March 21, 2005
The Honorable Todd Smith
Texas House of Representatives
Post Office Box 2910
Dear Representative Smith:
At your request, I am providing a response for your review of HomeOwners for
BuildingÂs comments on the recommendations suggested in the report by the Comptroller of Public Accounts dated
January 23, 2006.
First and foremost, we agree with the findings of the State Comptroller that the Texas Residential Construction Commission (TRCC) is a builder protection agency that places an unnecessary bureaucratic burden on homeowners. This agency places minimal requirements and restrictions on homebuilders, while simultaneously creating additional roadblocks for homeowners seeking relief.
Furthermore, the affirmation that 93% of those homeowners who went through the State Sponsored Inspection and Dispute Resolution (SIRP) process were found to have a valid claim, is telling. This dispels the suggestion that homeowners file frivolous complaints. The 2Â½ years of TRCC operation does, however, provide incontrovertible proof that
Texashomebuilders are constructing an unacceptable number of defective homes. In addition, builderÂs warranties are for the most part, unenforceable.
Comments regarding ComptrollerÂs Recommendations
1. The Legislature should amend TRCCÂs Act to add two new grounds for taking enforcement action against builders: Failure to fix a confirmed defect and repeated failure to meet TRCC performance standards.
These grounds would relate directly to buildersÂ performance in constructing houses that meet accepted performance standards. The TRCC should be able to sanction builders for violating these grounds with its normal range of enforcement possibilities, including, for example, revocation or suspension of a
registration, formal or informal reprimand and administrative penalties.
HOBBRecommendation: TRCC should have enforcement authority for building code comp
liance and structural integrity issues during the entire construction process, as well as post construction issues. This practice is the primary means used in other states by building enforcement agencies.
2. TRCC should not require homeowners to pay to register a home before they file a SIRP.
This is the responsibility of the builder and the burden should not be shifted to the homeowner simply because the builder is negligent and has not complied with the law.
HOBBRecommendation: Builder must pay the mandatory penalty as stipulated in the Fee Schedule for failure to register a home, with increased penalties for subsequent violations. The Legislature should require that cities verify
registrationof every home with the TRCC before issuing a permit.
3. TRCC should change its SIRP fee rules so that no fee is required to file a SIRP.
SIRP fees should be assessed after the independent inspection is complete. If a defect is found, homebuilders should pay the fee. If no defect is found, homeowners should pay the fee.
HOBBRecommendation: If defects and/or code violations are confirmed, the TRCC should issue the builder a citation that is subject to a class C misdemeanor fine or suspension or revocation of
registration. Other state agencies that regulate plumbers, electricians, and heating and air conditioning contractors do not charge prior to inspections to confirm defects. In addition, contractors are subject to disciplinary action and/or fines.
Supporting comments: Additionally, the fees paid for
registrationof homes with the TRCC is ultimately paid by the buyer. This generates in excess of $l million in annual revenue, which would be more than ample for conducting state investigative inspections when a complaint is filed.
According to the Comptrollers report only two other states charge a fee.
Rhode Islandcharges $25.00, while
New Jerseycharges a significant $250.00 fee. However, it should be noted that
New Jerseyhas a state recovery fund if the builder fails to correct the defects.
New JerseyÂs, Department of Community Affairs (DCA) oversees homebuilding, which has policing and enforcement authority of builderÂs, monitored by state and local inspections. See related background information on
New Jerseyprovided at the end of this report.
Related comments: It important to know that the model program used for structuring TRCC was the state of
New JerseyÂs DCA program. The commonality with
New Jerseyhas a State Limited Home-Warranty program, in lieu of an implied warranty of habitability and a dispute resolution complaint process with a $250 fee charged. Where the
New Jerseyprogram differs significantly is that the New Jersey DCA has a comprehensive statewide authority for building code enforcement that is commonly found in most other states. Local townships employ inspectors who are subject to the authority of the state to ensure enforcement of building standards.
It should be further noted that at the time the Texas Association of Builders (TAB) was drafting their TRCCA legislation for
Texas, modeled after the New Jersey DCA, the New Jersey State Commission of Investigation (CSI) was in the midst of conducting an internal investigation. Shortly after the TRCCA took effect in
Texas the New Jersey CSI announced on
November 13, 2003, it had been conducting an internal investigation concerning DCA for widespread abuses in new-home construction and inspections. CSI announced it would begin conducting a public investigation for lax oversight and enforcement of state and local laws and regulations, and serious problems involving the adequacy of the Âcomplaint-response mechanisms and home-warranty programs.Â Eventually the investigation resulted in numerous indictments, convictions and imprisonment of both building and elected officials.
