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Homebuilders Stack Deck Against Buyers With Arbitration

New report shines light on unscrupulous practices

By Martin H. Bosworth
ConsumerAffairs.com

July 8, 2009

That's the premise of "Home Court Advantage," a new report released by Public Citizen that explores the homebuilding industry's usage of private arbitration to avoid responsibility for structural defects and flaws in their products--often violating state consumer protection laws on many fronts.

"The arbitration companies know that their futures depend on keeping the people who hire them happy, and that means the builders and warranty companies," said David Arkush, the director of Public Citizen's Congress Watch division. "As a result, the system is stacked against the consumer."

The 69-page report combines testimony from aggrieved homeowners and its own investigative research to paint a picture of a business where arbitrators are literally adjuncts of the homebuilding industry, and how homeowner warranties often fail to disclose the restrictions arbitration places upon the buyer until it's too late. Among the report's findings:

• Construction arbitration firms were either created by or with the help of major homebuilder associations, causing an immediate conflict of interest. The American Arbitration Association (AAA), for example, advertises openly that its rules were "developed in conjunction with the National Construction Dispute Resolution Committee, made up of representatives of industry organizations."

• Homebuilders force arbitration contracts on buyers in violation of Federal Trade Commission (FTC) orders banning the practice. The report documented the ongoing case of KB Home's repeated attempts to force buyers into accepting arbitration clauses for almost thirty years, despite repeated warnings and multiple fines from the FTC. Even after a Texas judge invalidated KB Home's arbitration agreements in 2006, the company continues to include them in warranties.

• Arbitrators often fail to disclose their close connections with the homebuilding industry. The report details the case of Stephen Paxson, a Houston, Texas attorney who had performed contract work for the Greater Home Builders' Association, but failed to disclose that--or testimony he had offered in favor of homebuilders--when arbitrating disputes between builders and buyers. In one case, Public Citizen claimed, Paxson had rejected borrowers' claims under Texas state law, after previously testifying before the state Supreme Court to get the same law overturned.

"We are losing our 7th amendment rights by contract and the word needs to get out all over this nation," said Nancy Seats, president of Homeowners Against Deficient Dwellings (HADD), which has lobbied against arbitration in building contracts and for better homeowner protections. "Forced arbitration clauses are found in nearly ever purchase we make or service we use today, and the consumer almost always loses."

A 2007 report from Public Citizen stated that in California, arbitrators ruled against consumers 95 percent of the time in cases involving credit card disputes.

The "Home Court Advantage" report is available as a free download from Public Citizen.

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