Guides for Advertising Shell Homes

FEDERAL TRADE COMMISSION

16 CFR Part 230

Guides for Advertising Shell Homes

AGENCY: Federal Trade Commission.

ACTION: Elimination of Guides.

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SUMMARY: The Commission's Guides for Advertising Shell Homes (the

``Guides'') address the marketing of certain factory-built homes that,

on delivery, require further construction to be inhabitable. Due to

lack of industry understanding of the term ``shell homes'' and other

circumstances, many sellers of factory-built housing have not viewed

the Guides as relevant to their sales practices. The Guides, to be made

up-to-date, also would require extensive revision. Although the

revision and reissuance of the Guides might be warranted if there were

evidence of significant marketing abuses covered by the Guides, the

Commission has no such evidence. It appears that likely abuses, if any,

could be adequately addressed by state and local housing code

enforcement authorities. Accordingly, the Commission has determined

that the costs associated with revising and reissuing the Guides would

outweigh the benefits, and the Guides should be repealed.

Although the Commission is eliminating the Guides, proceedings

still may be brought against businesses under section 5(a)(1) of the

Federal Trade Commission Act, 15 U.S.C. 45(a)(1), for engaging in

unfair or deceptive acts or practices in or affecting commerce in the

advertising and sale of these products.

EFFECTIVE DATE: September 30, 1994.

ADDRESSES: Requests for copies of this document should be sent to the

Public Reference Branch, Room 130, Federal Trade Commission, Washington

D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

Joel N. Brewer, Division of Enforcement, Bureau of Consumer Protection,

Federal Trade Commission, Washington, D.C. 20580, (202) 326-2967.

SUPPLEMENTARY INFORMATION:

I. Introduction

As a part of its ongoing project to review all rules and guides, on

September 11, 1992, the Commission invited comment on the Guides for

Advertising Shell Homes, 16 CFR Part 230.\1\ The notice contained six

questions relating to the economic impact and continuing relevance of

the Guides, any burdens relating to adherence to them, any changes

needed to minimize their economic impact, their relation to other

federal or state laws or regulations, and any changed conditions since

they were issued and the effect of these changes on them. The comment

period ended on October 13, 1992. In response, one comment was

received.\2\

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\1\``Request for Comments Concerning Guides for Advertising

Shell Homes,'' 57 FR 41707, P924219, A-1, p. 41707. The record in

this proceeding has been designated P924219 in the Commission's

Public Reference Branch. A copy of the Commission's request for

comments originally appearing in 57 FR 41707 is designated document

A-1, and is filed in a single volume labeled P924219. There are

three categories, ``A,'' ``B,'' and ``G'' for the materials in this

volume.

\2\Comment of Marjory Wood, Chesterton, IN, P924219, G-1 (Sept.

25, 1992). Ms. Wood stated that around the time of the Great

Depression her father, a civil engineer, had invented portable,

demountable houses for emergency use. She suggested that his plans

be revived to cope with the losses of housing occasioned by recent

natural disasters.

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To obtain additional information about shell homes, staff contacted

representatives of the National Institute of Building Sciences, the

Manufactured Housing Institute, the National Manufactured Housing

Federation, and the National Association of Home Manufacturers.\3\

Additionally, staff contacted nine randomly-selected manufacturers of

factory-built housing from a directory of over 250 such businesses\4\

and elicited comments and advertising materials from two manufacturers

or sellers of factory-built houses or factory-built housing

components.\5\ On the basis of the information collected by the staff,

it appeared that manufacturers of factory-built housing, including

manufacturers of housing the Commission has characterized as ``shell''

homes, are not familiar with the Guides. This is because, in part, the

term ``shell'' homes is not adequately defined in the Guides and is not

a classification used by any segment of today's factory-built housing

industry.

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\3\Report of telephone interviews by John Dugan, P 924219, B-7

(June 1, 1992).

\4\A.M. Watkins, Complete Guide to Factory-Made Houses, P924219,

B-2, pp. 152-74. The purpose of staff's inquiry was to determine if

manufacturers of factory-built housing are currently making

advertising claims that are addressed by the Guides.

