leo E. Walsh, Perry F. Watson, Jr., James L. Roddy and James V.
Merl.
Allegations :
6 counts of violating 15 U.S.C. 1703(a) (1).
7 counts of violating 15 U.S.C. 1717.
1 count of violating 18 U.S.C. 2 (aiding and abetting) .
1 count of \'iolating 18 U.S.C. 371 (conspiracy to defraud the U.S.).
1 count of violating 18 U.S.C. 1014 (false statements in an an^ication for
a loan).
31 counts of violating 18 U.S.C. 1341 (postal fraud) .
1 count of violating 18 U.S.C. 1343 (fraud by wire).
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CSironology:
Indictment returned on April 30, 1976.
Trial was commenced on October 15, 1975.
Defendants were found guilty on all counts. Jackson was sentenced to 3
years in prison, Walsh and sentenced to 2 years in prison, Oox was sentenced
to 3 years in prison, and the remaining defendants received lesser sentences
or were fined on November 1, 1975.
Leo Walsh and James Cox filed an appeal of their convictions with the U.S.
Court of Appeals — ^7th Circuit. The appellate court sustained the conviction
on February 22, 1977.
11. U.S. V. Stevens, et al, No. CRN75-77, U.S. District Court, Northern District
of Mississippi.
Parties : Larry Stevens, Floyd Montgomery and Robert J. Aubuchon.
Allegations :
6 counts of violating 15 U.S.C. 1703(a) (1) .
6 counts of violating 15 U.S.C. 1717.
3 counts of violating 18 U.S.C. 2 (aiding and abetting) .
8 counts of violating 18 U.S.C. 1341 (postal fraud) .
Chronology :
Indictment returned on June 26, 1975.
Defendants were convicted on all counts on Septemer 7, 1975.
Stevens was given a 4 year suspended sentence and fined $3,000.00, Mont-
gomery was given a 3 year suspended sentence and fined $3,000.00 and
Aubuchon was given a 3 year suspended sentence, on October 8, 1975.
12. U.S. V. Pocono Haven Corporation, et el, No. CR75-367, U.S. District Court,
District of New Jersey.
Parties :
Pocono Haven Corporation, a Pennsylvania corporation. Sea and Ski
Homes, Inc., a New Jersey corporation, Paul Bunyan Distributors, a New
Jersey corporation and Richard Feinberg.
Allegations :
4 counts of violating 15 U.S.C. 1708(a)(2).
4 counts of violating 15 U.S.C. 1717.
44 counts of violating 18 U.S.C. 2 (aiding and abetting).
40 counte of violating 18 U.S.C. 1341 (postal fraud).
Chronology :
Indictment returned on August 5, 1975.
Richard Feinberg and Pocono Haven Corporation pleaded guilty to 2 counts
of postal fraud and Sea and Sea and Ski Homes, Inc. pleaded guilty to 1
count of postal fraud on February 24, 1976. Paul Bunyan Distributors was
dropped from the case.
Richard Feinberg was sentenced to 1 year in prison, 5 years probation and
agreed to consent to a civil action for restitution to be monitored by a court
appointed receiver. Pocono Haven Corporation and Sea and Ski Homes, Inc.
were fined $2,000.00 and $1,000,00, respectively, on April 12, 1976.
Civil action for restitution filed in the U.S. District Court, District of New
Jersey, Case No. 76-558, and a receiver was aiq;>ointed on June 7, 1976.
13. U.S. V. Amrep Corporation, et al, U.S. District CJourt, Southern District of
New York.
Parties :
Amrep Corporation, an Oklahoma corporation, Rio Rancho Estates, Inc.,
a New Mexico corporation, ATC Realty Corporation, a New York corporation,
Howard W. Friedman, CJhester Carity, Irving W. Blum, Henry L. Hoffman,
Herman B. Iberman, Saloman H. Friend and Daniel Friedman.
Alleirations *
10 counte of violating 15 U.S.C. 1708(a).
80 counts of violating 18 U.S.C. 2 (aiding and abetting).
70 counts of violating 18 U.S.C. 1341 (postal fraud).
Chronology :
Indictment returned on October 29, 1975.
Trial was held in January, 1977, resulting in conviction on 20 counts of
postal fraud and 5 counte of land sales fraud against Howard Friedman,
Daniel Friedman, Chester Carity, Henry Hoffman, Amrep Corporation and
Its 2 corporate subsidiaries, on January 25, 1977. The remaining defendants
were acquitted.
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Howard Friedman, Daniel Friedman, Chester Carity and Henry Hcrffknan
were sentenced to 6 months each in jail, and Amrep Corporation was fined
$45,000.00, on March 10, 1977.
The 4 individuals and the 3 corporations appealed their conyiction to the
U.S. Court of Appeals — ^2nd Circuit, which affirmed the convictions in all
respects, on August 8, 1977.
U.S. Supreme Court denied a petition for a writ of certiorari, on January
9 1978
14.' U.S. V. Morgan, No. CR77-94, U.S. District Court, for the Middle District
of Pennsylvania.
Parties : William D. Morgan.
Allegations :
40 counts of violating 15 U.S.C. 1703(a) (2) .
40 counts of violating 15 U.S.C. 1717.
102 counts of violating 18 U.S.C. 2 (aiding and abetting) .
32 counts of violating 18 U.S.C. 1341 (postal fraud) .
