Advisory opinion letter to Mr. Canavan and Mr. McMahon: the Magnuson-Moss Warranty Act, Public Law 93-637…

October 20, 1976 Dear Mr. Canavan and Mr. McMahon:

This is in response to your letter of September 28, 1976 concerning the Magnuson-Moss Warranty Act, Public Law 93-637 (the Act), requesting a postponement in the effective date of the rule on Informal Dispute Settlement Mechanisms (16 C. R. 703) so that it will not apply to warranties on new homes except those for which contracts of sale are entered into after October 1 , 1977. You also requested that the Commission issue its decision on the final application of the Act warranties on new housing before October 20, 1976. We have carefully considered your uncertainty about the application of the Act, and the logistical problems you face in bringing the HOW program into compliance with the proposed interpretations published in the Federal Register on August 16, 1976 (41 F.R. 34654). Because of those logistical problems, we have determined to grant an additional postponement of the effective date of the rule on informal dispute settlement mechanisms as it applies to warranties on consumer products sold with ne\v homes.

The additional postponement will extend until May 1, 1977. You had requested a longer extension, until October 1, 1977. Although we are well aware that certain changes in the HOW program must submitted for approval in each of the states where the program is in

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operation, we feel that the additional time wiII be sufficient and that a longer extension cannot be justified. The Commission has already granted a six-month postponement, until January 4, 1977 (41 F. 27828); the nine months more you request would mean a delay of a year and three months in the application of the rule. Therefore, we conclude that such a lengthy extension would not be in the public interest. will be published in the FederalNaturally, notice of this postponement Reg'iste' I' as soon as possible.

difficulties ofWe have also given serious consideration to the interpretation you discern in the application of the Act to consumer products sold with new homes, including the comments filed by ROW and N ARB on the proposed interpretations. Although the interpretations are not yet ready to be issued in final form, we have concluded that the general standard contained in the proposal-that the Act applies to separate items of equipment attached to real property, such as air conditioners, furnaces and water heaters-is the correct one. The Act, of course, embraces certain kinds of personal property including any such property intended to be attached to or installed in real property without regard to whether it is so attached or installed. We believe that the separate item of equipment test is more consistent with the statutory standard than is the test proposed by ROW and orN ARB , that is, whether the product in question is "free-standing" easily removable.

The HOW /NARB test simply applies traditional law on the distinction between real and personal property, while the statute specifically rejects such a differentiation by directing that the determination must be made "without regard to whether (the propel~ty) is so attached installed (in the real property)." The separate item of equipment test by contrast, looks to separateness of function, not ease of removal. It articulated by follo\vs the legislative history of the definition as Congressman Moss in the Rouse debate. He said that the definition includes separate items of equipment such as heating and air conditionwhich he ing systems, as distinct from dry wall, pipes, and wiring, described as "integral components of a home. We know that you would like a specific enumeration of the various products the Commission feels are or are not covered by this definition. Accordingly, we will treat your September 28 letter as a request for an advisory opinion under Secs. 1. 1.4 of the Commission s Rules of Practice, and we will furnish you with a listing of covered and non- ADVISORY OPINIONS 1039

covered products in the form of an advisory opinion within the next few days.

In accordance with this letter, therefore, the Commission s Rules on Informal Dispute Settlement Mechanisms, 16 C. R. Sec. 703, will not apply to written warranties on consumer products offered with the sale of new homes for which a contract of sale is signed after July 4, 1976 but before May 1, 1977. This rule will become applicable to warranties on the sale of new homes, contracts for the sale of which are entered into after May 1, 1977. As you are doubtless aware, this postponement in no way affects private rights of action under Section 110 of the Act. By direction of the Commission.

Letter of Request

September 28, 1976 Dear Mr. Chairman:

Home Owners Warranty Corporation (HOW) and the National Association of Home Builders (N AHB) on April 28, 1976 requested through our legal counsel a postponement of the effective date of the Commission Regulations regarding informal dispute settlement mechanisms (16 R. Part 703). In a letter of June 10, 1976, amended by a letter of June 28, the Secretary of the Commission informed us that the Commission had granted such a postponement and that these Regulations would apply only to warranties given on new home contracts for the sale of which "vere entered into after January 4 1977. Notice of this postponement was published in the Federal Register of July 7, 1976. This extension was requested because (a) uncertainties as to how the Act applies to warranties on new housing had to be resolved before the industry could begin to alter its practices in accordance with the Act and (b) logistical problems existed such that, even with an immediate resolution of those uncertainties, it would have been physically impossible for the necessary changes to be made before the originally designated effective date.