At the conclusion of the investigation one of the recommendations made by the Commission was to implement a state home lemon law.
4. TRCC should not require homeowners to have forms notarized.
HOBBNotation: Homeowners trustworthiness should never be in question. For years car titles have not had to be notarized so why should homeowners be required to notarize forms, especially when builder are not required to notarize any documents.
5. TRCC should allow homeowners and builders five business days to object to a third-party inspector.
HOBBRecommendation: This would not be an issue if TRCC had statewide agency enforcement authority. TRCC would simply assign a state inspector that already has law enforcement authority granted when the state adopted the International Residential Code (IRC) in 2001. This practice is common in other states.
6. TRCC should not require a fee for educational documents such as its warranty standards.
7. TRCC should upgrade its web site to make it more customer-friendly.
As part of this upgrade, TRCC should include an effective search engine on its web site. The web site also should include arbitration awards for residential construction that have been filed with TRCC.
HOBBRecommendation: The list of all registered contractors should be easily accessible and include the number of all complaints submitted to the TRCC, and the number of SIRP requests including the results of the findings.
8. TRCCÂs board should closely examine agency salaries to ensure their comparability to salaries in agencies with similar missions, staffing and work volumes.
9. The State Classification Office of the State AuditorÂs Office should work with TRCC to ensure that its salaries are consistent with the provisions of the General Appropriations Act and salaries of other state agencies.
10. TRCC should follow state procurement law and guidelines and exercise due diligence to ensure that it gets the best value for the taxpayersÂ money.
HOBBNotation: After review of TRCC documents it is evident that taxpayers did not get the best value for their money by contracting with the outside public relation firms of Pavlik and Associates, and Burson Marsteller. This was an unnecessary expenditure of $600,000 that duplicated the responsibilities of adequately compensated professional TRCC staff.
11. The Legislature should require that cities verify a builderÂs TRCC registration before issuing a building permit for a residential construction project.
registrationis not necessarily an incentive for good home building, this recommendation will help TRCC enforce current state law regarding homebuilder registration.
12. The Legislature should authorize TRCC to issue a cease-and-desist order against an unregistered builder engaged in a residential construction project.
The statute should specify that TRCC could issue a cease-and-desist order only after notice and opportunity for a hearing. Violations should constitute grounds for imposing an administrative penalty.
13. The Legislature should authorize TRCC to seek injunctive relief against unregistered builders in district court.
This would eliminate the need for going through the Attorney GeneralÂs Office.
14. The Legislature should amend TRCCÂs enabling statute to include the standard
TexasSunset Commission provision defining public members.
This would help ensure that public members on TRCCÂs board have no direct ties to the regulated industry.
15. The Legislature should require that public-member appointments to the TRCC board have demonstrated a continued interest in consumer protection.
Requiring public members to have a background in consumer protection and no ties to the construction industry would help ensure that a balanced board heads TRCC.
16. The Legislature should amend TRCCÂs enabling statute to include the standard
TexasSunset Advisory Commission provision addressing board member conflicts of interest.
This would update TRCCÂs statute to prohibit a person from serving on the board if the person or his or her spouse is an officer of a statewide trade association in the field of residential construction.
Scope of the Report Limits ComptrollerÂs Recommendations
The ComptrollerÂs report identified substantial deficiencies that negatively affected and restricted the TRCCÂs ability to resolve construction defects for homeowners.
Due to the limited nature of the request for the independent assessment of the TRCC, it limited the ComptrollerÂs scope of the report as well as recommendations. Consequently our concern for homeowners goes beyond the recommendations of the Comptroller.
Areas of considerable concern not addressed in the report
liance with the state-adopted International Residential Code (IRC) by homebuilders:
We and TRCC had a significant number of complaints from homebuyers who verified non-comp
liance with the state adopted building code (IRC) during construction. Homeowners were frustrated and disillusioned to find that the TRCC had no authority to make the builders comply. When the buyer objected to continuing construction or refused to close on the home due to known defects, builders refused to return the earnest money and/or the disproportionate funds drawn from the lender for the construction loan.