Chronology :
Indictment returned on July 22, 1977.
William Morgan was found guilty (after trial) of 21 counts of land
sales fraud and 12 counts of postal fraud, on December 1, 1977.
Morgan was sentenced to 4 years in prison and fined $11,500.00, on
January 6, 1978.
Morgan's motion for a new trial was denied and he has filed a notice of
appeal, on April 26, 1978. His sentence is stayed pending the appeal.
15. U.S. V. Dacua, et aZ, No. CR-LV-78-62 RDF. U.S. District Court, District
of Nevada.
Parties :
Norman L. Dacus, Raymond E. Anderson, Donald Johnson, Daniel Keaer,
Jay Luna, Louis D. Sidwell, Cary M. Weiler, Donald C. Wilson, Nevada
Land Builders, Inc. and Green Saddle Ranch Company.
Allegations :
15 counts of violating 15 U.S.C. 1703(a) (1).
14 counts of violating 15 U.S.C. 1703(a) (2) .
1 count of violating 15 U.S.C. 1705.
30 counts of violating 15 U.S.C. 1717.
Chronology : Indictment returned on June 8, 1978.
[Note. — A previous indictment had been returned on July 20, 1977, in Case
No. CR-LV-77-8 RDF against the same parties, but it was dismissed upon
motion of defendants on the bases of duplicity, ambiguity and vagueness in
December 1977.]
16. U.S. V. Elliott, et ah No. S78-O004(c), U.S. District Court, Southern
District of Mississippi.
Parties: Nicholas Elliott, James C. Smith, Daniel F. Dawson and Timothy
Kee Sharp.
Allegations :
3 counts of violating 15 U.S.C. 1703(a) (1).
3 counts of violating 15 U.S.C. 1717.
6 counts of violating 18 U.S.C. 2 (aiding and abetting) .
3 counts of violating 18 U.S.C. 1341 (postal fraud) .
Chronology : Indictment returned on April 28, 1978.
Mr. Brown. One final thing while you're doing that.
In your testimony before Senator Nelson, you said $133 million
was in the rescissions available to purchasers. If you have done a study,
would you give nie the results, and if you have not done a study,
I wish you would do it, if you could, to establish how much of that
$13:i million in refunds that was made available was actually refunded
to purchasei-s.
Ms. Worthy'. Mr. Chainnan, we have not conducted a study. We
might have some information and we would give that to you,
Mr. Brown. In your rescission letter. I think it might be well to say
that you would wish to l)e notified as to whether purchasers took
advantage of that rescission because I think of $133 million made avail-
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able to purchasers, if only $1,000 resulted, it means that probably we
don't have a very cost-effective operation.
Ms. Worthy. We will get that information, what we have avail-
able, to you, Mr. Brown.
[In response to the request of Congressman Brown for additional
information, the following response was received from Ms. Worthy
for inclusion in the record :]
Response From Ms. Worthy
When the Enforcement Division enters into an administrative settlement with
a developer concerning the notification of rescission rights under Interstate
Land Sales Full Disclosure Act and the offer of refunds, the developer is re-
quested to provide us with the dollar value of the lots subject to the rescission.
After the notification, we ask that he indicate how many buyers afforded them-
selves of the refund offer. In an effort to minimize the burden in cost and time
which such a settlement may put on a developer, both of these requests are
voluntary, not required. From the information that is volunteered by developers,
it appears that approximately ten percent of those consumers receiving letters,
cancel their sales and are refunded their money.
By taking the 1977 figure of $133 million in contract value subject to rescission
and incorporating the ten percent seeking rescission, you arrive at a figure of
$13,350,000 as contract value of those agreements cancelled by consumers in 1977
per administrative agreements with OILSR*s Enforcement Division. On an aver-
age, a contract subject to rescission is one-fifth paid off. Consequently, real dollars
returned to consumers resulting from these administrative settlements during
1977 alone approximates 2.6 million.
In addition to these rescission settlements, OILSR's Enforcement Division
enters into hundreds of administrative settlements remedying consumer com-
plaints and alleged violations of the Act. One such case resulting directly from
consumer complaints also took place in 1977. In this case OILSR filed a civil
fraud complaint against Bankers Life and Casualty Company and its affiliated
companies involved in land sales at Holley by the Sea, a registered subdivision
in Florida. The allegations were fraudulent oral misrepresentation. In settle-
ment of the lawsuit, the companies offered money back to all purchasers since
December 8, 1975, and nearly all purchasers accepted. Consequently, the actual
real dollars returned to consumers via consent or settlement agreements no
doubt exceeds the 2.6 million dollars estimate by at least half a million dollars.
Chairman Ashley. The subcommittee will stand in recess for 10
minutes.
[A brief recess.]
Chairman Ashley. The subcommittee will come to order.
Our next witnesses will appear in a panel. The panel will be com-
posed of : Edward D. Steinman, Acting Assistant Director, Division
of Marketing Abuses, Federal Trade Commission, accompanied by
John M. Tifford, staff attorney in the land sales program; John E.
Hempel, assistant commissioner for policy and planning. Department
of Real Estate, State of California; and Gordon J. Pfersich, director,
Florida Division of Land Sales and Condominiums, Department of
Business Regulation for the State of Florida.
