Page images

associations and professional men who have standards and enforce them.

Mr. EMLEN. Many realtors have actively participated in working toward effective legislation remedies to the problem of interstate land sales. In 1962, for example, our license law committee drafted a suggested model law for control by the States of sales of subdivisions located within our borders, and we have worked in close cooperation with the National Association of License Law Officials on the subject. Our California and New Mexico State associations, among others, have sponsored and worked for enactment of effective laws in their States.

We have also worked closely with the Commission on Uniform State Laws and, in 1965, prepared a draft of a proposed Uniform State Control Act for submission to that body. We have held a number of meetings with that group, which will meet in August to adopt a final version for recommendation to State legislatures.

Senator MONDALE. What do you propose at the State level to meet this problem?

Mr. EMLEN. We have 16 or 17 State statutes in this area now, I believe. Are you talking about this uniform State control

Senator MONDALE. I gather you are working on a proposed uniform law. What does this embody?

Mr. EMLEN. It would bě similar to the New Mexico, California, New York statutes.

Mr. WILLIAMSON. It is really a tough disclosure statute. I think it is not a perfect answer to the problem, but they all involve strict disclosure requirements of land sold within the States.

Senator MONDALE. Does it require a prospectus to be provided to the customer before there is a valid agreement ?

Mr. WILLIAMSON. Yes, disclosure of information very similar to the California prospectus that is required.

Mr. EMLEN. Of course, hopefully, when we get this model law in complete form this August, we can induce the other States to have them come along.

Mr. WILLIAMSON. It isn't the perfect answer. All of the State laws have certain shortcomings and these shortcomings have been presented to this committee.

Senator MONDALE. Of course, you always have the problem with any State law of reaching interstate sales. It is a jurisdictional problem of the State, particularly use of the mails and phone.

Mr. WILLIAMSON. I think in Mr. Emlen's testimony we have what we think might be the answer to that.

Mr. EMLEN. At the Federal level, we have studied a number of proposed remedies to this problem

including the amendment of the civil postal fraud statute, 39 U.S.C. 4005, to eliminate the requirement that the Post Office Department prove actual intent to defraud as a prerequisite to the issuance of a fraud order.

We testified on the House side earlier this month in favor of legislation which would accomplish that purpose, and commend the chairman of this subcommittee for his sponsorship of a similar Senate bill, S. 1364.

As the chairman is well aware, we have also devoted considerable time to the study of the proposal embodied in S. 2672. We have


concluded, however, that the most effective remedy to the problem lies with the States and with the Federal agencies which are now operating in the area of fraudulent and deceptive practices in interstate commerce.

The provisions of this bill, in our view, are much more drastic than the problem warrants. The heart of the matter is, after all, the sight-unseen purchase of land involving the prospective purchasers who live hundreds or even thousands of miles from the project. This represents a minute fraction of homesite sales. Yet S. 2672 would cover every developer who intends to market 25 or more undeveloped lots, whether he intends to engage in sight-unseen promotions or not.

In other words, the bill is designed to meet problems encountered by a particular method of sale of the subject regulated rather than by any inherent characteristic of the subject itself.

Senator MONDALE. If the bill were limited to the sight-unseen problem, would you have any objection to it?

Mr. Emlen. I am particularly glad you have asked this, because one of my complaints in our own association has been that I think that the bill suffers a lack of proper definition and I don't see why all of the collective brains on your side and ours can't think of a better word than subdivision.

Senator MONDALE. I am not on any side. I am serving the public.

Mr. EMLEN. I mean on the legislative or trade association part. I think the word subdivision is such a broad definition, and yet we all know we are talking about one certain kind of subdivision.

Senator MONDALE. We are trying to get at the Golden Palms problem, where they obviously didn't sell the local community because everybody there knew better than to buy. It was an outrageous promotion and the basis of the pitch had to be to deal with the uninformed at some remote point.

Mr. EMLEN. Yes, sir.

Senator MONDALE. And it is to those purchasers we want to be sure that the full information, the bad as well as the good, is provided and the facts are there.

