KB Home to Pay $2 Million Penalty for Alleged Violations of FTC Order

Under the terms of a stipulation and modified consent decree approved by the Federal Trade Commission and submitted in federal court by the U.S. Department of Justice (DOJ), KB Home, a California-based homebuilder formerly known as Kaufman and Broad, Inc., will pay a $2 million civil penalty to settle charges that it violated the terms of a 1979 consent order with the Commission. The modified consent decree also bars KB Home from violating the terms of the original order in the future, and requires the company to modify existing home repair warranties to comply with the consent order and extend for one year certain homeowners’ two-year warranty coverage for major home components. The FTC also has issued a new publication for consumers to help them understand the issue of home warranties.

Case Background

This case concerns a 1979 FTC consent order against KB Home that, among other things, required it to make timely warranty repairs and to furnish home purchasers with a warranty that is “substantially identical” to the Home Owners Warranty Corporation warranty. Under the consent order, warranties must provide for mandatory arbitration of warranty repair disputes that is binding upon KB Home, but is not binding on homeowners. In addition, the warranties must provide for arbitration for which no fee or deposit is required of homeowners. In 1991, the DOJ filed a complaint in U.S. District Court alleging that KB Home had violated several provisions of the 1979 order related in part to the timing and quality of warranty repairs. Ultimately, the court entered a consent decree under which KB Home paid a civil penalty of $595,000 and stipulated to a permanent injunction requiring it to comply with the 1979 order. The action approved by the Commission alleges that KB Home violated specific terms of the original order, as detailed below.

The Alleged Violations

The stipulation and decree submitted today resolve allegations that KB Home violated Part III.B of the FTC’s order by furnishing new home buyers with a warranty: 1) providing for arbitration of warranty disputes that is binding on homeowners; and 2) requiring homeowners to pay fees and costs to initiate and conduct such dispute arbitration. KB Home also allegedly violated Part III.B by furnishing new home purchasers with purchase agreements that required binding arbitration of warranty disputes.

According to the Commission’s amicus brief filed earlier in private litigation involving KB Home, the company knowingly violated the consent order’s provisions. Despite having sought and received a staff advisory opinion in 1995 that explained to do so would violate the 1979 order, KB Home nonetheless provided homeowners with warranties that provided for mandatory binding arbitration of warranty disputes. In addition, the amicus brief contended that KB Home violated commitments to the FTC staff that it would not seek to enforce its binding warranty arbitration provisions while the staff was investigating its conduct. The amicus brief and the press release announcing its filing are available from the FTC’s Web site at http://www.ftc.gov/opa/2003/08/fyi0350.htm.

The Modified Decree

The modified consent decree, which replaces the consent decree entered in 1991, resolves the Commission’s allegations that KB Home violated the prior order. It enjoins KB Home from violating the 1979 consent order and requires KB Home to: 1) modify the dispute resolution provisions of existing warranties to comply with the 1979 order; 2) comply with the warranties as so modified; 3) extend for one year the two-year warranty coverage for major home components for homeowners whose homes were delivered during 2002 through 2004; and 4) reimburse homeowners for fees they had to pay to arbitrate warranty disputes in alleged violation of Part III.B of the order. In addition, the decree will require KB Home to pay a civil penalty of $2 million to settle the Commission’s charges that it violated the order.

Finally, the modified decree contains terms requiring KB Home to distribute the order to certain company personnel, as well as to keep relevant records and provide them to the Commission to ensure its compliance with the order’s terms.

The Commission vote approving the stipulation and modified consent decree and authorizing transmission to the DOJ for filing was 5-0. DOJ submitted the modified consent decree in the U.S. District Court for the Southern District of California on August 3, 2005.

Consumer Education on Home Warranties

The FTC also has issued a new “Facts for Consumers” educational piece on the subject of home warranties that provides consumers with useful information on this subject. Consumers can obtain copies of the piece by contacting the Consumer Response Center at the number below, or on the FTC ’s Web site at: http://www.ftc.gov/bcp/conline/pubs/homes/homewarranty.htm.

Copies of the stipulation and modified consent decree are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish (bilingual counselors are available to take complaints), or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC Docket No. C-2954; Civ. No. 91-0872K)