Gentlemen, we appreciate your being with us. We apologize that
the proceedings have not allowed us to get to you sooner. You have been
patient and we appreciate that fact.
I think we will just go in the order that I introduced you, if that is
agreeable, gentlemen. If any of you have got travel problems, we can
accommodate those.
Do you, Mr. Hempel ?
Mr. Hempel. Several hours yet, sir.
Chairman Ashley. We certainly will try to accommodate you. Why
don't we lead of with Mr. Steinman.
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STATEMENT OF EDWASB D. STEIHMAH, ACTIHO ASSI8TAIT
SIBECTOB, DIVISION OF MABKETINO ABUSES, BTTBEAir OF COI-
SXTHEB PBOTECTION, FEDEBAL TBADE COHHISSION, ACCOM-
PANIED BT JOHN M. TIFFOBD, PBOOBAM ADVISEB FOB THE
BVBEATJ'S LAND SALES ACTIVITIES
Mr. Steinman. Thank you, Mr. Chairman.
I am Edward D. Steinman, Acting Assistant Director of the Divi-
sion of Marketing Abuses of the Federal Trade Ccmimission's Bureau
of Consumer Protection.
Accompanying me today is John M. Tifford, program adviser for the
Bureau's land sales activities. We welcome the opportunity to testify
about land sales. My testimony reflects the views of the Bureau of Con-
sumer Protection, but not necessarily those of the Commission nor any
individual commissioner.
I have distributed to the subcommittee and to the public the full
text of my remarks prepared for today's hearings. I ask that this testi-
mony be inserted in the record.
At this time, I will present a brief summary of the major points of
the testimony.
Calls for amendments to the Interstate Land Sales Full Disclosure
Act come from all quarters. And Congress is taking action. This session
of Congress has seen the introduction of three different bills seeking to
amend the Act: H.R. 12574, H.R. 11265, HUD's 1978 legislative pro-
posals which include amendments to the act, and S. 2716, which ap-
pears as section 715 of S. 3084.
These bills reflect several different but not necessarily contradict
tory le^slative strategies for change. Section 715 removes certain
categories of developers from the registration requirements of the
act. H.R. 12574 proposes a number of substantive consumer protec-
tion reforms. The HUD proposals — ^generally track much of the
H.R. 12574, but omit several important substantive issues addressed
in that bill.
S. 3084 has been passed by the Senate. H.R. 12574 has not as yet
been acted upon by the House. Thus, the issue at this time is whether
to now either: one, mako limited legislative change-^hat is, remove
certain categories of developers from the rejgistration requirements
of the act wliile taking no action on substantive consumer protection
reforms; or two, make more comprehensive legislative changes which
would encompass the best features of both bills.
On April 11 of this year, we testified before the House Subcommit-
tee on Greneral Oversight and Renegotiation of this committee in
support of H.R. 10999. which bill now has been reintroduced as H.R
12574. Our testimony at that hearing, as well as our prepared testi-
mony for this hearing, describes the Bureau's reasons for supporting
H.R. 12574.
Accordingly, we will limit our comments to a brief summary of such
testimony and will direct most of our testimony to the problems we
see with section 715 of S. 3084.
H.R. 12574 contains three categories of suggested substantive re-
form : First, better enable consumers to enforce their statutory rights,
on their own, by expanding the availability and nature of such rights;
second, discourage industrj^'s use of certain imfair practices whidi
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563
harm consumers; and third, increase the statutory authority of the
Office of Interstate Land Sales Registration to regulate land sales.
Among the specific features of H.R. 12574 which we believe provide
the greatest protection for consumers are the following: It will ex-
tend the statute of limitations for consumers who widi to bring ac-
tions against land sales companies; it will broaden the t^pe of relief
available to consumers who are successful in private actions; it will
extend the cooling-off period after purchase during which consumers
may cancel their contracts without liability; it will discourage the
use of forfeiture clauses in installment contracts; it will encourage
developers to furnish consumers with legal titles to their property
promptly after purchase; it will provide for a financial mechanism
to insure that contractually promised improvements are properly
funded and will be constructed; and it will increase the quality of
OILSR's regulation by giving it better tools with which to regulate.
In sum, U.K. 12574 tackles many of the issues contributing to con-
sumer's land sales problems. The Bureau is on record as supporting
this bill with some limited modifications.
In contrast, section 715 of S. 3084 addresses none of these problems.
Its expressed purpose is to remove certain developers from the registra-
tion requirements of the act. By so doing, a major benefit which arises
from registration under the act, namely, receipt of a Federal property
report, may be lost by consimiers.
Our first concern is that purchasers from developers who are ex-
empted from the registration requirements of the act by section 715 no
longer will receive important information about the property — infor-
mation which they currently receive by means of a Federal property
report.
A minority of States have their own proi)erty report. If a Federal
property report is no longer required, then information disseminated
by the developer will be limited in many instances to sales presentations
by a salesperson and/or the developer's own advertising and promo-
tional material.
The Bureau's past experience strongly suggests that reliance on sales-
persons or advertising aoes not represent a reliable source for informa-
tion about the property ; traditionally, both have been prime sources of
deception. On the other hand, the property report furnishes objective
and important information about the property.
Its existence also tends to eliminate or at least tone down potential
misrepresentations, since many sales claims are verifiable by the prop-
erty report.