\5\Bow House, Inc., Bolton, MA, P924219, B-4; and Kan-Build,

Inc., Osage City, KS, P924219, B-5. Bow House, Inc. specializes in

laminated bowed rafters and other ``New-England look'' components of

production and stick-built housing. Kan-Build, Inc., produces

modular housing.

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Thus, if unlawful practices are occurring, the current Guides

cannot perform their intended purpose of informing industry of the

Commission's views of the practices and providing the basis for their

``voluntary and simultaneous abandonment'' by industry members.\6\ In

order to provide adequate notice of the scope and applicability of the

Guides to certain forms of factory-built residential housing, the

Guides would have to be revised to inform the relevant members of the

industry that the Guides apply to some of their marketing practices.

However, under the circumstances this would be tantamount to issuing

new guides.

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\6\See, 16 CFR Sec. 1.5.

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In these circumstances, the Commission has determined that revising

or reissuing the Guides is necessary only if there is reason to believe

that unfair or deceptive practices are occurring in the relevant

industry to some significant extent or are likely to occur in the

absence of Commission guides. Based on the response to the request for

comment and on the staff interviews with the responsible heads of the

housing code authorities of California, Florida, Maryland, Missouri,

New Jersey, Texas and Virginia, the Vice President of the National

Foundation of Manufactured Home Owners and a Senior Analyst from the

American Association of Retired Persons, the Commission has determined

that the practices addressed by the Guides are not common and, to the

extent they exist, are adequately handled by state or local housing

code authorities. Accordingly, the Commission has determined to repeal

the Guides.

II. Background

On April 12, 1962, the Commission adopted the Guides under the

authority of sections 5(a) (1) and 6(g) of the FTC Act, 5 U.S.C.

45(a)(1) and 46(g).\7\ The Guides address advertising claims relating

to housing features that are material to consumers such as

inhabitability upon delivery, dimensions, included items, savings,

availability of financing, guarantees, time of delivery or

installation, and whether the cost of delivery or installation is

included in the advertised price. The Guides generally reflected the

law previously developed by the Commission in cases involving

advertising for shell homes,\8\ factory-built homes,\9\ and home

improvements.\10\

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\7\27 FR 3917 (April 25, 1962); P924219, B-10. The Guides took

effect immediately upon publication in the FR. Originally appearing

as section 14.6 of the Commission's Administrative Interpretations,

the guides were later recodified as 16 CFR Part 230, 32 FR 15531

(Nov. 8, 1967).

\8\Monumental Engineering, Inc., 58 FTC 1093 (1961); and

Lifetime, Inc., 59 FTC 1231 (1961).

\9\Main Line Lumber and Millwork Co., 56 FTC 17 (1959); R.H.

Best, Inc., 54 FTC 416 (1957); Nomis Corp., 34 FTC 318 (1941).

\10\Commerce Contracting Co., 59 FTC 473 (1961); Crawford

Industries, Inc., 59 FTC 398 (1961).

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There is no definition of shell homes in the Guides. Instead,

section 230.1(a) states, ``* * * the typical shell home does not

include such features as wiring, plumbing, heating, interior trim and

finish, or other requisite components * * *.'' (Emphasis added.) This

and the cases brought before or around the time the Guides were

formulated\11\ indicate that the Commission intended the term ``shell''

to be interpreted in a generic sense--i.e., structures assembled or

installed in whole or in part by the seller that lack all the necessary

components to make the building inhabitable when delivered to the

buyer.\12\

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\11\Five pre-guide cases involved most of the acts or practices

addressed by the Guides. Two cases, Monumental Engineering, Inc., 58

FTC 1093 (consent decree, 1961); and Lifetime, Inc., 59 FTC 1231

(1961), which were decided relatively contemporaneously with the

Commission's adoption of the Guides, are the only pre-guide cases

that refer to ``shell'' homes. Additionally, three other cases

involving factory-built housing, Main Line Lumber and Millwork Co.,

56 FTC 17 (consent decree, 1959); R.H. Best, Inc., 54 FTC 416

(consent decree, 1957); and Nomis Corp., 34 FTC 318 (1941), involved

additional practices addressed by the Guides.

