Why it matters
The automotive industry is continuing to face heavy scrutiny from regulators. On the heels of a Federal Trade Commission operation and new oversight from the Consumer Financial Protection Bureau, the New York Attorney General's Office announced a deal with three auto dealers in the state totaling almost $14 million. AG Eric Schneiderman alleged that the three companies sold consumers add-on products such as identity theft protection services and credit repair without disclosing the costs and fees, with some customers paying up to an additional $2,000. In some instances, the dealers misrepresented that the products were free or deceived consumers about the source of the charges, Schneiderman added. To settle the case, the auto dealers agreed to pay $13.5 million in restitution to consumers plus another $325,000 in penalties, fees, and costs to the state. Keeping the pressure on, the Attorney General said another 11 dealerships will soon be facing a similar lawsuit. Add-on products are an important source of dealer revenue, and regulatory scrutiny of these products, including by the CFPB in connection with auto financing, will present challenges for dealers.
Car dealerships were the subject of an investigation by New York Attorney General Eric Schneiderman in an effort to halt the alleged practice of "jamming," or unlawfully charging consumers for hidden purchases.
During the review, the AG's Office focused on the practices of three jointly owned dealerships that claim to be the largest combined Honda dealership in the country, made up of Paragon Motors of Woodside, Inc. (Paragon Honda), Worldwide Motors, Ltd. (Paragon Acura), and Civic Center Motors Ltd. (White Plains Honda).
Between 2010 and 2014, the Paragon dealerships used deceptive sales tactics, the AG alleged, by charging consumers for "after sale" items and credit repair services without their knowledge or by misrepresenting the services were free. The dealerships—which estimated they sell or lease approximately 1,000 new and used vehicles each month—would sell credit repair or identity theft protection services purchased from third party Credit Forget, Inc. (CFI) to those customers.
Also part of the AG's investigation, CFI's operations were halted pursuant to a consent order obtained by Schneiderman's office. The Paragon dealerships sold the service contracts purchased from CFI to consumers at a higher price, the AG said, violating a prohibition found in both state and federal law against charging upfront fees for "credit repair" services that promise to help consumers improve or restore their credit. "Every time Paragon charged a consumer for these services they violated state and federal laws banning upfront fees for these services," the Attorney General said.
In a typical transaction, a customer would meet with a "Finance & Insurance Manager" at a Paragon dealership after working with a salesperson to select a car. The manager would attempt to sell the customer additional products ranging from extended warranties to credit repair services, Schneiderman alleged. The Attorney General's investigation revealed that Paragon charged some consumers without permission and concealed the charges; other customers were told the services were free and then charged for them.
The Paragon dealerships also added after-sale items (such as Lo-Jack or tire protection) without disclosing what the charges were for, bundling the cost of the items into the sale price and not separately itemizing them, according to the allegations. And consumers did not always receive the required disclosures about their rights to cancel the credit repair services contract or, despite negotiating purchase and lease terms in Spanish, were only provided with contracts and documents in English.
To settle the charges, the Paragon dealerships agreed to pay $6 million for a restitution fund to be distributed to customers with CFI contracts. Each of the estimated 15,000 customers will also receive a $500 "settlement card" that can be used at one of the Paragon dealerships for the purchase or lease of any new or used vehicle, certain services or maintenance (oil changes or tire rotations, for example), or accessories including windshield wipers and mats. Total restitution is expected to reach $13.5 million.
In addition to the monetary component, the deal also includes injunctive relief, prohibiting the Paragon dealerships from selling, offering to sell, or marketing credit repair and identity theft services in connection with the sale or lease of a vehicle; any after-sale products or services may not be sold without material terms—including price—disclosed verbally and in writing. The dealerships are banned from misrepresenting the price of a vehicle in final lease or sale contracts, must provide translated documents for customers who need them, and are prohibited from failing to provide customers with a sale or lease agreement that "clearly and conspicuously" itemizes each after-sale product or service and its price.
Attorney General Schneiderman didn't stop with the Paragon dealerships. A Generation Kia operation in Long Island settled with the AG's Office for $41,000 over similar charges related to CFI contracts sold to consumers, and Schneiderman announced that he served notice of his intent to sue 11 additional dealerships located throughout New York, with the investigation ongoing.
To read AG Schneiderman's announcement about the settlement, click here.
To read the consent order in New York v. Credit Forget It, click here.