We should emphasize that our concern is not that extensive documen-
tation which accompanies registration will be eliminated. Instead, we
are uneasy about the elimination of the developer's obligation to fur-
nish necessary information needed by consumers in order to make an
informed decision. Whether this information is given to consumers in
the form of the present Federal property report, or by some other
means, there should be some requirement for developers to furnish
meaningful information to prospective purchasers. Certainly, we sup-
port any means to simplify the registration process for all developers,
especially the smaller ones.
At this time, OILSR is in the process in preparing final revisions to
regulations governing the form and content of property reports.
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One of the^oals of these revisions is to make the property reports
more useful mr consumers. We understand that emphasis is being
placed on eliminating nonessential information in the reports and
making the reports more readable for consumers.
It is ironic, then, that at the very time that the property reports are
being improved, their use may be eliminated for many persons.
We would agree that essentially local purchasers should not need
some of the information which now appears in the Federal property
reports, such as weather conditions and distances from the develop-
ment to schools and hospitals.
We also think that onsite inspection of the property eliminates the
need for descriptions of visible features of the property; for example,
soil conditions and terrain.
However, the Federal property report, as proposed in the new reg-
ulations, will cover topics such as special risks of buying land, special
notices of significant facts and the consequences to purdiasers arising
out of unusual or potentially adverse circumstances, if applicable, ana
other topics relevant to the purchase of property, such as aevelopment
obligations and the costs of purchasing the property.
This and other information to be contained in the Federal property
reports is important to purchasers. The only important information
that consumers would be assured of receiving from developers who fit
imder the registration exemption contemplated by section 715 would
be an assurance from the developer that, on the day of sale, the title
to the property was free and clear of all liens, encumbrances, and
adverse claims.
However, taking an onsite inspection tour accompanied by a skilled
salesperson or being a local resident will not compensate for the lack
of the other important information contained in the Federal property
reports.
We are also uneasy about several other features of section 715. One
feature exempts sales made to out-of-Stnte consumers residing within
a 100-mile radius of the property. We believe this radius is too big and
should be reduced to 25 miles. If this exemption is designed for cfevel-
opers selling to a local market only, then the radius should be scaled
down to make sure that only local residents are included.
The character of the land and the communities may change com-
pletely in 100 miles. Consumers residing in the outer limits of this
radius may be completely ignorant of the local conditions.
For example, a lOO-mile radius would exempt many Pocono develop-
ers for sales to New York City residents, even though the two locations
have very little in common. What assurance is there that New Yorkers
would be any more familiar with the Pocono region than a resident
from Chicago ? A shorter radius would make the exemption consistent
with the expressed rationale for its existence.
Another feature involves the requirement that the land be free and
clear of all restrictions. This requirement seems to applv only on the
day of sale. Nothing in the bill prevents the developer from immedi-
ately encumbering the land aft«r it is sold. Developers should be re-
quired to deed property promptly since, by prompt deeding, consumers
need not fear any developer's acts to encumber the property after sale.
Moreover, prompt deeding will accomplish several of the substantive
reforms proposed by H.R. 12574.
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Finally, we believe that the 5-percent exemption requirement could
become extremely complex mathematically and be difficult for develop-
ers to administer properly. Under the formula, after the initial five
exempt sales, a developer would need to keep a running tally of lots
sales to residents and nonresidents in order to know which sales qualify
under the exemption.
This mathematical numbers game should be eliminated. In its place,
we would suggest a formula such as the following: Exempt 5 lots
in a development of up to 125 lots ; exempt 10 lots in a development
containing more than 125 lots but fewer than 225 lots, and exempt 15
lots in a development containing 225 lots or more.
This formula not only would eliminate the numbers game, but would
also put a cap on a now apparently imlimited 5-percent exemption.
The 15-lot cap itself is a reasonable one.
One rationale for exemption is the fact that the cost of compliance
with OILSR's registration process imposes an unfair burden upon
small developers. We believe that developers who build developments in
excess of approximately 225 lots began to lose the character of a "small
developer."
In sum, we are sympathetic to the expressed goals of section 715.
At the same time, we wish to make sure that the proposed solutions
do not create more problems than they attempt to solve.
The time is ripe for land sales reform, not only for the purpose of
increasing consumer protection, but for the purpose of reducing im-
necessary burdens of business.
We urge that you consider the problems we see in section 715 of S.
3084 and not approve such legislation without incorporating the best
features of both section 715 and H.R. 12574.
In this way, land sales reform may be made in a comprehensive
fashion to the ultimate benefit of both consumers and businesses.
At this time, we would be pleased to answer questions. Thank you.
[Mr. Steinman's prepared statement, on behalf of the Bureau of
Consumer Protection of the Federal Trade Commission, follows:]
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STATEMENT OF EDWARD D. STEINNAN
ACTING ASSISTANT DIRECTOR, DIVISION OP MARKETING ABUSES
FEDERAL TRADE COMMISSION
BEFORE THE SUBCOMMITTEE ON HOUSING AND
COMMUNITY DEVELOPMENT OP THE COMMITTEE OP BANKINGr
FINANCE AND URBAN AFFAIRS
HOUSE OP REPRESENTATIVES
August 3, 1978
Mr. Chairman and members of the Subconnittee, I mm Bdvard D.