Recommendation 17: The Texas Legislature should give authority to a state agency such as the Texas Department of Licensing and Regulation, or the Real Estate Commission to oversee enforcement of state-adopted codes. Builders should not be allowed to keep earnest money when a home under contract and construction does not comply with state codes and standards. Buyer should have a state agency to turn to for code enforcement or refund of earnest money deposits.
Amendments create a lower State Minimum Standard:
Increasingly, the state-adopted (2001) IRC has been amended by some cities to a lesser standard, and the majority of builders building in the county have refused to comply. Unlike other states,
Texashas no authority that assures comp
liance with building codes statewide.
Recommendation 18: The Texas Legislature should pass a law stating specifically that the state-adopted IRC prohibits any amendment to the IRC that results in a lesser standard.
As pointed out in the ComptrollerÂs report, the performance standards are lax and inadequate to protect homebuyers. Engineering and architectural experts at
Texassaid the standards are "overly lenient and in need of fine-tuning."
The fact that Texas A&MÂs Department of Construction ScienceÂs two principal faculty members responsible for drafting the warranty and performance standards specialize in Business Risk Management, might explain why the standards are tailored toward homeowner responsibility and less builder responsibility.
Not surprisingly, the final TRCC approved performance standards limit
liability for the home building Industry and in fact promote shoddy and substandard construction.
Recommendation 19: Rewriting current performance standards to reflect protection for the homebuyer and promote verifiable comp
liance with state adopted codes.
The TRCCÂs approval of third party Warranty Companies is misleading and gives another false sense of security to homebuyers. TRCCÂs approval, in fact, is an endorsement of warranty companies that have a long history of creating another layer of a biased dispute resolution process called mandatory binding arbitration in addition to the TRCCÂs dispute resolution.
Home Buyers Warranty (HBW), for example, is one of the most popular warranty companies amongst builders, however; it has an official record of denying 86% of all claims. Once the claim is denied, HBW requires homeowners to send $650 to begin the mandatory binding arbitration conducted by its own biased subsidiary, Construction Arbitration Services (CAS). Other approved warranty companies also use CAS, whose sole purpose, emphasized by its name ÂConstruction Arbitration Services,Â is to conduct arbitration for the home construction industry nationwide.
Recommendation 20: Prohibit builder warranties from imposing Mandatory Binding Arbitration and other conditions on the homeowner which are not contained in the state-approved limited warranty.
With TRCC/State approval of a Third Party Warranty, the warranty provider should comply with the findings of TRCCÂs SIRP decisions within 30 days of the issuance of the decision.
The Texas Legislature should pass a law that would require that all third party builder warranty companies to register with the Texas Department of Insurance (TDI). Additionally, third party warranty companies should be regulated and required to report the number of claims paid, the number of claims denied, and the disposition of all claims to TDI and be subjected to review and enforcement.
The ComptrollerÂs report opens the doors to a great deal of justifiable criticism of TRCC and the building industry and questions even the need for such an agency. TRCC statistics do, however, affirm that defective homebuilding is occurring at an alarming rate in
Further, the confirmation that 86 percent of those who went through the TRCC/SIRP which confirmed defects did not result in the builder making repairs, establishing that TRCC has failed to help homeowners and caused a legal action to ensue. The fact that only 14 percent of those homeowners who went through SIRP resolved their disputes, establishes that TRCC is not a cost effective agency and has failed its alleged mission to prevent lawsuits.
Again, the alleged objective of HB730 was to help avoid legal action and resolves disputes, however; the process actually impedes many homebuyers from resolving warranty issues that are in fact not legal disputes at all.
The most unforgiving aspect of TRCC and its process is the instruction to homeowners to write the first certified Residential Construction Liability Act (RCLA) demand letter to the builder, which initiates a legal action with specific timelines and statutes of limitations. This authority of TRCC is patently unfair, dangerous and perhaps unconstitutional when a state agency is empowered to intentionally direct naive homeowners into a legal action without legal representation.
The bottom line is that homeowners innocently began legal action when their only intent was to complain to a state agency about a defective home and the builder who failed to respond. The effect, homeowners learn that complaining to the state about a bad home costs a great deal of money, time, heartaches, and a lawsuit if they complain. In fact, TRCC becomes the punishment phase of homeownership in
Since the passage of TRCCA, builders have become more unwilling to address homeowners warranty requests and have less of an incentive to make repairs now that itÂs more difficult and expensive for homeowners to go through these complex bureaucratic barriers. Our experience is that builders are demonstrating an increased resistance and challenging homeowners to take their complaints to TRCC if they donÂt like it.