We now request that the Commission consider further postponing the effective date of Part 703 so that it wiI1 apply only to warranties given on new dwellings contracts for the sale of which are executed after October 1, 1977. We believe that we must make this request for the following reasons.

1. Continu,ing Uncerta'i'nty as to the Act's Appl? catiO'lL It is still

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unclear just how the Act applies to new home warranties. First, the Commission has not as yet issued its Interpretation on this question (proposed 16 C. R. Section 700.1(d)-(g)) in final form. Second, if the final Interpretation, when issued, is as different from present real estate law and custom as the proposed, there will be widespread confusion in the industry which will take time to clear up. Third, the proposed Interpretation offers no solution to the fundamental problem which we have been discussing with the Commission s staff for many months the disclos"ure regulations requiTe that a buitderluho wishes to pl'O'v'ide differentwctrra:nty cO"L' J'age for cons'wmer and 'JUJn-CO'il.s'loner products explai'J'l. those differences, and hence -iclen.hfy the line behueen the two types of products , ilL ffsi1nple and readily 'understood lang'uage wuen tlwugh no on,e to date has been able to produce a construction of the defi:nition" ' be reduced to such l.ang'llage. Even the language of the Commission s proposed Interpretation would require the consumer to perform "an analysis of the transaction. 2. Logist-ical. PJ'oble'nls. These also remain. In the brief time between issuance of a final Interpretation and the effective date of Part 703 staff members of NAHB, HOW, and individual builders must be retrained; complex warranty documents must be revised; advisory materials must be supplied by NAHB and HOW to 30 000 member builders; over 600 local home builders' associations and 82 HOW Local Councils; and documents and instructions must be distributed by builders to personnel at many points of sale. All of this must completed several weeks before the effective date, as new home warranties are given at closing and many dosings after the effective date will be pursuant to contracts of sale, entered into before that date which legally commit the builder to give a particular warranty. There is an additional overriding problem in the case of HOW. First state laws will require that the insurance policies that form the core of the HOW program be revised and re-approved by the insurance authorities of the 46 states where the progTam is now active. As the original approvals took 2 years to obtain, the process could not possibly be completed by January 4 even if it could be started now. Therefore, if relief is not granted we expect the HOW program will have to suspend operations in several key states on January 4, 1977. 3. We believe it is now dear to all of us that the application of the Act to housing is uncertain and that the uncertainty creates genuine difficulties for the industry. We would like the Congress to have an opportunity to review the matter and perhaps to provide legislative ADVISORY OPINIONS 1041

clarification before irrevocable damage is done to HOW and our industry's relationship to its consumers.

Work on the above tasks canlwt even beg'in until the Commission Interpretation is published in a clear and final form, and definitely cannot be completed by January 4.

The problems posed by this statute are in fact so serious that there is strong sentiment among members of the HOW Board of Directors favoring the termination of the progTam unless there is adopted an official construction of the consumer product definition which takes cognizance of those problems. Our future course of action will have to be decided at a meeting of the Board on October 21. This meeting was scheduled with the hope that the final Interpretation would be a vailable by then.

In light of the above, NAHB and HOW, on behalf of the home building industry, urgently request that the Commission take the following actions:

1. Postpone the effective date of the Regulations on informal dispute settlement mechanisms (16 C. R. Part 702) so that those Regulations will apply only to warranties on new homes contracts for the sale of which are entered into after October 1, 1977. 2. Issue its decision as to this postponement request and its final Interpretation of the application of the Act to warranties on new housing before October 20, so that both can be available to the HOW Board of Directors at its crucial October 21 meeting.

, publish notice of it in the 3. If the postponement is granted Federal Register. (While we recognize that this may not eliminate the risk of civil liability for builders, it will place them in the best possible position should that issue arise.

We thank you and the other Commissioners for your continuing

assistance.
Very truly yours
HOME OWNERS WARRANTY CORPORATION
By: Isl Richard J. Canavan
President