Steinnan, Acting Assistant Director of the Division of Marketing
Abuses of the Federal Trade Connission's Bureau of Oonsimer
Protection. Accompanying me today is John M. Tiffordr Program
Advisor for the Bureau's Land Sales activities. Wto welcoaa
the opportunity to testify about land sales. Our testiaony
reflects the views of the Bureau of Oonsimer Protection, but not
necessarily those of the Commission or any individual. Com issionar.
1^ Ihe Federal Trade Commission has had extensive experience
I::
with land sales problems over the past few years. During this
tine, the Commission has investigated more than' 35 land sales
companies, issued four formal complaints, held 2 administrative
trials, and currently is involved in a number of public and
nonpublic land sales matters. Our activities have resulted
in substantial relief to consumers. One federal court has awarded
nearly four million dollars in cash refunds to consumers and
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ordered the coapany to set aside an additional 16 Billion dollars
for use in constructing capital improveaents on its subdivisions.
In addition, the Coimission has accepted five consent agreenents
fron companies which provide, anong other things, consumer refunds,
property exchanges, extended periods to cancel contracts to
purchase land, and company agreements to construct additional
subdivision improvements or facilities. Moreover, ve have elicited
company agreements to cease and desist from a host of sales
practices, such as misrepresentations to consumers concerning
potential investment appreciation, financial security inherent
in land ownership, ease of resale and scarcity of land. Agreements
also provide that certain facts be disclosed, such as those
dealing with the absence of basic services like water and utilities,
additional costs of land ownership, and the speculative nature
of the land sales purchase. Finally, the Commission staff recently
issued a release informing consumers of millions of dollars
in potential tax savings from land contracts cancelled for nonpayment
of amounts due; most consumers are unaware of the potential
relief from this source.
At the present time, the Commission is reviewing public
comments received with respect to yet another proposed consent
agreement which it has tentatively accepted. This new consent
agreement would provide at least seven million dollars in redress
to consumers who purchased interests in land from the respondent
company.
^■^ Over the years. Commission staff has visited many subdivisions
He have seen large and small, good and bad, planned conmunities
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and barren desert. And we have spoken with countless nuabsrs
of consumers r each with his own special needs and expectations.
Some were pleased by their purchases i many were disappointed
and angry. He have met with land sales company personnely real
estate brokers, land use and planning experts, economists and
government officials on all levels — federal, state and local.
Among other matters, our investigations have uncovered
a myriad of deceptive marketing and sales practices which have
harmed consumers. He will merely list some of the major ones.
Hiese include misrepresentations about the value of the proper tyi
profit potential! lack of risk; ease of resale; extent of present
demand; company obligations to repurchase land or assist in
its resale; company commitment to develop land or construct
utilities, roads, or other improvements; extent of development!
cost to consumers to construct utilities, roads or improvements y
property exchange privileges; refund and cancellation privileges i
function and cost of property owners association; need to purchase
property immediately, and availability of other property. Other
deceptive practices include deceptive sales introductions! decep-
tive or misleading comparisons of investment appreciation of
land in general or between land and other forms of investment!
deceptive use of unilateral price increases to suggest true
market value or potential profits, and deceptive use of celebrity
endorsements.
These and other types of deceptive or unfair practices
have caused consumers to buy land because of mistaken expecta-
tions about vital aspects of the land, such as its present or
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569
future investnent value or habitability.
In view of the foregoing, it is snail wonder that great
numbers of consumers have lost money on their land sales purchases.
It has been estimated that in one year — 1971 — 650,000 recre-
ational lots were sold at an aggregate price of 5.5 billion
dollars. Many consumers who brought land in that year have
lost all or a substantial part of their investment - as have
purchasers in years before and after 1971. For some, the loss
has represented the bulk of their savings. Hiis is especially
tragic among the elderly.
While sales declined substantially during the mid-seventies,
they are once again on the upswing, according to a recent survey
of the real estate development industry conducted by the American
Land Development Association. This survey indicates that sales
9r9 increasing, prices are higher, lots are smaller but contain
more basic amenities like water, etc., and that industry members
are optimistic about the future. Against the background of
consumer problems and a revitalized industry, it is essential
that Congress take action now.
And Congress is taking action. This session of Congress has
seen the introduction of three different bills seeking to amend
the Act: H.R. 12574, introduced by Congressman Joseph R. Minish,
H.R. 11265-HUD's 1978 Legislative Proposals which include amendments
to the Act, and S. 2716 introduced by Senator Gaylord Nelson
which now appears as Section 715 of S. 3084.
These bills reflect several different but not necessarily
contradictory legislative strategies for change. Section 715 of
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S. 3084 reaoves certain categories of developers froa t&e Eegistcatlon
requirenents of the Act. H.R. 12574 proposes a nuaber of substantive
reforas. The HOD proposals - H.R. 11265 - generally track aucb
of the H.R. 12574, but onit several iaportant substantive issues
addressed in that bill. Thus, the real issue at this tiae is
not whether to aaend the Act but, rather, how to serge the various
proposals into a single coherent proposal deserving everyone's
support. We believe it can be done.
He would like to discuss the proposals set forth in both
H.R. 12574 and Section 715 of S. 3084. Wto believe that there
are elenents of both bills which should be included in any final
legislative proposal.