Mr. EMLEN. But the subdivider with 26 lots in Fairfax County is caught in this even though he has no intention of getting into interstate sales. This is where I saySenator MONDALE. Do you have some proposed language? Mr. EMLEN. No, sir, this was an observation.

Senator MONDALE. If we can meet this problem, do you think the association could support this measure?

Mr. EMLEN. I think that, of course, our official position and the one I am instructed to represent is that we oppose this bill in this form. I think, as I will disclose later as I go along, we feel that this is too drastic an action and that the postal remedy would be better at this time. And if, after 2 years of operation under that it wouldn't work, we would like to reconsider.

Senator MONDALE. Is it your position, then, that we should improve the exemptions, so that it does not apply to anything other than the sight-unseen problem we are trying to define, but even if we do im. prove it, you are still against it?

Mr. EMLEN. I couldn't speak for the association, obviously, without its ratification, but I think I would like to say this as chairman of this legislative committee, when this thing was brought up, the objection from our 70-man legislative committee wasn't to not punish these bad promoters. None of our men in our committee has even a remote connection with this kind of thing, but we do have maybe 25 or 30 or 40 men on that committee who were developers and who would fall under this statute as it is presently proposed and, of course, they raised their hands in alarm.

Senator MONDALE. Aren't the responsible real estate promoters concerned about this problem, not only in terms of the fact that as ethical men they are concerned about the fraud or misrepresentation or failure to affirmatively state the good and bad, but also this is sort of unfair competition? It permits the unethical to profit.

If the consumer is uninformed and presented with two sales promotions and one from responsible businessmen telling the truth about a decent lot that, say, costs $1,000 and then by one of these fly-by-night operators, proposing a fantastic scheme but not telling them bad facts, that is not fair competition to the ethical realtor.

Mr. EMLEN. They are terribly concerned and they feel very strongly, but they don't want to be cast in the same mold.

Mr. WILLIAMSON. Senator, if a bill could be devised that would just be directed to the unseen purchaser, we might be for it, but I can't imagine such a provision appearing in legislation involving the SEC registration that would be limited only to cases where the purchasers do not see the property. I just—that is why we never considered

Senator MONDALE. Would you be willing to try your hand at an amendment that might deal

Mr. WILLIAMSON. I have had some experience with SEC and I can't see how the registration statement would be worded. It would just be as though you had a tombstone ad on the financial page that only those who do not propose to see the property write for a prospectus. I just don't think it would work. If it did work, I think our attitude would be changed, but our opposition is based on the fact that all of the sellers of lots are going to be blanketed in under SEC registration.

Senator MONDALE. How do you solve this problem at the State level where you propose a uniform law?

Mr. WILLIAMSON. At the State level, we need rigid disclosure requirement of people who have subdivisions within the States. It is not the perfect answer. We know that the problem of the man in Florida who sells a lot situated in Arizona to a couple in New Jersey is

. not met by any State law, but we think that

Seantor MONDALE. In other words, this proposed uniform law would not deal

Mr. WILLIAMSON. It still would not be the perfect answer, but in conjunction with the strict State laws and a change in the postal fraud statutes, we would like to see the combination of those two have a chance to operate. In fact, I think the postal fraud statutes would have prevented much of the fraudulent sales that went on in Arizona, New Mexico, and Florida, because these brochures contained material misrepresentations of fact, but the postal authorities have to prove intent to defraud, and this is very difficult, and by the time they establish intent, the damage is done.

Senator MONDALE. Fraud requires—if you don't mind, let's set the question of the actual intent problem aside for a moment and go back to that. Do you want to continue?

Mr. EMLEN. Corporate securities actually represent “sight-unseen" assets, and the Securities Act of 1933 is designed to cover all securities issues for the protection of the investor.

There is no other feasible way the investor can ascertain the facts he needs to know in reaching his decision to purchase an individual share in a particular business. The distance between the prospective investors and the situs of the corporation is not a material factor in the investor's access to information.

In real estate this same rationale does not apply, assuming that we are talking about the lease or purchase of an individual parcel or lot. In this type of transaction the buyer has available to him, through visual inspection and public records, the facts he needs to know for his protection.

