Magnuson-Moss Warranty Act—Interpretation of Section 102(b) of the Act, 15 U.S.C. 2302(h), and the…

Magnuson-Moss Warranty Act—Interpretation of Section 102(b) of the Act, 15 U.S.C. 2302(h), and the Commission’s Rule on PreSale Availability of Written Warranty Terms, 16 CFR 702, as they apply to certain situations that arise in the home building industry; and the applicability of Section 111(d) of the Act, 15 U.S.C. 2311(d), to a warranty required on all FHA/VA financed

housing, File 783 7009, 43 F.R. 35684.
Opinion Letter
June 21, 1978
Dear Mr. Colton:

This is in reply to your request of September 28, 1977, on behalf of the National Association of Home Builders, for an advisory opinion concerning Sections 102(b) and 111(d) of the Magnuson-Moss Warranty Act, 15 U.S.C. 2301, et seq., and the Commission’s rule on the Pre-Sale Availability of Written Warranty Terms, 16 C.F.R. 702, as they apply to the home building industry.

Your request contains five topics of discussion, each posing questions for Commission consideration. The Commission has rephrased your request in eight questions in order to clarify the issues posed. It has determined that the rephrased questions numbered 1 through 3 (below) are not appropriate for an advisory opinion under Part 1, Subpart A of the Commission’s Rules of Practice; instead these questions are treated as a request for an exemption from Rule 702, 16 C.F.R. 702. Where the Commission has granted an exemption from Rule 702, that exemption applies to all affected home builders and wholesale suppliers. The rephrased questions and the Commission’s answers are as follows:

1. When a builder gives the purchaser an allowance to select various fixtures or appliances (consumer products) from a third party supplier, is it the builder or the third party supplier who must comply with the pre-sale availability of warranties requirements for “sellers” under 16 C.F.R. 702.8(a) in each of the following situations:

(a) The purchaser makes selections from stock purchased wholesale by, and in the possession of, the builder, and makes payment to the builder for any items selected in excess of the allowance.

(b) The purchaser makes selections in the showroom of the builder’s supplier, from items not yet purchased by the builder, and makes payment to the builder for anv items selected in

ADVISORY OPINIONS 1209 (c) The purchaser makes selections from items not yet purchased .. by the builder, and makes payment directly to the supplier for any items selected in excess of the allowance. 2. What are a custom builder’s duties as a “seller” under 16 C.F.R. 702 when the purchaser can choose from among virtually all brands of appliances available in the marketplace? 3. If the builder has made the pre-sale warranty information available to the purchaser for all appliances from which the purchaser can choose, does the builder have any obligation under 16 C.F.R. 702 to make warranty information available, after a contract is signed, for substitute appliances which the purchaser must select due to a manufacturer’s discontinuation or replacement of the appliance initially chosen by the purchaser? 4. Does the Magnuson-Moss Warranty Act require that all builders’ warranties contain a clause assigning the manufacturers’ warranties on consumer products to the purchaser, or does the Act have the effect of automatically making all manufacturers’ warranties on such appliances run to the ultimate purchaser? 5. Is the builder or the purchaser the proper party to complete and return the warranty registration cards for consumer products installed in the home? 6. Does Section 111(d) exempt the mandatory FHA/VA warranty from the requirements of the Magnuson-Moss Warranty Act? 7. Isa builder who gives only the mandatory FHA/VA warranty required to comply with 16 C.F.R. 702 for those consumer products sold with warranties that are covered by the Act? ‘8. Ifa builder both gives the mandatory FHA/VA warranty, and voluntarily offers an additional warranty not required by any Federal law (e.g., a one year warranty against defects in materials and workmanship), to what extent is the additional warranty subject to the Magnuson-Moss Warranty Act? The Commission has carefully considered the matters set forth in your letter. It is the Commission’s determination that: 1. (a) When a builder gives a purchaser an allowance to select consumer products, and the purchaser makes selections directly from the builder’s stock, the builder must comply with the seller’s duties under 16 C.F.R. 702.3(a) to make warranty terms available prior to sale.

(b) & (c) When a builder gives a purchaser an allowance to select consumer products from the stock of the builder’s supplier, the builder is exempted from compliance with 16 C.F.R. 702.3(a). In this latter situation, the builder’s supplier is also not required to comply with the seller’s pre-sale duties under the rule if the

supplier’s sales are totally wholesale, including builder-referred sales.

2. When a purchaser contracts to have a custom home built, and pursuant to the contract can choose appliances from among virtually all of those available in the marketplace, the builder is exempted from compliance with the seller’s duties under 16 C.F.R. 702.3(a) to make the text of written warranties available prior to sale.

3. A builder must make warranty terms available for inspection by a purchaser if, after a contract is signed, the purchaser must make a second selection because originally selected items have become unavailable. The builder is not exempted from compliance with 16 C.F.R. 702.3(a) in this situation. 4. The Magnuson-Moss Warranty Act does not govern the issue of whether a manufacturer’s warranty on a consumer product must be assigned by a builder to the home purchaser. This question is governed by state law.