H.R. 12574 contains three categories of suggested substantive
refora: first, to better enable consuaers to enforce their
statutory rights, on their own, by expanding the availability
and nature of such rights; second, to discourage industry's
use of certain unfair practices irhich hara consuaers i and third*
to increase the statutory authority of the Office of Interstate
Land Sales Registration of the Departaent of Housing and Urban
Developaent to regulate land sales.
The first category involves expanding private rights. Proposed
reforas include (i) extending the statute of liaitations for
consuaers who wish to bring actions against land sales coapanies,
(ii) broadening the type of relief available to consuaers who
are successful in private actions, and (iii) extending the
tiae iaaed lately after purchase during which consuaers aay cancel
their contracts without liability, i.e. a cooling-off period.
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The present statute of liaitations is unduly short. At
present, actions for liabilities created by Section 1410(a) or
(b)(2) (which basically involve untrue statenents of naterial
fact or omission of material fact) must be brought within one
year from discovery or from when discovery should have been
made. Actions for liabilities created by Section 1410(b)(1)
(which basically involve the sale of unregistered property or
sale by fraud or misrepresentation) must be brought within
two years from discovery or from when discovery should
have been made. Finally, the maximum length of time from the
sale or lease of property within which to commence an action
is three years.
Since land purchases are frequently made sight-unseen in
an area about which the purchaser knows very little, and involve
statements whose truth can only be determined by future events,
misstatements may remain undetected for years. This often occurs
in land sales transactions where the consumer has no immediate
need for the property and thus makes no immediate effort either
to inspect the property or to learn the true facts. A typical
example is the consumer who buys land and holds it four years
after being assured that in such time his investment will double
or that utilities will be extended to his property, only to then
discover that no market exists for his property, no development
has occured, and neither event is likely to happen in the foresee-
able future.
In addition, certain developer obligations may not accrue
for several years after purchase. A consumer's suit based on
SS-718 O - 78 - 87
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a breach o£ such obligations, while possibly valid ondsr state
contract laws, aay not be able to obtain the special statutory
relief available under the Act if brought after the sxpiration
of the Act's statute of linitations period. Accordingly, a
longer statute of limitations is very auch appropriate.
Expanding the range of daaages available to consusecs in
the event of a company's violation of the Act would also be
of great benefit to consumers.
The present Act restricts the maximum civil damages obtainable
by private parties to the purchase price, the reasonable cost
of improvements, and court costs. Our experience suggests that
the present restrictions on awardable damages for consumers
has inhibited the initiation of private litigation because of
the limited potential return available to consumers, even if
successful. The court should be free to award to the successful
consumer other damages reasonably attributable to the land sales
company's breach, such as attorneys fees, specific performance,
reasonable travel expenses to and from the property and appraisal
fees, niese categories of expenses are proximately related
to the company's violation of the Act. It would seem inequitable
for consumers to be forced to bear such expenses in instances of
proven breaches or misrepresentation by the land sales company.
Reasonable attorney's fees, especially, should be a recoverable
expense by successful consumers. Prom our observations* a purchaser
with a relatively small financial investment in his property
and the prospect of incurring substantial legal expenses simply
will abandon his contract and lose his investment, rather than
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673
atteapt to MMrt bis rights. Purcluiasca also will bsvs tho
right to obtain specific porforsanca in instaneos ifbaro tho land
salas coapany fails to furnish proaissd iaprovoaonts ifbsno^ror
tho court dooms this fors of roliof to be appropriate. Spiicific
perforaance is a traditional fora of relief in real estate trans-
actions .
Pinallyr extending the tiae iaaediately after purchase for
consuaers to cancel their contracts without liability would help
to eliainate aany potential probleas later. Consuaers should
purchase land only after careful thought and consideration.
Pew people are knowledgeable enough about real estate to be
able to aake an inforaed decision without such careful consid-
eration. Unfortunately , the sales scripts we have reviewed froa
aany coapanies iapress upon salesaen the iaportance of closing
the sale when the presentation is aade, and describe techniques
to aake it appear that proapt action is required.
The current cooling-off provisions afford inadequate tiae
for review. Most consuaers siaply do not have ongoing relations
with attorneys or financial advisors which would result in con-
sultations, let alone full review of dosens of pages of aaterialt
within two days before or three days after the signing of a
land sales contract. The Ooaaission has aceepted a nuaber of
consent agreements froa land sales coapanies which provide a
10 day cooling-off period. The extended period enables a con-
suaer to review his decision outside of the pressured sales
environment. We believe that an extended cooling-off period
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574
is especially iaportant in view of today's average purchase
price of more than $13,000.
The second category of proposed change is to disoonrage
industry's use of certain unfair practices which are especially
harmful to consumers r while at the same time are not justified
by the legitimate needs of land sales companies.
One such practice is the use of forfeiture clauses in install-
ment contracts. These clauses authorise land sales companies
to keep the property and retain all monies paid by consumers
in the event of a consumer's defaultf even if the money retained
exceeds the company's actual damages. This practice results
in unjust enrichment to the land sales companies. It also tends
to "lock in" a consumer to continue payments even after be realises
the folly of his original purchase, because the later the consuser
breaches, the more he pays in and the greater his losses become.
This is particularly unfair, since those consumers who pay off a
greater percentage of their contracts before stopping are pena-
lized more than those who pay a lesser percentage of their contracts.