I think it would be safe to say that if substantially all the sales of undeveloped land had been made in person at the site of the development, this bill would not be before us today.

Our point is that if we are seeking to protect the buyer who lives at some distance from the development, there is no reason to enact legislation which would, as I stated earlier, apply to a vast number of persons whose operations are not geared to "sight-unseen” sales.

The principal exceptions to the bill's coverage are based on number of lots and use of the instrumentalities of interstate commerce. These exemptions bear little relation to the problem of "sight-unseen” sales.

A developer in Fairfax County, for example, might be involved in a project of more than 25 lots of undeveloped land. He may have no intention of soliciting purchases from persons who have not inspected the property, but if he advertises in a Washington daily newspaper he would be subject to the provisions of S. 2672.

We have over the past several years developed considerable familiarity with the operations of the SEC, and in 1963 supported amendments to the Securities Exchange Act of 1934 designed to increase the effectiveness of the Commission in the field of real estate securities. Again, this was for the protection of purchasers of securities, not for purchasers or lessees of land.

The SEC registration process is expensive. For a small subdivider it might result in an increase of $500 in the price of home sites designed for middle income families. In addition, we fear that in complying with this legislation the SEC would be injecting itself into appraisals, market analysis, and a host of other factors in order to justify the implied endorsement of the registration statement.

The 1964 Senate hearings on interstate mail order land sales developed an excellent record of the strengths and weaknesses of enforcement of subdivision sales laws at the State level. It was clear that the States have no jurisdictional problems with respect to inState subdivisions, or with advertisement and other sales activities within the State for out-of-State lands.

The key problem, as stated by a number of witnesses, is the lack of jurisdiction over mail which enters the State, promoting out-ofState land and issued by an out-of-State developer. It is precisely this kind of sales activity which we believe to be the proper concern of the Federal Government, and which is not precisely defined in the bill.

As I stated earlier, we support legislation to remove certain impediments to the enforcement of the civil fraud statutes relating to fraudulent use of the mails. Postal officials have testified at several hearings as to the increased effectiveness in enforcement of the fraud statute which would result from the removal of the requirement of proof of actual intent to defraud.

Establishment of the truth or falsity of facts relating to the physical characteristics of subdivisions, or the location of nearby facilities, is a relatively simple matter in many cases, and we have no doubt that unscrupulous promoters would hesitate to misrepresent such facts if they knew the Post Office Department could secure a restraining order on their incoming mail if visual examination of the subdivision by a postal inspector revealed that statements in their promotional material were false of misleading.

While this type of enforcement is "after the fact” we believe that the enactment of S. 1364 would cut down the timelag in enforcement but, more importantly, would dampen the promotional zeal of the "sight-unseen” operator.

We recommend that the subcommittee reject S. 2672 in the hope that utilization of other and less drastic methods will resolve the grave problem of fraudulent sale of land in interstate commerce.

Thank you.

Senator MONDALE. I think that there is much merit in S. 1364, but I am not persuaded that it is an alternative to S. 2672. First of all, it is an administrative statute, it is not a criminal statute. Secondly, it deals with the problem of restraining actual fraud, affirmative misrepresentation of a material fact upon which a person relies to his detriment. Every word in that formula must be met.

As amended, it does not require intent to defraud, but it does require proof of those elements. And it is after the fact. What about the problem of misinformation, which is not fraudulent, what about the problem of not providing information about the detrimental aspects, the basic information which the consumer must have to make a rational choice?

We recently passed truth in packaging, not because we thought there was fraud involved, but because we thought the consumer was denied the information she needed to make a rational choice. I think the same problem exists in real estate sales and there is a “no man's land” between criminal fraud and rational information that we are trying to deal with here, and a crafty promoter, an unethical promoter can, if he is creative enough, do almost as much without violating fraud statute as he does by violating a fraud statute, just by failing to inform or by leaving an impression that is misleading. What some of us who sponsor this measure want to do is to be sure the consumer is supplied by law with the facts that require a rational choice.

This is exactly what the ethical rules of your association require, I think, that most members of your association realize that they should, they must, and it is the wise business thing to do to be fair and decent and tell the bad as well as the good factors.

« PreviousContinue »