Informal Dispute Settlement Procedures Rule - SS - 2020 - 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

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the 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
becomes public record and available 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

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does not require 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.” 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.

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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).
8.

Public Comments/Consultation Outside the Agency

As a prelude to this request, the Commission sought public comment. See 85 Fed. Reg.
14,939 (March 16, 2020). No germane comments were received.1 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.
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
57b-2(f).
12.

Hours and Labor Cost Burden

The primary burden from the Rule comes from the recordkeeping requirements that apply
to IDSMs that are incorporated into a consumer product warranty through a prior resort clause.
Currently, there are two IDSMs operating under the Rule: the BBB AUTO LINE and the
National Center for Dispute Settlement (NCDS). Although the Rule’s information collection
requirements have not changed since 2017, staff has adjusted its previous estimates upward for

1
The Commission received six non-germane comments.

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its 2020 calculations because the two IDSMs indicate that, on average, more disputes have been
handled since the previous submission to OMB (10,727 disputes/year projected in 2017; 12,241
disputes/year projected in 2020). The calculations underlying staff’s new estimates follow.
Estimated Annual Burden Hours: 9,055 (derived from 6,121 recordkeeping hours in
addition to 2,040 reporting hours and 894 disclosure hours).
Recordkeeping: The Rule requires IDSMs to maintain records of each consumer warranty
dispute. Both the BBB AUTOLINE and NCDS report the number of disputes closed each year.
Staff is using those numbers to project what will happen over the next three years of OMB
clearance for the Rule. The BBB AUTO LINE handles an average of 9,894 disputes each year.
NCDS handles an average of 2,347 disputes each year. Based on these figures, staff estimates
that the average number of IDSM disputes covered by the Rule is approximately 12,241. 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 business. Nonetheless, staff estimates that maintaining individual case files
imposes an additional burden of 30 minutes per case.
Accordingly, the total annual recordkeeping burden is approximately 6,121 hours ((12,241
disputes × 30 minutes of burden/dispute) ÷ 60 minutes/hour).
Reporting: The Rule requires IDSMs to update indexes, complete semiannual statistical
summaries, and submit an annual audit report to the FTC. Staff estimates that covered entities
spend approximately 10 minutes per case for these activities, resulting in a total annual burden of
approximately 2,040 hours ((12,241 disputes × 10 minutes of burden/dispute) ÷ 60
minutes/hour).

Disclosure
(a) Warrantors’ Disclosure Burden

Similar to 2017, 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 the IDSM and its
procedures; and (2) information that makes consumers aware of the existence of the IDSM.
A review of the annual audits of the BBB AUTO LINE and the NCDS indicates that there are
approximately twenty-three 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 690 hours (23 manufacturers × 30 hours).

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(b) IDSMs’ Disclosure Burden
Under the Rule, the IDSMs are 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 two IDSMs, staff estimates that the burden imposed by
these disclosure requirements is approximately 179 hours per year. This estimate draws from the
average number of disputes closed each year with the IDSMs (12,241) and the assumption that
twenty percent of consumers request copies of the records pertaining to their disputes
(approximately 2,448 disputes). Staff estimates that copying such records would require
approximately 5 minutes per dispute. Staff estimates a total disclosure burden of approximately
204 hours ((2,448 disputes × 5 minutes of burden/dispute) ÷ 60 minutes/hour) for the IDSMs.
Accordingly, the total PRA-related annual hours burden attributed to the Rule is
approximately 9,055 (6,121 hours for recordkeeping plus 2,040 hours for reporting plus 690
hours for warrantors’ disclosures and 204 hours for IDSM disclosures).
Total annual labor cost: $209,595.
Recordkeeping: Staff assumes that IDSMs use clerical staff to comply with the
recordkeeping requirements contained in the Rule at an hourly rate of approximately $17. Thus,
the labor cost associated with the 6,121 annual burden hours for recordkeeping is approximately
$104,057 (6,121 burden hours × $17 per hour).
Reporting: Staff assumes that IDSMs also use clerical support staff at an hourly rate of
$17 to comply with the reporting requirements. Thus, the labor cost associated with the 2,040
annual burden hours for reporting is approximately $34,680 (2,040 burden hours × $17 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. Staff
assumes that one third of the total disclosure hours for warrantors (230 hours) require legal work
at a rate of $250 per hour, one third require graphic design at a rate of $26 per hour, and one third
require clerical work at a rate of $17 per hour. This results in a disclosure labor burden of
$67,390 for warrantors ((230 × $250) + (230 × $26) + (230 × $17)).
In addition, staff assumes that IDSMs use clerical support at an hourly rate of $17 to
reproduce records and, therefore, the labor cost associated with the 204 annual hours of
disclosure burden for IDSMs is approximately $3,468 (204 burden hours × $17 per hour).
Accordingly, the combined total annual labor cost for PRA-related burden under the Rule
is approximately $209,595 ($104,057 for recordkeeping + $34,680 for reporting + $70,858 for
disclosures).

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13.

Estimated Capital/Other Non-Labor Costs Burden
Total annual capital or other non-labor costs: $314,566.

Total capital and start-up costs: The Rule imposes no appreciable current capital or startup 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 already have access.
The Rule imposes one additional cost on IDSMs operating under the rule, which is the
annual audit requirement. According to representatives of the IDSMs, the vast majority of costs
associated with this requirement consist of the fees paid to the auditors and their staffs.
Representatives of the IDSMs previously estimated a combined cost of $300,000 associated with
the audits. Staff retains that estimate.
Other non-labor costs: As discussed above, staff assumes that approximately twenty
percent of dispute files (approximately 2,448 files) are requested by consumers. Staff also
estimates that only five percent of consumers will request a copy of the IDSM’s audit report
(approximately 612 audit reports).2 Staff bases this assumption on the number of consumer
requests received by the IDSMs in the past and the fact that the IDSMs’ annual audits are
available online. Staff estimates that the average dispute-related file contains 35 pages and a
typical annual audit file contains approximately 200 pages. Staff estimates copying costs of 7
cents per page.
Thus, the total annual copying cost for dispute-related files is approximately $5,998 (35
pages per file × $0.07 per page × 2,448 disputes) and the total annual copying cost for annual
audit reports is approximately $8,568 (200 pages per audit report × $0.07 per page × 612 audit
reports). Accordingly, the total cost attributed to copying under the Rule is approximately
$14,566.
Thus, the total non-labor cost under the Rule is approximately $314,566 ($300,000 for
auditor fees + $14,566 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.

2
This estimate assumes each dispute is associated with one consumer.

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15.

Program Changes or Adjustments

There are no program changes. The estimated total annual hours of burden has increased
from 7,841 hours in 2017 to 9,055 hours estimated in 2020. Although the Rule’s information
collection requirements have not changed since 2017, staff adjusted its previous estimates
because the annual audits filed by the two IDSMs currently operating under the Rule indicate
that, on average, more disputes were handled since the previous submission to OMB (10,727
disputes/year in 2017; 12,241 disputes/year in 2020). This factor results in an increased annual
hours burden estimate for the IDSMs. Because the annual burden hours has increased, the
associated labor costs have also increased, from the estimated $159,265 in 2017 to $209,595 in
2020.
The estimate of the total capital and non-labor costs has increased slightly from
$312,759 in 2017 to $314,566 in 2020. This new estimate retains the previous estimate of
$300,000 in capital and start-up costs, but increases the copying costs from $12,759 in 2017
to 14,566 in 2020. The increase is due primarily to a increase in the number of estimated
disputes filed each year (from 2,145 in 2017 to 2,448 in 2020).
16.

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