INTERSTATE LAND SALES FULL DISCLOSURE ACT

TUESDAY, JANUARY 17, 1978

U.S. SENATE,

SELECT COMMITTEE ON SMALL BUSINESS,

Washington, D.C.

The committee met, pursuant to recess, at 10 a.m., in room 424, Russell Senate Office Building, Hon. Gaylord Nelson, chairman, presiding.

Present: Senator Nelson.

Also present: Sherman Stock, legal counsel to Senator Nelson; and William R. Buechner, staff economist, Senate Small Business Committee.

Senator NELSON. We will resume our hearings this morning on the Interstate Land Sales Full Disclosure Act. Our witness today is Patricia Worthy, Administrator of the Office of Interstate Land Sales Registration, who is accompanied by two other officials of HUD. We are pleased to have you here this morning. Would each of you identify yourself so the reporter can keep the record correct?

STATEMENT OF PATRICIA M. WORTHY, ADMINISTRATOR, OFFICE OF INTERSTATE LAND SALES REGISTRATION, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY ALAN J. KAPPELER, ASSOCIATE ADMINISTRATOR, OILSR; AND PETER S. RACE, ATTORNEY, OFFICE OF GENERAL COUNSEL, HUD MS. WORTHY. I am Patricia M. Worthy, Administrator of the Interstate Land Sales Registration Office.

With me is Alan J. Kappeler, Associate Administrator for OILSR; and Peter S. Race, an attorney with the HUD Office of General Counsel.

Senator NELSON. Your statement will be printed in full in the record. You can present it however you desire.

MS. WORTHY. Thank you very much.

From time to time, charges have been made from various quarters of the land sales industry that HUD's enforcement of the Land Sales Act has been overzealous.

HUD's effectiveness in performing its mission can only be damaged by misunderstandings between it and the industry or the Congress. Secretary Harris has asked me, along with Mr. Kappeler, to appear before this committee and clarify those aspects of our administration of the act that have given rise to these criticisms.

From testimony taken by this committee earlier, it is apparent that a number of groups and individuals believe that HUD seeks to exercise jurisdiction beyond the bounds originally envisioned by Congress, specifically with regard to what constitutes interstate commerce and a subdivision, within the meaning of the act.

Let me state at the outset that the new administration of the Department of Housing and Urban Development is taking steps to simplify the registration procedure to make compliance for both large and small developers easier and less costly. Changes are underway to eliminate needless repetition of disclosure in the property report and the rest of the statement of record. Developers will be required to answer only those questions in the property report that pertain to their particular subdivision and that will be of interest to a prospective purchaser. The thresholds triggering audit requirements for financial statements are being raised, and financial statements will no longer be required to be attached to property reports when they are delivered to purchasers. A substantial effort has been made to eliminate superfluous documentation from the statement of record. Among the documents we are considering eliminating from the old requirements are: Copies of State property reports and registration statements; diagrams of cross sections of streets and curbs; financial statements or pro forma financial statements for nonpublicly regulated water suppliers, suppliers of sewage treatment service, and property owners' associations; construction contracts for water systems; rate schedules for nonpublicly regulated electricity suppliers; articles of incorporation and bylaws for nonpublicly regulated telephone service suppliers; copies of construction contracts, bond or escrow agreements for installation of telephone service facilities, and information regarding television service. However, the main purpose of our visit is to discuss jurisdiction, not specific disclosure requirements.

Judicial precedent is the single most overriding influence upon HUD's interpretation of the act in jurisdictional matters. The question of what constitutes means or instruments of transportation or communication in interstate commerce is not unique to considerations of jurisdiction under the Interstate Land Sales Full Disclosure Act. When the act became effective in 1969, an extensive body of case law relating to interstate commerce already existed. The Office of Interstate Land Sales Registration relied upon those precedents which issued from securities and exchange cases, since the Securities and Exchange Act served as a model for the Land Sales Act. These securities cases produced a consistently broad judicial interpretation of "interstate commerce and use of the mails." HUD's adoption of similar interpretations when challenged by the industry has been upheld by the courts, confirming our view that HUD's position is correct.

We also have looked to the legislative history of the act for guidance in jurisdictional questions. One quote from the legislative hearings stands out in clarifying whether Congress intended a broad or narrow interpretation of "interstate commerce." Senator William Fulbright (D., Ark.) acknowledged the broad scope of the act when he said, "It would be difficult to imagine any developer being able to conduct sales without coming under the act, through the use of the mails or under current interpretations of interstate commerce" (114 Cong. Rec. 15270, May 28, 1968).

Senator NELSON. Have you read Senator Fulbright's speech which was given on the floor of the Senate and from which this quote was taken? Not the full speech.

MS. WORTHY. No; I have not.