\12\Some industry members may be familiar with another use of

the term ``shell'' housing that differs from the Commission's use of

the term in the Guides. According to Philip Schneider of the

National Institute of Building Sciences, a ``shell'' home concept

was part of HUD's so-called ``Operation Breakthrough'' program to

provide affordable housing to Americans on a large scale. Housing

without any plumbing, heating or wiring, was to be produced in the

factory, transported to the site in one piece or in sections, and

assembled or mounted on the foundation and fitted with utilities on-

site. Schneider says Operation Breakthrough was formulated while

George Romney was Secretary of HUD (1969 to 1972). The program

accordingly postdated the Guides by nearly a decade and could not

have been their inspiration. The vestiges of Operation Breakthrough

that exist today are limited to housing produced and finished with

``sweat equity'' as part of a publicly subsidized housing program.

Report of interview of Philip Schneider by John T. Dugan, P 924219,

B-7, p. 4 (June 1, 1992); re-interviewed by Joel Brewer, P 924219,

B-11 (May 10, 1994).

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Presently, it appears that other terms are now used in the industry

to describe housing that the Commission characterized as ``shell''

housing.\13\ For example, according to one source, a ``shell'' home is

a ``pre-cut'' home under classifications established by the National

Association of Home Manufacturers (``NAHM'').\14\ There are also other

industry terms for factory-built housing, such as ``panelized''\15\ and

``modular,''\16\ where the degree of completeness varies, and that may

not be inhabitable as sold.

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\13\P924219, B-7, p. 3. According to one industry spokesperson,

in the final analysis, it is easier to define what is

``inhabitable'' than what is a ``shell'' home. Report of interview

of Barbara Martin, Buildings Systems Council, National Association

of Home Builders (``NAHB''), by John Dugan, P924219, B-7, p. 4 (May

27, 1992). NAHM is now part of the Building Systems Council of NAHB.

\14\Nutt-Powell, Thomas E., Manufactured Homes: Making Sense of

a Housing Opportunity, pp. 2-3 (1982). Pre-cut housing contains all

or most of the lumber and millwork for the main structure of the

house, from floor to roof, plus exterior doors and windows,

insulation, and roofing materials. The package may contain

additional materials and supplies for the interior as well. Pre-cut

housing requires the most on-site labor to finish the house and make

it inhabitable after delivery.

\15\Panelized housing consists of complete walls that are

factory-made in large sections and then shipped to the site. After

set-down, the inhabitability of the dwelling depends on the extent

to which the structure needs work such as installing a roof or

panelized roof, installing a wet core (central plumbing, heating and

wiring equipment), installing a floor or panelized floor, hanging

doors and windows, installing utilities and insulation, closing the

panel interiors, and hooking up the utilities.

\16\Modular or sectional housing is 95% complete when it comes

off the assembly line. It is shipped in two or more sections for

set-down at the site. After set-down, inhabitability depends on the

extent to which the house needs work finishing the interior and

hooking up the utilities.

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III. Review of the Guides

No member of the factory-built housing industry responded to the

Commission's request for comment on the Guides.\17\ Part of the

explanation for this may be that the term ``shell'' home as it is used

by the Commission in the Guides is not familiar to most current members

of the industry.\18\

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\17\In addition to publishing the Commission's request for

comments in the FR, staff sent copies of the FR notice and the

guides to (among others) the trade associations whose members most

likely included producers of factory built housing (e.g., the

National Institute of Building Science, the National Association of

Home Builders, and the Manufactured Housing Institute).

\18\John Samples, President and C.E.O. of Kan-Build, Inc., Osage

City, KS, responding to a staff questionnaire concerning the guides

said, ``I have been in this industry 20 years, and have never had

knowledge of or questions pertaining to the Guide.'' P924219, B-5,

p. 1 (Jan. 19, 1993).

