IDSP Rule - SS - 2014 -FINAL

Informal Dispute Settlement Procedures
16 C.F.R. 703
(OMB Control Number 3084-0113)
1.

Necessity for Collecting the Information

Section 110(a)(2) of the Magnuson-Moss Warranty Act (15 U.S.C. Section 2301, et seq.)
directed the Commission to prescribe rules setting forth the minimum requirements for any
informal dispute settlement procedure that the warrantor requires the consumer to use before
pursuing any legal action in court. On December 31, 1975, the Commission issued its Rule on
Informal Dispute Settlement Procedures, 16 C.F.R. § 703 (“the Rule” or “Rule 703”), which sets
minimum standards for informal dispute settlement mechanisms (“IDSM”) established to resolve
consumer warranty disputes. The purpose of the Rule is to carry out Congress’s intent to
encourage the fair and expeditious handling of consumer disputes through the use of alternative
dispute resolution methods.
Rule 703 applies only to those warrantors who (1) provide a written warranty, (2) on a
consumer product, and (3) place a “prior resort” requirement in their warranty (i.e., require
consumers to use a dispute resolution mechanism before exercising their legal remedies in
court). Neither the Act nor Rule 703 requires warrantors to set up IDSMs. Furthermore, a
warrantor is free to set up an IDSM that does not comply with Rule 703 as long as the warranty
does not contain a “prior resort requirement.”
Rule 703 contains procedural standards that must be followed by every IDSM that is
incorporated, through a prior resort clause, into the terms of a written consumer product
warranty. These standards include requirements concerning the mechanism’s structure, the
qualifications of staff or decision makers, the mechanism’s procedures for resolving disputes,
recordkeeping, and annual audits.
The recordkeeping provision of the Rule, Section 703.6, requires IDSMs to maintain
three types of information:
(a) Individual records for each dispute submitted to the IDSM [§ 703.6(a)];
(b) Indexes that categorize disputes by product model and show the extent to which the
warrantor has abided by decisions of the mechanism [§ 703.6(b) - (d)]; and
(c) Statistical summaries that group disputes according to various status and final
disposition categories [§ 703.6(e)].
Section 703.6(f) requires the records specified in Section 703.6(a) through (e) to be
retained for four years after final disposition of a dispute. Section 703.7 of the Rule requires
IDSMs operating under Rule 703 to conduct an annual audit of their procedures and submit the

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audit to the FTC.
2.

Use of the Information

Information that IDSMs are required to maintain under Section 703.6(f) is available for
review by consumers and by the FTC to determine compliance. In addition, the annual audit
required under Section 703.7 must be submitted to the Federal Trade Commission, where it is
placed on the public record for review by any interested party. Finally, states have incorporated
the Rule by reference in many of their “lemon law” statutes and may use the records and audits
required by Rule 703 in their own review and enforcement actions.
3.

Consideration of the Use of Improved Information Technology to Reduce Burden

Rule 703 requires that warrantors disclose the existence of the IDSM within their written
warranties, sets out guidelines for operating the mechanism, and specifies recordkeeping and
reporting functions. The recordkeeping functions are the primary area where entities subject to
the Rule could employ new or improved information technology to reduce burdens under the
Rule. In this regard, the Rule does not specify how the information required to be maintained
and reported is to be kept. Thus, those IDSMs subject to the Rule are free to use whatever
information systems they wish to use. In addition, there is nothing in Rule 703 that would
preclude mechanisms from allowing interested parties the option of viewing audits and other
public information online. Indeed, the FTC and some IDSMs make the annual audits available
on their websites. Accordingly, consistent with the Government Paperwork Elimination Act,
Pub. L. No. 105-277, Title XVII, 112 Stat. 2681-749, nothing in the Rule prescribes that
disclosures be made, records filed or kept, or signatures executed, on paper or in any particular
format that would preclude the use of electronic methods to comply with the Rule’s
requirements.
4.

Efforts to Identify Duplication/Availability of Similar Information

There is no other statute or regulation of nationwide applicability that governs the
operation of dispute resolution mechanisms for consumer product warranty disputes. Some
states have incorporated Rule 703 by reference in their state lemon laws; others have set up
arbitration systems under their lemon laws. Where states have set up their own systems, they
have used Rule 703 as a guide. Accordingly, staff believes there is little, if any, duplication.
There are no other sources of information concerning the operation of the Rule 703 IDSMs.
5.