Another practice involves the failure of many land sales
companies to furnish the consumer with legal title to the property
promptly after purchase. On such occasions, the property remains
subject to claims by the company's creditors as long as the
company remains legal owner of the property. As a result » a
company's bankruptcy or other default after purchase but before
deeding - in some cases a period of 8 years - may prevent the
ultimate conveyance of a legal title to the consumer when be
completes payment.
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Ttie third practice involves the failure to establish for con-
sinners* benefit a financial aechanisn to ensure that contractually
promised inprovenents are properly funded and will be constructed.
At the present time, most funding plans for contracted improvements
are based upon individual corporate internal financial policies
of varying prudence. A company bankruptcy or other business
reverse could jeopardize construction of promised improvements,
if it results in insufficient cash to finance construction.
Since the construction may not be scheduled for several years,
consumers may not even be aware of the problem until it is too
late. Some states, such as Florida, have recognized this problem
and require the creation of escrow accounts to ensure funding
of promised improvements.
B. R. 12574 will discourage developers' use of either a
forfeiture clause or delayed deeding, by permitting the consumer
to rescind his contract for a period of three years after sales
consummated under such circumstances. Obviously, a rescission
period of such length is wholly unworkable for a developer.
Moreover , the Bill will mandate use of an escrow account to
guarantee funding for construction of the developers* contractually
obligated improvements. We favor the concept of a funding mechanism,
such as escrows, bonding, or any other method likely to assure
consumers that funds will be available to construct bargained
for improvements, ffhile such funding mechanisms possibly may
cause cash flow strains to some companies, they furnish important
protection to consumers.
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The third category of proposed change is to incrssss the
statutory authority of the OILSR to regulate land sales. The
Interstate Land Sales Pull Disclosure Act created OILSR and
vested it with authority to administer the Act. Since that
tiae, OILSR has been the federal organisation with specific
statutory responsibility for land sales regulation. We beliave
it should have sufficient regulatory authority and resources
to do the complete job - just as it should have the accountability
for doing the job properly. Increased regulatory authority
does not mean increasing the number of companies regulatad or
the quantity of required registration paperwork; it means increasing
the quality of regulation by giving OILSR better tools with
which to regulate. For example » land sales companies* advertising
and sales scripts should be made a part of the statement of
record. Our investigations demonstrate the heavy reliance that
consumers place on advertising and promotional material when
making purchase decisions. In factr they generally raly on
such material for information even more than they do on property
reports. Accordingly, it makes little sense for OILSR to rmview
the contents of property reports so carefully while ignoring
the statements made in advertising.
As you knowr property cannot be sold to consumers -until
a registration statement is made effective by the Secratary.
Statements are made effective when OILSR determines that the
statement of record is not inaccurate or incomplete In any material
respect. If advertising is made part of the statement of record »
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it must meet the ummm standards of accaraey at othar itaas f Had
with the stataaanty such as tha proparty raport, bafora proparty
can be sold. Ivan after the registration stataaant bacoaas
affective r it can ba subsequently suspended should the advertising
later be found to be inaccurate or incoapleta.
An additional benefit is that consuaars' private rights
against a land sales coapany will ba enhanced. One type of
potential liability to consuaers involves an oaission or ais-
stateaent in the stateaent of record. If advertising bacoaas
part of the stateaent of record, it becoaes an additional alaaant
upon which the consuaer could base a claia against a coapany.
In addition, OILSR's authority to proaulgata advertising
regulations should be clarified. 0IL8R has published advertising
guidelines, but up to now, soae have questioned 0IL8K*s authority
to proaulgate or enforce these regulations. Ihay aistakanly
claia that OILSR can register land but not regulate its sale,
and thus has no authority either to develop or enforce advertising
guidelines. Their arguaents should ba put to rest by statute.
Moreover, regulations are an effective way to describe in detail
the problems and propoaed solutions.
Purtheraore, OILSR should have authority to issue cease and
desist orders against land sales coapanias which violate tha
teras of the Act or any rules or regulations proaulgatad there-
under, or fail to coaply with tha teras of any order issued
by the Secretary, and to obtain proapt adjudications in such
caaes. We understand that OILSR has bean frustracad in attaapting
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to enforce provisions of the Act by the delay soaetiaes atten-
dant upon getting land sales companies to curtail practices
which are in violation of the Act. According to 0IL8R, its
present enforcement tools of either administrative proceedings
or injunctions are very time consuming. As a result, effective'
relief cannot be accomplished without substantial delay. Otate
and desist authority can help obtain prompt and effective relief
against violators.
Other features of H.R. 12574 should be helpful to consumers f
such as the parens patriae section and the authorisation for
a public education program.
In sum, H.R. 12574 is a consumer protection bill which
tackles many of the issues which have contributed to consumers'
land sales problems. The Bureau is on record as supporting
this bill with some limited modifications.
Section 715 of S. 3084, on the other hand, addresses none
of these problems. Its expressed purpose is to remove certain
developers from the registration requirements of the Act. By
so doing, a major benefit arising from registration under the
Act; namely, receipt of a Federal property report, may be lost
by consumers.
As we indicated earlier in our testimony, many conmusers
have bought land on the basis of mistaken expectations about
vital aspects of the land, such as its present or future investaent
value or habitability. These expectations often are generated
by false or misleading claims. An effective means of combatting
such claims is through the required dissementation, by developers.
