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KB Home Customers Find FTC Penalties Inadequate

Giant LA Builder Has Long History of Ignoring FTC Settlements

By Martin H. Bosworth
ConsumerAffairs.com

August 16, 2005
The recent penalty levied against KB Home by the Federal Trade Commission for violating a prior agreement is the latest in a long string of incidents associated with the Los Angeles home builder.

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Even as KB Home has reported net earnings of $480 million as of November 2004, it has also faced continuing charges of poor building procedures and deceptive lending practices from consumer action groups and homeowners' associations.

In the words of frustrated homeowner Natalie Shanks, "We are left being subjected to discomfort or paying for careless mistakes that were not of our making, but that of KB Home and other builders like them."

Builder Behemoth

KB Home began as Kaufman & Broad in 1957, and has diversified into a multi-tiered realty operation. Its home-buying operation services most of the western and southern United States, and it is a major commercial real estate developer in France through its Kaufman & Broad S.C. subsidiary.

KB Home's prime market is the new home buyer, specifically for professionals and workers with families, generally in medium-sized developments close to major metropolitan areas.

The company offers assistance for first-time buyers through its KB Homebuyers program, and boasts an exceptional rating for customer satisfaction from J.D. Power and Associates.

KB Home's chairman, Bruce Karatz, is considered the second-highest-paid CEO in Los Angeles with earnings and bonuses of $38 million for 2005. Karatz attributes the success of his company to a disciplined business model and "strict cost monitoring."

In an interview with Boston University's Bostonia magazine, the 1967 alumnus stated that "Subcontractors show up only when there's work to be done."

"Box of Crackers"

Meanwhile, disgruntled KB Home buyers complain of faulty construction, failure to provide customer service, miscalculated or ignored escrow charges, and contracts that deny buyers their rights to lodge complaints or sue.

Many angry homeowners have taken to the Web to protest, using sites like KB Homes Suck and KBHomeStink to tell their stories.

KB Homes Suck contains video clips of families touring their homes, showing mold on the walls, poorly built doors, leaky roofs, and water damage. One young Texan woman compares the quality of her new house to a "box of crackers."

The sites are filled with horror stories from first-time homeowners, including one young married couple whose new house flooded four times and has suffered continual structural problems.

"The poor quality, material and craftsmanship used by KB Home to build our house has left us very upset and worried about the safety of our family in this home," they said.

Lawrence Gotlieb, VP for Government and Public Affairs at KB Home, did not return telephone calls seeking his response to the homeowners' complaints.

Binding Arbitration

Another frequent complaint levied against KB Home is its use of arbitration to settle customer grievances. Arbitration has become a common process in many real estate and financial fields, and binding arbitration -— the form used by KB Home -— places an injunction against both parties and prevents them from seeking redress elsewhere if they disagree with the arbitrator's result.

Disgruntled KB Home homeowners say the company works with arbitrators that nearly always rule in its favor.

In 1979, KB Home entered into a consent agreement with the Federal Trade Commission, which had filed a complaint charging the company provided inadequate repairs under its warranty and employed deceptive advertising to lure homebuyers.

Under the consent agremeent, KB Home agreed had to provide mandatory binding arbitration to resolve disputes, but agreed that homeowners would be free to seek legal recourse if they were not satisfied with the arbitration result.

Despite this, KB Home continued to insert arbitration clauses into its contracts that mandated homeowners utilize arbitration to solve disputes, and requiring that they pay the costs themselves, an option placing arbitration out of the reach of many cash-strapped Americans.

In 1991, the Department of Justice filed a complaint against KB Home for violating the terms of the 1979 agreement, and KB Home settled for a $595,000 fine and a permanent order to uphold the original agreement.

Since then, homeowners' rights groups such as Homeowners Against Deficient Dwellings (HADD) have charged that KB Home continued to use binding arbitration in violation of both the 1979 and 1991 agreements, particularly by offering two types of warranties for buyers -- a ten-year warranty without an arbitration clause, and a twelve-year warranty that included one.

HADD President Nancy Seats stated that, "Most people will go for the twelve-year agreement without looking at what's really in it."

Pocket Change

The August 3, 2005 settlement of FTC charges mandates that KB Home "modify the dispute resolution provisions of existing warranties to comply with the 1979 order."

According to one FTC attorney, "KB must offer new home buyers the option for mandatory non-binding arbitration. If a home buyers decides they do not want to use arbitration, they can have the opportunity to go to court."

The FTC also ordered KB Home to reimburse homeowners' costs of seeking arbitration and to pay $2 million to settle the dispute.

In addition to the FTC fine, the Department of Housing and Urban Development (HUD) found that KB Home's former mortgage division, KB Home Mortgage Company, had engaged in poor underwriting practices, such as overstating buyers' income to qualify for loans.

KB Home agreed to settle the dispute for $3.2 million, the largest settlement of its kind for HUD, in July of 2005. By that time, KB Home had sold its mortgage division to Countrywide Home Loans in June of 2005.

Nancy Seats called the settlements "inadequate," noting that KB Home stated that the settlements would not affect their bottom line.

"Bruce Karatz could pay those costs out of his checking account and not miss a thing," said Seats.

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