Efforts to Minimize the Burden on Small Businesses

Although warrantors of any size may utilize informal dispute settlement procedures, the
IDSMs that currently operate under the Rule are maintained by very large organizations.
However, the Rule is flexible in terms of the type of procedures that can be offered. The Act
does not require warrantors to set up IDSMs. Furthermore, a warrantor is free to set up an IDSM

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that does not comply with Rule 703 as long as the warranty does not contain a “prior resort
requirement.” Thus, a small warrantor is free to set up an IDSM that does not comply with Rule
703 if there is no prior resort requirement in the warranty; alternatively, a small warrantor can
choose to contract with organizations such as the Better Business Bureau to handle any
consumer warranty disputes that might arise.
6.

Consequences of Conducting the Collection Less Frequently

If the individual case files required by Section 703.6(a) of the Rule were compiled less
frequently, the IDSM would not be able to comply with Section 703.8(e) of the Rule, which
requires it to provide (upon request) to either party to a dispute access to all records relating to
the dispute and copies of any records relating to the dispute at a reasonable cost. It is essential
that these files be maintained by the mechanism and that they be made available to the parties
because they would provide the basis for any subsequent arbitration, legal or other proceedings
following action by the IDSM.
The indexes required by Section 703.6(b) are intended to enable the mechanism to
analyze patterns of complaints and report indications of consistent problems to the warrantor.
Less frequent compilation of the information in the index would not affect the Commission’s or
the public’s ability to monitor the IDSM’s compliance, but it would prevent the mechanism from
imparting useful information to the warrantor.
Less frequent compilation of the indexes required under Sections 703.6(c) and (d) would
hamper the Commission’s ability to monitor compliance with the Rule. These indexes provide
key indicators of a warrantor’s good faith participation in an IDSM and the mechanism’s ability
to resolve disputes expeditiously.
The statistical reporting requirements set forth in Section 703.6(e) provide the basis for
review by interested members of the public. On the basis of the statistically-reported
performance of an IDSM, an interested person could determine whether to file a complaint with
the FTC pursuant to Section 110(a)(4) of the Magnuson-Moss Warranty Act, and thereby initiate
an FTC review of the bona fide operation of the IDSM. The statistics required under Section
703.6(e) must be compiled semiannually. If the statistics were compiled less frequently, the
ability of the public to evaluate the performance of the IDSM would be hindered.
The audit report is intended to be a comprehensive evaluation of the IDSM’s
performance and its compliance with the Rule. If the audit report were required less frequently,
public review of the mechanism as well as the Commission’s evaluation of the mechanism
would most likely be based on outdated information.
7.

Special Circumstances Requiring Collection Inconsistent With Guidelines

The collection of information required by the Rule is consistent with all applicable
guidelines contained in 5 C.F.R. § 1320.5(d)(2).
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8.

Public Comments/Consultation Outside the Agency
(a) Public comments

As a prelude to this request, the Commission sought public comment. See 78 Fed. Reg.
74,142 (Dec. 10, 2013). No comments were received. Pursuant to the OMB regulations that
implement the PRA (5 C.F.R. Part 1320), the Commission is providing a second opportunity for
public comment while seeking OMB approval to extend the existing paperwork clearance for the
Rule.
(b) Consultation Outside the Agency
As part of its periodic review of all Commission rules and guides, the Commission solicited
public comments on August 23, 2011, about the costs and benefits of all Rules promulgated under
the Magnuson-Moss Act, including Rule 702, as well as the regulatory and economic impacts. 76
Fed. Reg. 52,596. During the review, 29 organizations submitted comments, including industry,
trade associations, and consumer groups. The Commission’s review is ongoing.
9.

Payments or Gifts to Respondents

Not applicable. There have been no payments or gifts to respondents in connection with
Rule 703.
10. & 11.

Assurances of Confidentiality/Matters of a Sensitive Nature

Section 703.8(b) of the Rule provides that all records of a mechanism may be kept
confidential, except the statistical summaries specified in Section 703.6(e). Therefore, the Rule
presents no issues concerning confidentiality or questions of a sensitive nature. The Rule does
not require any confidential or sensitive information to be filed with the FTC as part of the audit
report mandated by the Rule.
From time to time, the Commission may require a warrantor or IDSM to submit
information as part of a law enforcement investigation to determine whether it has engaged in
any practices that might have violated Rule 703. Any information provided to the Commission
in connection with such law enforcement investigations is treated as confidential under Sections
6(f) and 21(f) of the Federal Trade Commission Act, 15 U.S.C. § 46(f) and 61(f).
12.