5. Registration cards would be prohibited for all full warranties under the Commission’s rule on Reasonable Duties Under a Full Warranty, as proposed in 43 F.R. 39223 (August 3, 1977); see also the Commission’s Interpretations of the Act, 16 C.F.R. 700.7(b). However, registration cards are permitted for limited warranties. When a limited warranty offered on a consumer product by a manufacturer includes the registration card, the home purchaser is the proper party to complete and return the card, unless the warranty specifically requires this of retailers. 6. Section 111(d) of the Magnuson-Moss Warranty Act exempts the mandatory FHA/VA warranty offered by a builder from the requirements of the Act (except for Section 102(c)). 7. A builder who gives only a FHA/VA warranty must still make available under 16 C.F.R. 702 those warranties that are covered by the Act; the fact that the FHA/VA warranty is generally exempt from the Act does not affect the builder’s status as a “seller” of consumer products covered by warranties that are governed by the Act.

8. Any warranty offered by a builder on a consume product that is not required by Federal law is subject to the provisions of the Magnuson-Moss Warranty Act.

By direction of the Commission.

ADVISORY OPINIONS 1211

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Letter of Request
September 28, 1977
Dear Mr. Thomas:

This firm represents the National Association of Home Builders of the United States (NAHB). On behalf of that organization and pursuant to Part I, subpart A of the Commission’s Rules of Practice, we hereby request an advisory opinion on the following questions relating to the application of Title I of the Magnuson-Moss Act to the home building industry.

The Commission will no doubt recall that it, NAHB and Home Owners Warranty Corporation have had extensive discussions over the last several years concerning the difficulty of applying to the building industry.a statute which was drafted with an eye to the customary retail consumer transaction where both the product and the details of the transaction are far less complicated than are a new dwelling and its transfer. NAHB sponsored several seminars in various parts of the country to inform and educate builders about the Act and to discuss questions arising from the nature of dwelling sales. These questions were repeadedly asked; none of those present, including representatives of our industry who have intensively studied the Act, and observers from the Commission, were certain of the answers. I. FIXTURE AND APPLIANCE ALLOWANCES It is a common practice in the home building industry for the purchaser of a new home to request and to be granted an allowance for the purchase of appliances, light fixtures, carpeting, and/or other items, some of which might be considered consumer products. Under this practice, the purchaser is permitted to select (either from stock in the builder’s possession or at the warehouse of showroom of the builder’s supplier of such items) up to a certain dollar amount of specified items. The builder will install the selected items (in substitution for similar items normally provided) in the home with no addition to the purchase price. If the purchaser selects items costing ‘more than the allowed dollar amount, the purchaser must pay the . difference.

For example, the purchaser of a $50,000 home might be given a $300 allowance for light fixtures of purchaser’s selection. The builder would direct the purchaser to the showroom of the builder’s electrical supplier. If the purchaser selected $400 worth of light fixtures at the showroom, the builder would install them in the home provided that (depending upon the arrangement between the builder and the supplier) (a) the purchaser paid $100 (the excess over the allowance) to the supplier at the time he made his selections or (b) the purchaser paid $50,100 for the house, so that the builder could pay the additional $100 Hn 4h nwvennlinn

1212 ; FEDERAL TRADE COMMISSION DECISIONS The specific question is the application to such a practice of Section 102(b) of the Act and Part 702 of the Commission’s Regulations. Under an allowance arrangement such as that outlined above, is it the builder or his supplier who must maintain copies of warranties on consumer products which can be selected by the purchaser under each of the following circumstances:

1. The purchaser makes his selections from stock purchased wholesale by, and in the possession of, the builder, and makes payment to the builder for any items selected in excess of the allowance. 2. The purchaser makes his selections at the showroom of the builder’s supplier, from items not yet purchased by the builder, and makes payment to the builder for any excess (with the builder in turn paying the supplier).

3. The purchaser makes his selections in the showroom of the builder’s supplier from items not yet purchased by the builder, and makes payments direct to the supplier for any excess (the builder, of course, paying the supplier the amount of the allowance). In our view, presale availability of these warranties in situations 2 and 8 should be the responsibility of the supplier rather than the builder because it is at the supplier’s facility that the consumer compares the available items and makes his selections, and it is there that he should have the opportunity to compare the written warranties on those items as well. The fact that in situation number 2 the title to the items may technically have passed to the builder does not alter the fact that the convenience of the consumer is best served, and the comparison shopping intended by the Act’s drafters is most strongly stimulated, if the presale display of written warranties takes place at the supplier’s facility.

