California-based home builder KB Home faces a $2 million civil penalty in resolving allegations relating to the company’s warranty practices, the U.S. Federal Trade Commission announced this week.

FTC officials approved a modified consent decree, submitted in federal court by the U.S. Department of Justice, that requires the company to modify its existing home repair warranties and to extend some warranties issued for major home components, according to the announcement.

Shaun Rachau, a KB Home spokesman, said today, “We believe we have consistently complied with the terms of the 1979 consent decree but the FTC disagrees with us on the point at issue here. We are pleased to have reached an agreement with the commission to resolve this issue and put it behind us.” Rachau also said that “customer service is a number one priority” for the company.

The modified consent decree states that KB Home “denies the (FTC’s) allegations and states that it has been in compliance with the commission’s order…but is willing to amicably resolve the matter” and agrees to the terms of the modified decree.

The decree relates to a 1979 FTC consent order against KB Home that had required the company “to make timely warranty repairs and to furnish home purchasers with a warranty that is ‘substantially identical’ to the Home Owners Warranty Corp. warranty, according to the announcement.

That order also provided that warranties must provide for mandatory arbitration of warranty repair disputes that is binding upon KB Home but is not binding for homeowners. Also, that earlier consent order provided that no fee or deposit is required of homeowners who enter into arbitration.

“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 (FTC) alleges that KB Home violated specific terms of the original order,” according to the announcement.

Under this modified order, KB Home is barred from violating the terms of the original order.

KB had allegedly violated the terms of the original consent order by furnishing home buyers with a warranty that provided for arbitration of warranty disputes that is binding on homeowners, and that required homeowners to pay fees and costs to initiate and conduct this arbitration, the FTC announced.

According to an FTC court brief filed earlier in private litigation involving KB Home, the company “provided homeowners with warranties that provided for mandatory binding arbitration of warranty disputes…despite having sought and received a staff advisory opinion in 1995 that explained to do so would violate the 1979 order.”

The modified consent decree, which replaces the consent decree entered in 1991, resolves the FTC’s allegations that KB Home violated the prior order.

Under the provisions of the modified decree, KB Home is enjoined from violating the 1979 consent order. Also, the company must modify the dispute-resolution provisions of existing warranties to comply with the 1979 order, must comply with the modified warranties, and must extend for one year the two-year warranty coverage for major home components for homeowners whose homes were delivered during 2002 through 2004; and must reimburse homeowners for fees they had to pay to arbitrate warranty disputes in alleged violation of 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 FTC to ensure its compliance with the order’s terms, according to the FTC announcement.

DOJ submitted the modified consent decree in the U.S. District Court for the Southern District of California on Aug. 3, 2005.

The FTC also has issued a new “Facts for Consumers” educational piece about home warranties, available at http://www.ftc.gov/bcp/conline/pubs/homes/homewarranty.htm.

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Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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