Hours and Labor Cost Burden
Total annual hours burden: 8,318 hours (derived from (5,757 hours for recordkeeping
+ 1,919 hours for reporting + 642 hours for disclosures).
The primary burden from the Dispute Settlement Rule comes from the recordkeeping

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requirements that apply to IDSMs that are incorporated into a consumer product warranty through
a prior resort clause. In its 2011 submission to OMB, staff estimated a total annual hours burden
of approximately 13,266 hours (derived from 9,114 hours for recordkeeping + 3,038 hours for
reporting + 1,114 hours for disclosure requirements). Although the Rule’s information collection
requirements have not changed since 2011, staff has adjusted its previous estimates downward for
2014 calculations because the annual audits filed by the two IDSMs currently operating under the
Rule indicate that, on average, fewer disputes have been handled since the previous submission to
OMB in 2010 (18,227 disputes/year in 2011; 11,514 disputes/year in 2014). This factor results in
a decreased annual hours burden estimate for the IDSMs. The calculations underlying staff’s new
estimates follow.
Recordkeeping: The Rule requires IDSMs to maintain records of each consumer warranty
dispute that is referred to it. These case files must include information such as the consumer’s
contact information, the make and model of the product at issue, all letters or other correspondence
submitted by the consumer or warrantor, and all evidence collected to resolve the dispute. Because
maintaining individual case records is a necessary function for any IDSM, much of the burden
would be incurred in the ordinary course of the IDSM’s business. Nonetheless, staff retains its
previous estimate that maintaining individual case files imposes an additional burden of 30
minutes per case.
The amount of work required will depend on the number of dispute resolution proceedings
undertaken in each IDSM. A review of the annual audits completed since the prior submission to
OMB in 2011 (audits for calendar years 2010 through 2012) indicates that there are two IDSMs
operating under the Rule: the BBB AUTO LINE and the National Center for Dispute Settlement
(NCDS). Audit reports submitted on behalf of the BBB AUTO LINE, which in 2012 handled
disputes on behalf of ten automobile manufacturers, indicate that it handled an average of 9,358
disputes each year.1 Audit reports submitted on behalf of NCDS, which most recently handled
disputes on behalf of five automobile manufacturers, indicate that an average of 2,156 disputes
were closed each year for calendar years 2010 through 2012.2
Based on the above figures, staff estimates that the average number of disputes handled
annually by IDSMs covered by the Rule is approximately 11,514 (an average of 9,358 disputes
handled by BBB AUTO LINE + an average of 2,156 disputes handled by
NCDS).3 Accordingly, staff estimates the total annual recordkeeping burden attributable to the
Rule to be approximately 5,757 hours (11,514 disputes × 30 minutes of burden) ÷ 60 minutes).

1

According to its annual audits, the number of disputes filed each year with the BBB AUTO LINE
are 8,821 (2012), 9,177 (2011), and 10,075 (2010).
2
According to its annual audits, the number of disputes closed each year with NCDS are 1,505
(2012), 1,359 (2011), and 3,603 (2010).
3
Because the number of annual disputes filed has fluctuated, staff believes that using the average
number of disputes filed for years 2010 through 2012 (the most recent available data) is the best
way to project what will happen over the next three years of the OMB clearance for the Rule.
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Reporting: The Rule requires IDSMs to update indexes, complete semiannual statistical
summaries, and submit an annual audit report to the FTC. Staff retains its previous estimate that
covered entities spend approximately 10 minutes per case for these activities, resulting in a total
annual burden of approximately 1,919 hours (11,514 disputes × 10 minutes of burden ÷ 60
minutes).
Disclosure:
(a) Warrantors’ Disclosure Burden
The Rule requires warrantors that incorporate the use of an IDSM into their warranties to
disclose in their warranties a statement about the availability of the IDSM, the contact information
for the IDSM, and any “prior resort requirement.”4 Similar to 2011, staff has determined that it
would be appropriate to account for the disclosure burden as it relates to warrantors based on two
types of additional information that warrantors are required to disclose under the Rule: (1)
information concerning IDSM and its procedures; and (2) information that makes consumers
aware of the existence of the IDSM.
First, the Rule requires that warrantors include, either in the warranty or in a separate
document accompanying the warranted product, more detailed information concerning the IDSM.
Among other things, this information may include: a form addressed to the IDSM, filled out by the
consumer, that provides the IDSM with information needed to resolve consumer disputes, a brief
description of IDSM procedures, the time limits adhered to by the IDSM, and the types of
information the IDSM might require for prompt resolution of the consumer dispute.5 Because
warrantors have the option of providing this additional information in materials separate from the
warranty, warrantors likely will bear an additional burden that is separate and apart from whatever
burden already imposed on warrantors from drafting warranty terms that comply with Rule 701
(the rule on the disclosure of warranty terms).
Second, the Rule requires that warrantors take steps reasonably calculated to make
consumers aware of the IDSM’s existence at the time consumers experience warranty disputes.6
The annual audits—which are required to assess how well warrantors comply with this
requirement—demonstrate the different steps warrantors take to inform consumers of the existence
of the IDSM procedures. For example, some warrantors create separate pamphlets that deal
specifically with the IDSM process. Other warrantors publish entire warranty manuals or booklets,
within which several pages are dedicated to the IDSM. Still other warrantors have created posters
to alert consumers to the existence of the informal dispute settlement process. Based on this
information, it is clear that warrantors bear more than a negligible disclosure burden under the
Rule. Accordingly, staff includes an assessment of the disclosure burden for warrantors in its
estimates.