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Factory-built housing (including homes that are inhabitable upon

delivery) constitutes a large segment of the new home market. At this

time the Commission does not know what portion of the factory-built

housing industry is comprised of structures erected in whole or in part

by the seller that lack all the necessary components to make the

building inhabitable when delivered to the buyer. Based on the

information collected by staff, it is probable that some portion of the

industry delivers structures that are not inhabitable.\19\

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\19\According to Curtis McGiver, Associate Director for Building

Regulations, Virginia Department of Housing and Community

Development, modular housing is sold that is unfinished when

installed. He adds that in Virginia the advertising for this housing

makes it clear that the price varies with the degree of completeness

of the product, and that the consumer must pay a premium to receive

a finished inhabitable module. Report of Interview by Joel Brewer, P

924219, B-12, p. 2 (July 20-22, 1994).

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Since adopting the Guides, the Commission has brought a number of

actions that, without expressly mentioning the Guides, reflect the

principles articulated in them. Specifically, the Commission has

prohibited manufacturers of shell, pre-cut or other factory-built

housing from:

Representing that housing was complete to a greater degree

than it was (Guide 1);\20\

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\20\Best Homes, 77 FTC 6 (1970); H.R. Rieger Co., 75 FTC 168

(1969); Hi-Line, Inc., 74 FTC 1174 (1968).

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Using pictorial advertising that confused higher-priced

housing with prices of lower priced housing (Guide 3);\21\

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\21\Id.

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Representing that unskilled consumers will realize savings

on labor, or making false and unsubstantiated claims with respect to

the ease, economy or time involved in erecting the housing (Guide

4);\22\

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\22\Insilco Corp. 91 FTC 706 (1978); Lindal Cedar Homes, Inc.,

87 FTC 8 (1976).

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Offering financing without disclosing terms, or misleading

consumers with respect to the terms of the financing available (Guide

5);\23\

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\23\Insilco Corp., 91 FTC at 723; Hi-Line, Inc., 74 FTC at 1181.

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Using bait-and switch tactics (Guide 6);\24\ and

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\24\Best Homes, 77 FTC at 13-14; H.R. Rieger Co., 75 FTC at 172-

73; Hi-Line, Inc., 74 FTC at 1180.

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Representing that housing is guaranteed without disclosing

the nature and duration of the guarantee, the identity of the guarantor

and the manner in which the guarantor would perform (Guide 7).\25\

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\25\Best Homes, 77 FTC at 14; H.R. Rieger Co., 75 FTC at 173;

Hi-Line, Inc., 74 FTC at 118.

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Additionally, manufacturers of factory-built housing continue to

make claims addressed by the Guides. For example, the record reflects

advertising claims with respect to inhabitability (Guide 1(,\26\

depictions of size or dimensions (Guide 2),\27\ pictorial

representations of features not included (Guide 3),\28\ savings (guide

4),\29\ guarantees (Guide 7),\30\ and delivery and installation (Guide

9).\31\ However, the Commission has no basis to believe that the

advertising it has monitored is deceptive or unfair.

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\26\P924219, B-6, p. 5.

\27\P924219, B-5, pp. 7-9, 12-17, 21-39.

\28\Id., p. 22.

\29\P924219, B-6, p. 1.

\30\P924219, B-5, pp. 10, 17, 20.

\31\P924219, B-6, pp. 1-2.

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IV. Evidence of Unlawful Practices

In order to obtain some evidence relating to the prevalence of the

unfair or deceptive practices in the pertinent industry staff

interviewed the responsible heads of the housing code authorities of

California, Florida, Maryland, Missouri, New Jersey, Texas and

Virginia.\32\ One interviewee, Bill Connolly, the Director of the

Division of Codes and Standards in the New Jersey Department of

Community Affairs, is also the present chairman of the Industrialized

Building Commission (the ``IBC''), the commissioners of which comprise

the housing code enforcement authorities of New Jersey, Rhode Island,

and Minnesota.\33\ Additionally, staff interviewed representatives of

the National Foundation of Manufactured Home Owners and the American

Association of Retired Persons.\34\

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\32\Staff interviewed Richard Conrad, Executive Director,