[The information referred to follows:]

[From the Congressional Record, May 28, 1968, pp. S. 15270-71]

Mr. FULBRIGHT. Mr. President, I send to the desk an amendment and ask that it be stated.

The PRESIDING OFFICER. The amendment will be stated.

The bill clerk read the amendment, as follows:

"On page 261, after line 18, insert the following:

"(10) The sale or lease of real estate which is free and clear of all liens, encumbrances and adverse claims if each and every purchaser or his or her spouse has personally inspected the lot which he purchases and if the developer executes a written affirmation to that effect to be made a matter of record in accordance with rules and regulations of the Secretary.'"

Mr. FULBRIGHT. Mr. President, I have discussed this amendment with the Senator from New Jersey, the Senator from Texas, and the Senator from Alabama. It relates to the interstate sale of lands in title XIII. It simply exempts those sales in which a company sells land only after onsite inspection and makes a statement with regard to the title.

Mr. President, I thinks this is a legitimate and proper exemption because with respect to these companies in my State that are developing land in recreation areas and around lakes--many of them are large but most of them are small-it would be a great burden for them to have to file with HUD. Many of them have been operating a long time and there has never been a case of fraud and never a rescission. If there had been I think I would have heard of it. There has never been a deception in the sales in Arkansas. The conditions that give rise to this language have been concentrated in three or four States and I see no necessity for everybody coming to Washington and filing elaborate statements when there is no justification for it.

Title XIII of the omnibus housing bill sets up a system to require "full disclosure" in the sale of land in interstate commerce or through the mails.

The proposal is acknowledged to be a vast improvement over the original bill, S. 275, which would have applied the Securities Act of 1933 almost literally to interstate land sales.

However, the bill is still an adaptation of the Securities Act to these sales, even though it would be administered by the Department of Housing and Urban Development and even though there is recognition of the differences between sales of land and sales of securities.

Thus, a developer would be required to file with HUD, in great detail, a statement of record. The information required for such a statement is described on pages 113 and 114 of the committee report.

Developers are prohibited from selling land in interstate commerce and through the mails until the statement of record is effective and procedures are set forth for amendmnets, stop orders, investigations by the Secretary, and so forth.

The title requires that a property report containing any information in the statement of record that the Secretary deems necessary must be given to the purchaser. The title provides that a purchaser may void a contract if he were not given a copy of the property report before or at the time of his signing and that where a purchaser receives the property report within 48 hours of his signing the contract, he may revoke it within 48 hours. However, this latter provision does not apply in the case of a purchaser who first, has read the report and inspected the lot in advance of signing; and second, acknowledges such by his signature.

Civil and criminal liabilities are provided comparable to those of the Securities Act.

The title will apply in any case where a developer has 50 or more undeveloped lots for sale and makes use of the facilities of interstate commerce and the mails. It would be difficult to imagine any developer being able to conduct sales without coming under the act, through the use of the mails or under the current interpretation of interstate commerce. It is true that the Secretary, under the bill, has authority to exempt subdivisions or lots within a subdivision from any of the provisions of the act, if he finds that coverage is not necessary to the public interest and for protection of purchasers due to the small amount involved or the limited character of the offering.

The committee in its report, states:

"It expects the Secretary to utilize the discretion given him to exempt sales of lots in subdivisions which would technically be covered but which are intrastate or almost entirely intrastate and mainly coincidental. Such a situation could arise, for example, where a few out-of-state purchases buy lots in a subdivision which is only being offered for sale within the State of the land's location or in nearby communities." (Page 111, committee report.)

I suggest that this is the most general sort of directive to the Secretary and it is by no means clear how he will use this authority, or in fact, whether under the bill he can use it to exempt completely any developer offering for sale 50 or more lots. At any rate a developer will have to hire a lawyer to determine whether or not he is under the act, or to obtain an exemption. Does a developer have to refrain from offering to an out-of-State purchaser? What if a developer in west Memphis advertises in Memphis? Or even merely sells to Tennessee residents?

It is my opinion that there are probably hundreds of developers in the State of Arkansas alone who would be covered by this legislation and who do not have the slightest notion that it is about to be foisted upon them by a Federal Government concerned with protecting a relatively few purchasers from a very few unscrupulous promoters. Unscrupulous promoters can be prosecuted, and many already have, under the mail fraud statutes and their false and deceptive practices can be enojoned under the Federal Trade Commission Act.

The burdens of this legislation fall equally on the good as well as the bad operators and this is what inevitably happens when government seeks to single out an industry and subject it to a kind of prophylactic method of regulation, instead of defining and punishing certain illegal acts.

The Securities Act was passed soon after the 1929 crash and in the beginning of the great depression, when the whole industry was shot through with corruption and widespread speculation had disastrous effect upon the economy Admittedly there have been some sharp practices and fraud in the interstate sale of land, most of which are now or can be covered by the mail fraud statutes and FTC regulation. There is certainly no crisis which would justify putting real estate in the same straitjacket as the securities industry.