4

16 CFR 703.2(b).
16 CFR 703.2(c).
6
16 CFR 703.2(d).
5

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A review of the annual audits of the BBB AUTO LINE and the NCDS indicates that there
are approximately fifteen automobile manufacturers covered by the Rule. Staff assumes that each
manufacturer spends an average of thirty hours a year creating, revising, and distributing the
informational materials necessary to comply with the Rule, resulting in an annual disclosure
burden of 450 hours (15 manufacturers × 30 hours).
(b) IDSMs’ Disclosure Burden
Under the Rule, a portion of the disclosure burden would be borne by the IDSM itself,
which is required to provide to interested consumers, upon request, copies of the various types of
information the IDSM possesses, including its annual audits. In addition, consumers who have
filed disputes with the IDSM also have a right to copies of their records. IDSMs are permitted to
charge for providing both types of information.
Based on discussions with representatives of the IDSMs over the years, staff estimates that
the burden imposed by the disclosure requirements is approximately 192 hours per year for the
existing IDSMs to provide copies of this information. This estimate draws from the average
number of consumers who file claims each year with the IDSMs (11,514) and the assumption that
twenty percent of consumers individually request copies of the records pertaining to their disputes,
or approximately 2,303 consumers. Staff estimates that copying such records would require
approximately 5 minutes per consumer, including a negligible number of requests for copies of the
annual audit.7 Thus, the IDSMs currently operating under the Rule have an estimated total
disclosure burden of 192 hours (2,303 consumers × 5 minutes of burden ÷ 60 minutes).
Accordingly, the total PRA-related annual hours burden attributed to the Rule is
approximately 8,318 hours (5,757 hours for recordkeeping + 1,919 hours for reporting + 642 hours
for disclosures).
Total annual labor cost: $161,000, rounded to the nearest thousand.
Recordkeeping: Staff assumes that IDSMs use clerical staff to comply with the
recordkeeping requirements contained in the Rule at an hourly rate of $14.07. Thus, the labor cost
associated with the 5,757 annual burden hours for recordkeeping is approximately $86,355 (5,757
burden hours × $15 per hour).
Reporting: Staff assumes that IDSMs also use clerical support staff at an hourly rate of $15
to comply with the reporting requirements. Thus, the labor cost associated with the 1,919 annual

7

This estimate includes the additional amount of time required to copy the annual audit upon a
consumer’s request. However, because staff has determined that a very small minority of
consumers request a copy of the annual audit, this estimate is likely an overstatement. In addition,
some case files are provided to consumers electronically, which further reduces the paperwork
burden borne by the IDSMs.
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burden hours for reporting is approximately $28,785 (1,919 burden hours × $15 per hour).
Disclosure: Staff assumes that the work required to comply with the warrantors’ disclosure
requirements entails an equal mix of legal, clerical, and graphic design work. The legal work
entails ensuring that the warranty information and other materials contain the information required
to be disclosed by the Rule, as well as reviewing the annual audits for any recommendations for
improving the warrantors’ materials, and implementing those recommended changes as
appropriate. The graphic design work entails creating pamphlets, brochures, posters, or other
materials aimed at making consumers aware of the existence of the IDSM and its procedures. The
clerical work entails copying and distributing those informational materials. Staff assumes that
one third of the total disclosure hours for warrantors (150 hours) require legal work at a rate of
$250 per hour, one third requires graphic design at a rate of $23 per hour, and one third requires
clerical work at a rate of $15 per hour. This results in a disclosure labor burden of $43,200 for
warrantors ((150 × $250) + (150 × $23) + (150 × $15)).
In addition, staff assumes that IDSMs use clerical support at an hourly rate of $15 to
reproduce records and, therefore, the labor cost associated with the 192 annual hours of disclosure
burden for IDSMs is approximately $2,880 (192 burden hours × $15 per hour).
Accordingly, the combined total annual labor cost for PRA-related burden under the Rule
is approximately $161,220 ($86,355 for recordkeeping + $28,785 for reporting + $46,080 for
disclosures).
13.