Il. CUSTOM BUILDER In contrast to the usual consumer product transaction where the purchaser buys an already completed item from the stock of a retailer, or (as in the case of an automobile) orders an item from a catalog and selects from among a limited number of available options, many new homes are constructed on a truly custom basis according to the purchaser’s specifications (which may be either general in nature or a complete design prepared by the purchaser’s own architect), generally on land already owned by the purchaser. In such custom building transactions, the selection of brand and model of appliances is not made until long after the construction contract has been signed and construction is under way — in the context of a $50,000 .to $100,000 transaction involvine eanntlace daricinne ac ta otwnatumal matoaiole

ADVISORY OPINIONS 1213 brands of dishwashers does not loom large. In addition, in such a situation, the purchaser’s choice is not among a few brands or models maintained in inventory by the builder or provided by those suppliers with whom the builder has a continuing relationship. The builder will generally obtain and install whatever appliance the purchaser asks for, and the purchaser’s choice is among virtually all the appliances available in the marketplace.

It should be noted that this is a selection which the purchaser may in fact be reluctant to make prior to signing the contract, (a) because of its comparative unimportance in the context of the much larger construction transaction and (b) because he may want to wait until late in the construction process, when the final cost of the home can ‘accurately be estimated, before selecting the types (and hence the cost) of appliances to be installed.

Advice is requested as to the following question: What, if anything, must the custom builder do under Part 702 of the Commission’s Regulations when the question of the type, brand and model of appliances does not arise until construction is under way pursuant to a binding construction contract? In our opinion, it is impossible for the custom builder to have available the written warranties on all the consumer products from which his purchaser might choose, because, since the custom builder dees not maintain an inventory of appliances or equipment but rather procures on an ad hoc basis whatever his customer requests, the alternatives (and hence the number of warranties that would have to be placed in a binder and kept up to date) number in the hundreds or thousands. Ill. NECESSARY SUBSTITUTION Another common practice in the industry is for the purchaser to view a model home and sign a contract with the builder for the purchase of a lot on which, by the time of closing, the builder will have constructed a home similar to the model. In such a situation, because the builder is constructing a number of similar homes, the purchaser has available either (a) only a single brand of appliances which the builder offers or (b) a selection, allowed by the builder, among two or three equivalent, alternative brands and models. The appropriate time for installation of the appliances selected by the purchaser will not arrive until the dwelling is nearly completed, several months after the purchaser has made his selection and the binding contract has been signed. By that time, one or more of the models selected by the purchaser may either have been discontinued by the manufacturer or been replaced by a more recent model having different features. ' Advice is requested as to the following question: If in the above

situation the builder has (in compliance with Part 702) maintained available, for inspection by the purchaser before he signs the contract, the warranties on those appliances from which the purchaser was invited to make his ‘selection, does the builder have any obligation under Part 702 with regard to availability of warranties on substitute appliances which the purchaser must select because of the discontinuance or replacement of the chosen appliance by the manufacturer? IV. WARRANTY REGISTRATION CARDS Prior to the advent of the Magnuson-Moss Act, there was some question as to whether manufacturers’ warranties on appliances which were installed in new homes ran to the builder or to the ultimate purchaser of the home. To deal with this problem, the builder’s warranty frequently contained a clause formally assigning benefits of those warranties to the purchaser, and the builder delivered to the purchaser at closing, for completion by the purchaser, whatever warranty registration cards the appliance manufacturers required to be completed and submitted to the manufacturer as a precondition to warranty effectiveness.

Advice is requested as to the following two questions: 1. Does the Magnuson-Moss Act require that all builders’ warranties contain such an assignment clause, or does it have the effect of automatically making all manufacturers’ warranties on such appliances run to the ultimate purchaser? 2. Who is the proper party to complete such warranty registration cards and send them to the manufacturer? Vv. VA/FHA WARRANTY Both the Veterans Administration and the Federal Housing Administration (a Part of the Department of Housing and Urban Development) require, as a condition to their guaranty or insurance of the purchaser’s mortgage on any new dwelling, that the seller of the dwelling (the builder) warrant in writing that it has been constructed in substantial conformity with the plans and specifications which were used by the agency as the basis for its determination that the dwelling was of sufficient value to constitute adequate security for it and the lender. For your information, a copy of the standard form suggested _ by these agencies for this warranty is attached to this letter as Exhibit A.

Section 111(d) of the Act provides that (with one exception) Title I daac nat annly ta whatadan nantian af a wreelttan corner edes fe wee ce nee

ADVISORY OPINIONS 1215
1208
fi

1. Are the form and content of the mandatory FHA/VA warranty exempt from the requirements of the Act? 2. Ifa builder gives a written warranty consisting of two parts, one of which is the mandatory FHA/VA warranty language while the other is an additional warranty not required by either agency (e.g., a one-year warranty against defects in materials and workmanship), to what extent are its form and content subject to Title I of the Act? 8. Is a builder who gives only the mandatory FHA/VA written warranty required to maintain copies of manufacturers’ warranties on appliances and equipment available for inspection by purchasers before they sign binding contracts to purchase homes? In our opinion, these questions provide a further illustration of the difficulty of regulating new home warranties and the home purchase transaction in the same way as more conventional retail transaction in purely personal property. We would appreciate the Commission’s advice and assistance in furnishing definitive answers to these

questions. ,
Very truly yours,
COLTON AND BOYKIN
/s/ Herbert S. Colton