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of accurate and relevant infornation about the land. The Interstate
Land Sales Full Disclosure Act requires that developers covered
by the Act furnish a Federal property report to purchasers at
or before the tine of sale. A minority of states require a
state report.
If a Federal property report is no longer required r then
information disseminated by the developer will be limited to
sales presentations by a salesman and/or the developer's own
advertising and promotional material. The Bureau's past experience
strongly suggests that neither method represents a reliable
source for information about the property; traditionally r both
have been prime sources of deception. On the other hand, the
property report furnishes objective and important information
about the property. Its existence also tends to eliminate or
at least tone down potential misrepresentation since many sales
claims are verifiable by the property report.
OILSR has published its latest revisions to regulations
governing the form and content of property reports. Gne of
the goals of these revisions is to make the property reports
more useful for consumers. He understand that emphasis is being
placed on eliminating nonessential information in the report
and making the report more readable for consumers. It is ironic »
then, that at the very time that the property report is being
improved, its use may be eliminated for many people.
We would agree that essentially local purchasers should
not need some of the information which now appears in the Federal
property report, like weather conditions and distances from
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the development to schools* hospitals etc. We also think that
an on-site inspection of the property eliainates the need for
descriptions of soil conditions r terrain, etc. Hovevec , the
Federal property report » as proposed in the new regulations,
will cover topics such as special risks of buying land, special
notices of significant facts and the consequences to purchasers
arising out of unusual or potentially adverse circuastances,
if applicable, such as the absence of financial arrangeaents
to assure the completion of facilities, sufficiency of water,
absence of developers* responsibility to provide roads, water,
electricity or sewage disposal, lack of local required permits
or licenses to construct improvements, litigation against the
developer which may reflect on its ability to perform, and any
developer financial difficulty. The Federal property reports
also will furnish a summary of costs to consumers. This sum-
mary will include one time charges like the purchase price,
plus water, sewer, electric, and telephone tap in fees. It
also will include recurring charges like taxes, dues and
assessments to local property otmer associations, recreational
facilities fees, garbage and trash collection, etc. Tliis, and
other information to be contained in the Federal property
reports, is important to purchasers. Otie only important infor-
mation that consumers would obtain under Section 715 of 8. 3084
would be an assurance from the developer that, on the day of
sale, the title to the property was free and clear of all liens,
encumbrances and adverse claims. However, taking an on-site
inspection tour accompanied by a skilled salesperson, or being
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a local rasidant, will not coapansata for tha lack of tha othar
iaportant inforaation containad in tha Padaral proparty raport.
We ara not lockad-in to continuad usa of tha praaant FadaraX
proparty raport foraat for aaall frSBentially intrastata davaljbpars*
Instead, wa are uneasy about tha possible aliaination of « vahiela
which furnishes inforaation needed by consumers in or4^r to sake
an inforaed decision. Certain inforaation is nead^ regardless
of the size of the developaent or the geographi.^ area in which
the property is aarketad. Whether this information is given to
consuaers in the fora of the present Pad.iiral property report,
or by soae other aeans, there should Ibe soae requireaent for
developers to furnish aeaningful inforaation to prospective
purchasers. Certainly, we support any aeans to siaplify the
registration process fOr all developers, especially tha sa^Utr
ones.
We also ara uneasy about several othar Caatures of Section
715 of s. )M4. One feature exeapts salaa ftada to out-of-state
consuaecs residing within a 100 aile r«dl«s of the pt'opie^ty.
We believe this radius is too big and should be reduced tb 25
ailes. If this exeaption is designed for devtilepars selling
to a local aarket only, then the tftdius Should be scaled to
make sure that only local residents ara included, the character
of the land and the coaaunities aay change coapletely in 100
Biles. Consuaers residing in the outer liaits of this radius
aay be conpletely ignorant of the local conditions. For asaapla,
a 100 aile radius would qualify aany Pooono developers for sales
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to Mew York City residents, even though the tiro locations hwre
^*'« little in cownon. What assurance is there that Mew Yorkers
^°"^^ ^ any more faailiar with the Pocono region than a resident
from Chic.^^ ^ shorter radius would make the exeaption conaistant
with the MP^^^j rationale for its existence.
Another feaw^^ involves the requirement that the land ba
free and clear of ai restrictions. This requirement seams to
apply only on the day o^^^^^^ Mothing in the bill prevents
the developer from immediate ^ encumbering the land after it
is sold, rtie bill should requ^^ developers to deed property
promptly which is sold under this ^emption, since, by prompt
deeding, consumers need not fear any Sveloper's acts to encum-
ber the property after sale. Moreover, Kompt deeding will
accomplish several of the substantive reform, proposed by B.R.
12574.
Finally, we believe that the five percent exehi^tion require-
ment could become extremely complex mathematically and be diffi-
cult for developers to administer properly. Ohder the formula ,
after the initial five exempt sales, a developer would need to
keep a running tally of lots sales to residents, to out-of-state
purchasers residing within a 100 mile radius, and to other out-
of-state residents, in order to know which sales qualify under
the exemption. This mathematical numbers game should be elimi-
nated. In its place, we would suggest a formula such at the
following: exempt five lots in a development of up to 125 lots i
exempt 10 lots in a development containing more than 125 lots
but fewer than 225 lots; and exempt 15 lots in a development
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containing 225 lots or aore. This formula not only would
eliminate the numbers game, but would also ^ut