Estimated Capital/Other Non-Labor Costs Burden

(a) Total capital and start-up costs. The Rule imposes no appreciable current capital or
start-up costs. The vast majority of warrantors have already developed systems to retain the
records and provide the disclosures required by the Rule. Rule compliance does not require the
use of any capital goods, other than ordinary office equipment, to which providers would already
have access. In addition, according to a representative of one IDSM, it has already developed
systems to collect and retain information needed to produce the indexes and statistical summaries
required by the Rule, and thus, estimated very low capital or start-up costs.
The only additional cost imposed on IDSMs operating under the Rule that would not be
incurred for other IDSMs is the annual audit requirement. According to representatives of the
IDSMs, the vast majority of costs associated with this requirement are the fees paid to the
auditors and their staffs to perform the annual audit. Representatives of the IDSMs previously
estimated a combined cost of $300,000 for both IDSMs currently operating under the Rule, and
staff retains that estimate.
(b) Total operation/maintenance/purchase of services costs. This total is based on
estimated copying costs of 7 cents per page and several conservative assumptions. Staff
estimates that the average dispute-related file is 35 pages long and that a typical annual audit file
is approximately 200 pages in length. As discussed above, staff assumes that twenty percent of
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consumers using an IDSM currently operating under the Rule (approximately 2,303 consumers)
request copies of the records relating to their disputes.
Staff also estimates that a very small minority of consumers request a copy of the annual
audit. This assumption is based on (1) the number of consumer requests actually received by the
IDSMs in the past; and (2) the fact that the IDSMs’ annual audits are available online. For
example, annual audits are available on the FTC’s web site, where consumers may view and or
print pages as needed, at no cost to the IDSM. In addition, the Better Business Bureau makes
available on its web site the annual audit of the BBB AUTO LINE. Therefore, staff
conservatively estimates that only five percent of consumers using an IDSM covered by the Rule
(approximately 576 consumers) will request a copy of the IDSM’s audit report. Therefore, the
total annual copying cost for dispute-related files is approximately $5,643 (35 pages per file x
$.07 per page x 2,303 consumer requests) and the total annual copying cost for annual audit
reports is approximately $8,064 (200 pages per audit report x $.07 per page x 576 consumer
requests). Accordingly, the total cost attributed to copying under the Rule is approximately
$13,707.
Thus, the total non-labor cost under the Rule is approximately $313,707 ($300,000
for auditor fees + $13,707 for copying costs).
14.

Estimated Cost to the Federal Government

Staff estimates that the yearly cost to the Federal Government resulting from
administration of the Rule’s warranty disclosure requirements is $10,000, which is the cost of
one-tenth of a professional work year.
15.

Program Changes or Adjustments

There are no program changes. The estimated total annual hours burden has decreased to
8,318 hours in 2014 from the 13,000 hours estimated in 2011. Although the Rule’s information
collection requirements have not changed since 2011, staff adjusted its previous estimates
because the annual audits filed by the two IDSMs currently operating under the Rule indicate
that, on average, fewer disputes were handled since the previous submission to OMB (18,227
disputes/year in 2011; 11,514 disputes/year in 2014). This factor results in a decreased annual
hours burden estimate for the IDSMs. Because the annual burden hours has decreased, the
associated labor costs have also decreased, from the estimated $264,600 in 2011 to $161,220 in
2014.
The estimate of the total capital and non-labor costs has decreased slightly from
$321,684 in 2007 to $313,707. This new estimate retains the previous estimate of $300,000 in
capital and start-up costs, but decreases the copying costs from $21,684 in 2011 to $13,707 in
2014. The decrease is due primarily to a decrease in the number of estimated disputes filed each
year (from 3,645 in 2011 to 2,303 in 2014).
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16.

Plans for Tabulation and Publication
There are no plans to publish any information.

March 2014