KB Home, a California homebuilder formerly known as Kaufman and Broad, Inc., will pay a $2 million civil penalty and will be required to extend home warranty coverage for an additional year for some homeowners.

The company settled charges that it violated the terms of a 1979 Federal Trade Commission consent order and agreed to comply with the order in the future.

The 1979 FTC consent order against KB Home 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 U.S. Justice Department filed a complaint in U.S. District Court alleging that KB Home had violated several provisions of the 1979 order related 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 latest action approved by the FTC alleges that KB Home violated specific terms of the original order. Specifically, the FTC said KB Home provided arbitration that was binding on homeowners and required homeowners to pay fees and costs to initiate the arbitration.

According to an FTC brief filed earlier in private litigation involving KB Home, the company knowingly violated the consent orders 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 FTC's 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 modified consent decree, which replaces the consent decree entered in 1991, resolves the Commissions 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 Commissions charges that it violated the order.

Consumer Education

In connection with the case, the FTC 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 at www.ftc.gov/bcp/conline/pubs/homes/homewarranty.htm.