[Federal Register Volume 59, Number 189 (Friday, September 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24145]


[[Page Unknown]]

[Federal Register: September 30, 1994]


=======================================================================
-----------------------------------------------------------------------

FEDERAL TRADE COMMISSION

16 CFR Part 230

 

Guides for Advertising Shell Homes

AGENCY: Federal Trade Commission.

ACTION: Elimination of Guides.

-----------------------------------------------------------------------

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outweigh the benefits, and the Guides should be repealed.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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \6\See, 16 CFR Sec. 1.5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \20\Best Homes, 77 FTC 6 (1970); H.R. Rieger Co., 75 FTC 168 
(1969); Hi-Line, Inc., 74 FTC 1174 (1968).
---------------------------------------------------------------------------

     Using pictorial advertising that confused higher-priced 
housing with prices of lower priced housing (Guide 3);\21\
---------------------------------------------------------------------------

    \21\Id.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \22\Insilco Corp. 91 FTC 706 (1978); Lindal Cedar Homes, Inc., 
87 FTC 8 (1976).
---------------------------------------------------------------------------

     Offering financing without disclosing terms, or misleading 
consumers with respect to the terms of the financing available (Guide 
5);\23\
---------------------------------------------------------------------------

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

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

    \24\Best Homes, 77 FTC at 13-14; H.R. Rieger Co., 75 FTC at 172-
73; Hi-Line, Inc., 74 FTC at 1180.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \25\Best Homes, 77 FTC at 14; H.R. Rieger Co., 75 FTC at 173; 
Hi-Line, Inc., 74 FTC at 118.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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