In the State of Arkansas, particularly in the mountainous areas, there is a rapidly growing market for vacation and retirement homes. Around Greer's Ferry Lake, Norfolk and Bull Shoals Lakes, Beaver Lake, and other lakes near the Missouri border, along the Arkansas River Valley area and in the Ouichita Mountain areas, I am sure, there are hundreds of landowners now offering the many as 50 or more lots. Futhermore, I expect that near almost every city there are farmers or other landowners in suburban areas and even on the edges of small towns who are offering 50 or more lots for sale in interstate commerce or by use of the mails, as those terms are currently defined. All of these are subject to the bill, unless they can be exempted under the Secretary's limited discretion, or unless they can devise some means of avoiding completely the use of the mails or the facilities of interstate commerce.

I question the premise that these people should be subject to the expense and burden of the filing and other requirements, merely because a few unscrupulous promoters have cheated customers.

The cure for these relatively few sharp practices may be worse than the disease. At a minimum it seems to me that there should be an exemption from the act for those developers who, whether or not they use the mails or the facilities of interstate commerce, make it a practice to sell only "onsite." This is the traditional method of selling real estate and it is hard to see how a purchaser would not have an opportunity to know what he is buying if he has inspected the lot himself. It is true, of course, that he would not know all the details of title, encumbrances, and so forth, merely by inspection, but civil and criminal provisions of State laws dealing with real estate transactions have been considered adequate. They apparently are still considered adequate for practically every form of sales except those of undeveloped land. There is no such proposal, for example, to deal with sales of new or used cars or, in fact, homes. Yet I daresay the opportunities for misrepresentation, fraud, and unscrupulous promotion are more prevalent in these areas than in interstate land sales. And their impact on the economy is greater.

The act contains a number of exemptions in section 1303 (a), pages 1 through 9, on pages 260 and 261 of the bill.

My amendment proposes a further exemption as follows:

"On page 261, after line 18, insert the following:

"(10) The sale or lease of real estate which is free and clear of all liens, encumbrances and adverse claims if each and every purchaser or his or her spouse has personally inspected the lot which he purchases and if the developer executes a written affirmation to that effect to be made a matter of record in accordance with rules and regulations of the Secretary.'"

This exemption will not, in itself, properly define those persons who operate truly interstate, but it is at least simple and easily understood. And it can provide a method by which one who is not truly an interstate promoter can avoid needless and burdensome requirements.

Those few interstate developers who would sell "onsite" would also be exempt, it is true, but the purchasers would have inspected the property and its surroundings and would still have the additional protection of the laws against fraud and deceptive practices.

Senator NELSON. I think your Agency ought to read it, and I think you will agree with me when you do, that this will be the last time you will quote Senator Fulbright on this subject.

Senator Fulbright's argument is against the quote that you excerpt here.

Three years ago, HUD gave us this quote, as an argument in favor of HUD's interpretation of legislative intent. The speech repudiates everything HUD has been saying about its broad jurisdictional mandate.

He raised an alarm on the floor. The legislative interpretation of his full speech is that you ought to narrow down your jurisdiction. Now, what puzzles me about HUD and the Administration, the people using this have not read the speech, or have read it and intend to mislead the Congress, me, and the public in using it.

Now, let me read excerpts from what Mr. Fulbright was saying, so you will see that you had better read the speech and quit using the quote.

This speech was given in connection with an amendment he offered, which was adopted to exempt real estate people who sell only after an onsite inspection.

First, let me read what the committee said in its report. I am sure you understand, it is a very compelling and important document in terms of interpreting the intent of Congress.

"TITLE XIII-INTERSTATE LAND SALES

"This title, which may be cited as the "Interstate Land Sales Full Disclosure Act," would give to the Secretary of Housing and Urban Development the authority to require full disclosure in the sale or lease of certain undeveloped land in interstate commerce or through the mails. The necessity for this legislation was made very apparent during hearings held by the Special Committee on Aging in 1964 and by the Securities Subcommittee of this committee in 1966 and 1967.

"Evidence of abuse in the sale of undeveloped land by promoters was presented at the hearings. For example, many people, including our Nation's senior citizens, have purchased property in response to false and misleading promises regarding the nature of the land and the type of community in which it would be located. As a result, they have suffered financial losses, which in many instances amounted to their entire life savings. The Post Office Department has reported that between 1962 and 1966 such losses totaled more than $50 million.

"The sale of undeveloped subdivided land in resort and retirement areas has become a major business. Naturally, it has attracted some get rich quick promoters who make glowing promises of fully developed "dream communities." There have been far too many cases where all of the pertinent information is not disclosed, such as, the availability of convenient access and utilities.