After a review of the records at the office of the Comptroller, it is abundantly clear why HB730 has had the opposite effect of the 2003 legislation to Âprevent lawsuits.Â The underlying reasons are exposed in the agencyÂs documents, which unequivocally confirm that for the past 2Â½-years TRCC and TAB have worked in concert to craft an agency for the good of the building industry and a bureaucratic nightmare for the homebuyer.
The fact that TRCC has the authority to force homeowners into a mandatory process actually creates lawsuits instead of preventing them. The rhetorical question is why would a builder do anything if they can put the homeowner through a costly and lengthy bureaucratic nightmare?
If TRCC is supposed to be good for homebuyers, it should be optional rather than mandatory. Homeowners would welcome a state service if it was free, voluntary, and effectively enforced.
The objective for state policy should be to regulate the industry, which would give an incentive for homebuilders to build homes correctly, not to create dispute resolution processes after the home has been built improperly. The emphasis should be to enforce comp
liance with sound state building codes and ensure that a homeowners warranty is an effective, enforceable document should a problem occur.
Implementing a common sense approach to prevent defects up front rather than continue to pursue a state bureaucratic dispute resolution process would make more sense. Logic dictates that it would be more expedient to use the information collected by the State Comptroller regarding how other states regulate homebuilding and adopt one of those already proven methods of regulation and law enforcement.
According to the ComptrollerÂs report, ÂIn all, 43 states regulate their residential construction industry either at the state or local level.Â
Currently, when compared to other states,
Texasfalls short. The ComptrollerÂs staff selected ten states for an in-depth survey of their residential construction regulatory authorities to gather background data on agency processes and procedures. All ten states had regulatory authority. However, only
Texashad no educational requirements, no proof of financial solvency, no proof of insurance, but most importantly,
Texasis the only state that does not have authority to enforce comp
liance with state standards. Nor does
Texashave authority to force repairs of defects, and has shown little concern to take disciplinary action.
With a substantial amount of changes and many years of redesign, TRCC could perhaps become a state agency that regulates homebuilding, and Representative Jessica FarrarÂs HB3404 filed in 2005 could be used as a starting point for making those changes.
In the meantime, TRCC has a flawed foundation that is founded on a broken system (
New Jersey) that has failed to help homeowners with defective homes and to rid the industry of fly-by-night contractors who continue to flock to
Texashas literally become a playground for unscrupulous and otherwise incompetent builders.
Janet Ahmad, president
Related background information on
Commission of Investigation
November 13, 2003
SCI HEARINGS: HOME CONSTRUCTION and INSPECTION ABUSES
TRENTON Â The State Commission of Investigation will hold public hearings next week on widespread abuses in new-home construction and inspections in
April 2, 2005- The Associated Press -
Report on home builders finds waste, abuse
"This is a system mired in the past, a system utterly incompatible with 21st century standards and expectations, a system that, in many respects, is as fractured and as imperiled by structural flaws as the problem-plagued homes it has produced," said the report released Thursday by the State Commission of Investigation. To correct the problems, the commission recommended several measures, including instituting stricter licensing of construction supervisors, requiring currently unlicensed carpenters and masons to become licensed, expanding the state Consumer Fraud Act to include new home construction and creating a "lemon law" for new homes that would require builders to buy back problem houses.
New JerseyÂ Commission of Investigation
SCI FINDS ÂPANORAMA OF WASTE, FRAUD and ABUSEÂ in NEW-HOME CONSTRUCTION
CALLS FOR SYSTEM-WIDE OVERHAUL TO PROTECT CONSUMERS
TRENTON Â The State Commission of Investigation (SCI) today issued the final report of an unprecedented investigation into abuses in new-home construction and inspections in New Jersey and recommended sweeping legislative and regulatory reforms to boost government oversight and to safeguard the interests of the home-buying public. The reforms would create licensing and performance standards for builders, expand criminal statutes aimed at enforcing accountability for corruption of the construction inspection process, and empower home-buyers by revamping the stateÂs Consumer Fraud Act and enacting a new-home ÂLemon LawÂ similar to one that has been on the books for years to aid purchasers of defective new cars.