IDSP - SS - 2011 - FINAL_mtd

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.

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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
(a) Public comments

As a prelude to this request, the Commission sought public comment. See 75 Fed. Reg.
71,704 (Nov. 24, 2010). 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 program of periodic ten-year regulatory review of all Commission rules and
guides, the Commission plans to solicit public comments during 2011 on the costs and benefits
of Rule 703, as well as its regulatory and economic impact. The Commission has also consulted
with industry members as part of its periodic evaluation of Rule 703. At the conclusion of the
prior periodic rule review in 1999, the Commission announced that it would retain Rule 703
unchanged (64 Fed. Reg. 19,700; April 22, 1999). During that earlier review, thirteen comments
were received. The comments generally reflected strong support for the view that the Rule is
achieving the objective it was fashioned to achieve – i.e., to facilitate the fair and expeditious
handling of consumer product warranty disputes through informal dispute settlement.
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
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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. 13,000 hours, rounded to the nearest thousand.

Recordkeeping Provisions. The primary burden from the Rule comes from the Rule’s
recordkeeping requirements that apply to those IDSMs incorporated into a consumer product
warranty. The burden of the Rule’s disclosure requirements is limited. 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. The staff has retained its previous
estimate that maintaining individual case files imposes a 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 2007 (audits for calendar years 2006 through 2009) indicates that
currently there are two IDSMs operating under the Rule: the BBB AUTO LINE and the
National Center for Dispute Settlement (NCDS). The BBB AUTO LINE audits from calendar
years 2006 through 2009 indicate that it handled an average of 16,187 disputes each year.1
Audit reports submitted on behalf of NCDS, which most recently handled disputes on behalf of
six automobile manufacturers, indicate that an average of 2,040 disputes were closed each year
for calendar years 2006 through 2009.2
Based on the above figures, staff estimates that the average number of disputes handled
annually by IDSMs covered by the Rule is approximately 18,227 (an average of 16,187 disputes
handled by BBB AUTO LINE + an average of 2,040 disputes handled by NCDS).3 Accordingly,

1

According to its annual audits, the number of disputes filed each year with the BBB
AUTO LINE are as follows: 20,658 in 2006; 17,365 in 2007; 14,958 in 2008; and 11,768 in
2009. As of its most recent audit in 2009, the BBB AUTO LINE handled disputes on a national
basis for thirteen automobile manufacturers. An additional eight manufacturers utilized BBB
AUTO LINE in some states, but not others.
2

According to its annual audits, the number of disputes closed each year with NCDS are
as follows: 1,836 in 2006; 1,759 in 2007; 2,110 in 2008; and 2,455 in 2009.
3

Because the number of annual disputes filed has fluctuated, staff believes that taking the
average number of disputes filed for years 2006 through 2009 (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
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staff estimates the total annual recordkeeping burden attributable to the Rule to be approximately
9,114 hours (18,227 disputes x 30 minutes of burden ÷ 60 minutes).
Reporting Provisions. 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 3,038 hours (18,227 disputes x 10
minutes of burden ÷ 60 minutes).
Disclosure Requirements.
Warrantors’ Disclosure Burden
The Rule requires warrantors that elect to incorporate the use of an IDSM into their
warranties to disclose in their warranties the following: a statement about the availability of the
IDSM, the contact information for the IDSM, and any “prior resort requirement.”4 In its 2007
submission to OMB, staff noted that any incremental costs to the warrantor of including this
additional information in the warranty would be negligible, and thus, did not account for
warrantors’ disclosure burden in its previous submission. Upon further review, 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) more detailed information concerning the 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 with
spaces to be filled out by the consumer to provide 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 is 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

Rule.
4

16 CFR 703.2(b).

5

16 CFR 703.2(c).

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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 now includes an assessment of the disclosure burden
for warrantors in its estimates as follows.
A review of the annual audits of the BBB AUTO LINE and the NCDS indicates that
currently there are approximately twenty-seven 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 810 hours (27 manufacturers x 30 hours).
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 304 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 (18,227) and the assumption
that twenty percent of consumers individually request copies of the records pertaining to their
disputes, or approximately 3,645 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 304 hours (3,645 consumers x 5 minutes of burden ÷ 60

6

16 CFR 703.2(d).

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, at least a portion of case files are provided to consumers electronically, which further
would reduce the paperwork burden borne by the IDSMs.
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minutes).
Accordingly, the total PRA-related annual hours burden attributed to the Rule is
approximately 13,266 hours (9,114 hours for recordkeeping + 3,038 hours for reporting + 1,114
hours for disclosures).
Total Annual Labor Cost Burden. Staff assumes that IDSMs uses clerical staff to
comply with the recordkeeping requirements contained in the Rule at an hourly rate of $15.
Thus, the labor cost associated with the 9,114 annual burden hours for recordkeeping is
approximately $136,710 (9,114 burden hours x $15 per hour).
In addition, 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 3,038
annual burden hours for reporting is approximately $45,570 (3,038 burden hours x $15 per
hour).
Finally, 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 how to improve the warrantors’ materials, and implementing those
recommended changes as appropriate. The graphic design work entails creating pamphlets,
brochures, posters, or other materials that are 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
(270 hours) requires legal work at a rate of $250 an hour, one third requires graphic design at a
rate of $23 an hour, and one third requires clerical work at a rate of $15 an hour. This results in
a disclosure labor burden of $77,760 for warrantors ((270 x $250) + (270 x $23) + (270 x $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 304 annual hours of disclosure burden
for IDSMs is approximately $4,560 (304 burden hours x $15 per hour).
Accordingly, the combined total annual labor cost for PRA-related burden under the Rule
is approximately $264,600 ($136,710 for recordkeeping + $45,570 for reporting + $82,320 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

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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
consumers using an IDSM currently operating under the Rule (approximately 3,645 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 911 consumers) will request a copy of the IDSM’s audit report. Therefore, the
total annual copying cost for dispute-related files is approximately $8,930 (35 pages per file x
$.07 per page x 3,645 consumer requests) and the total annual copying cost for annual audit
reports is approximately $12,754 (200 pages per audit report x $.07 per page x 911 consumer
requests). Accordingly, the total cost attributed to copying under the Rule is approximately
$21,684.
Thus, te total non-labor cost under the Rule is approximately $321,684 ($300,000 for
auditor fees + $21,684 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.

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15.

Program Changes or Adjustments

There are no program changes. The estimated total annual hours burden has decreased to
13,000 hours from the 17,000 hours estimated in 2007. Although the Rule’s information
collection requirements have not changed since 2007, staff adjusted its previous estimates based
on the following two factors. First, 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 in 2007. This factor results in a decreased annual hours burden estimate for
the IDSMs. Second, staff has reevaluated the methodology used and the assumptions made in its
previous submission with respect to the burden imposed on warrantors under the Rule, and now
includes that analysis in its new estimates. This factor results in an increased annual burden
estimate for warrantors (from negligible in 2007 to 804 annual hours in 2011). The result of
both factors was an overall decrease of 4,000 hours. Because the annual burden hours has
decreased, the associated labor costs have also decreased, from $266,000 in 2007 to $264,600.
The estimate of the total capital and non-labor costs has decreased slightly from
$329,000 in 2007 to $322,000. This new estimate retains the previous estimate of $300,000 in
capital and start-up costs, but decreases the copying costs from $29,000 in 2007 to $22,000 in
2011. The decrease is due primarily to a decrease in the number of estimated disputes filed each
year (from 4,896 in 2007 to 3,645 in 2011).
16.

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

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