California Building Standards Commission; Larry Jordan, Planning

Manager, Department of Community Affairs, Codes and Standards

Section, Florida Division of Housing and Community Development; Jim

Hannah, Director, Codes Administration, Maryland Department of

Housing and Community Development; Jim Phillips, Director,

Department of Manufactured Housing, Recreational Vehicles and

Modular Units, Missouri Public Service Commission; Bill Connolly,

Director, Division of Codes and Standards, New Jersey Department of

Community Affairs; Jim Martin, Manager of Rules, Policies and Codes

Section, Policies and Standards Division, Texas Department of

Licensing and Regulation; and Curtis McGiver, Associate Director for

Building Regulations, Virginia Department of Housing and Community

Development. Report of Interviews by Joel Brewer, P 924219, B-12,

pp. 2-5 (July 20-22, 1994).

\33\Id., pp. 1, 5. At this time the IBC is comprised of the

three states that have subscribed to an interstate compact on

building code standards for manufactured housing (often referred to

by code enforcement authorities as ``industrialized'' residential

housing). The purpose of the IBC is to facilitate the interstate

sale of factory-built housing by developing uniform housing code

requirements in the subscribing states. Because it is anticipated

that other states will join the IBC over time, the IBC has a Rules

Development Committee to develop uniform codes to which most states

could eventually subscribe. In order to assure the acceptability of

the rules to other states, several state housing code officials from

states other than the three Commission states (e.g., Maryland and

Virginia) represent them on the Rules Development Committee.

\34\Staff interviewed Leonard Wehrman, Vice President, National

Foundation of Manufactured Home Owners; and George Gaberlavage,

Senior Analyst, American Association of Retired Persons. Id., pp. 1,

5-6. Mr. Wehrman made no specific comments, and instead advised

staff to contact state housing code officials. Mr. Gaberlavage said

that he believed that the best source of information on the subject

of problems with factory-built housing is the state housing code

authorities.

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According to Mr. Connolly, approximately 35 states have adopted

codes providing for in-factory approval of closed construction

residential structures (primarily modular housing). These codes

contemplate a two-step process: (1) Plan review, which occurs in the

state, and (2) inspections in the plant, including out-of-state plants.

Almost universally, the states contract with third parties to conduct

the out-of-state in-plant inspections. For open construction factory-

built buildings (i.e., most panelized or all pre-cut housing), normally

the local code enforcement authority will inspect the work as it is

assembled. As a result of these state and local enforcement activities,

the sorts of problems consumers ordinarily will encounter from factory-

built housing almost exclusively consist of cosmetic or workmanship

problems, or problems arising in mounting the housing at the site. The

other housing code authoritues agreed.\35\ Such problems are not

covered by the Guides.

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\35\Id. pp. 2-5. Although the state officials were unanimous in

the view that the states afford consumers protection against the

kinds of harms addressed by the Guides, Mr. Connolly advised that

finding and preventing code violations for open factory-built

structures depends on the existence of local code authorities.

Although local code authorities exist in the most populous regions

of the country, in sparsely populated area that is generally not the

case. However, he could not tell how serious or widespread the

problems were with factory-built housing in such areas.

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Staff's review indicates that, although relevant advertising exists

and the affected industry is significant, the unlawful practices

addressed by the Guides do not appear to be widespread and, to the

extent they may exist, state or local housing code enforcement

authorities can appropriately handle such problems. Although some

problems of the sorts addressed by the Guides may arise in sparsely

populated areas of the country where there are no local housing code

authorities to inspect open construction factory-built buildings as

they are assembled, the Commission has no reason to believe these

problems are significant or involve significant consumer harm.

Accordingly, the Commission has determined to repeal the Guides.

(Authority: 15 U.S.C. 41-58.)

List of Subjects in 16 CFR Part 230

Advertising, Factory-built homes, Trade practices.

PART 230--[REMOVED]

The Commission, under authority of sections 5(a)(1) and 6(g) of the

Federal Trade Commission Act, 15 U.S.C. 45(a)(1) and 46(g), amends

chapter I of title 16 of the Code of Federal Regulations by removing

Part 230.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 94-24145 Filed 9-29-94; 8:45 am]

BILLING CODE 6750-01-M