While dealership management emphasized this week’s settlement with the New York attorney general “acknowledges no admission of wrongdoing or liability,” Dealertrack Technologies' Randy Henrick shared his unsavory assessment of the “payment packing” possibly orchestrated by a trio of Honda stores as well as what the enforcement actions and multi-million dollar penalties could mean for dealerships in the Big Apple and beyond.

General manager Brian Benstock released a message later obtained by SubPrime Auto Finance News stating that “Paragon Honda, Paragon Acura and White Plains Honda announced they have reached a settlement with the New York attorney general’s office related primarily to their long-discontinued sales of third-party credit services offered by Credit Forget It (CFI). These services were broadly available to consumers directly from CFI, through automobile dealers and other providers.

“The settlement with the attorney general acknowledges no admission of wrongdoing or liability by the settling dealerships,” Benstock continued.

To recap, New York attorney general Eric Schneiderman explained the agreement, which returns more than $13.5 million in restitution to consumers, concludes an investigation into these dealerships for the alleged sale of finance office products to 15,000 consumers — items that in some cases added more than $2,000 in “hidden costs and fees” onto the sale or lease price of a single vehicle.

“Paragon dealerships stopped offering CFI credit services to customers in early 2014,” Benstock said in his statement. “We appreciate the attorney general’s office bringing the matter to our attention and working with us to create a positive outcome for our customers. We thank our employees and our customers for their ongoing support. It is because of your trust in us that we are able to serve this market as we do.”

That trust, however, could be severely damaged by this settlement. SubPrime Auto Finance News reached out to Henrick, who is associate general counsel for Dealertrack. Henrick regularly offers instructional webinars and has been a presenter at the National Automobile Dealers Association Convention discussing the advertising pitfalls and other behaviors in the finance office that draw the ire of state and federal regulators.

“Credit repair services are always a big target for regulators. Under federal law, you cannot charge a customer for a credit repair service until you’ve actually performed the service and repaired their credit. So you start with an unpopular product. This looks like they were essentially payment packed into the price of the vehicle or otherwise misrepresented to consumers,” Henrick said.

“This was bad conduct. This wasn’t something anybody could defend as legitimate or unintentional or a mistake,” he continued. “Dealers know payment packing is unlawful. They know credit repair services are dubious at best, although they are very profitable to resellers. I think having to put all of the money into a fund, as well as pay the $325,000 in penalties, that’s a pretty significant penalty even if the fund is only used to allow consumers to purchase additional services from the dealerships.”

What Henrick referenced was that the agreement requires Paragon to pay $6 million into a restitution fund administered by a third-party administer to be distributed to Paragon consumers with CFI contracts and to provide each of the about 15,000 consumers with a $500 “settlement card” that can be applied to one or more of the following from Paragon:

— The purchase or lease of any new or used vehicle

— Certain services or maintenance, such as oil changes, tire rotations, tire repairs, and wheel alignments

— Certain accessories, such as mats and replacement windshield wipers.

“Paragon Honda and Paragon Acura are New York's premiere Honda/Acura dealerships. We are family owned and operated since 1929. Our mission is to make every customer a customer for life by consistently providing world class service at our new and used car dealerships,” Benstock said.

“Paragon has a friendly and helpful sales staff and highly-skilled mechanics. We employ people from 24 different countries who speak 22 different languages. We have won multiple automotive industry awards including the American Honda Presidents Award, Council of Excellence Award for Finance, and Certified Dealer of the Year Award,” he went on to say.

Despite that treasure trove of accolades and a diverse staff, Henrick isn’t upbeat about the prospect of those 15,000 customers returning to a Paragon store.

“They’re depositing the money, but I don’t see anything here about them getting it back any of those unused funds. I would doubt that a lot of the consumers who were subject to this behavior are going to want to deal with those dealerships. It’s terrible publicity. It’s costly. It’s flat out unlawful. I’m surprised in this day and age you would see conduct like this on such a mass scale,” Henrick said.

“This is not the (Federal Trade Commission) coming in and declaring something unlawful, something that previously was mainstream, as they’ve been doing with advertising,” he continued. “This is just bad conduct and known to be such. I’m not surprised by the harshness of the penalties given the magnitude of what the sales were.

“I suspect the majority if not all of it was payment packing,” Henrick added.

Impact in New York and Beyond

In recent months, Henrick has ramped up his educational and outreach efforts, especially in light of actions involving not only the FTC in what it dubbed Operation Ruse but also matters associated with the Department of Justice and franchised stores.

“I think there’s a number of dealers who see these things as a cost of doing business. Historically fines and penalties against auto dealers haven’t been of this magnitude such that it could be a cost of doing business,” Henrick said.

“These are not all dealers or most dealers. These are a few dealers that view these kinds of things as a cost of doing business,” he continued. “And even if they get caught, they were having to pay very little in relation to the profits, but Schneiderman here levied a very heavy penalty and that’s what the FTC has been doing as well.”

Henrick recollected how the FTC recently penalized a dealer who pushed buyers into a program where they made biweekly payments, pitched on the promotion of saving money. Regulators found the program didn’t save customers any money, rather it actually cost them more, which prompted them to say it was “a deceptive trade practice,” according to Henrick. He said the store eventually had to pay the FTC a fine approaching $200,000.

“You’re beginning to see large numbers and I believe part of that is regulators’ enforcement philosophy that this is no longer just a cost of doing business, that you’re going to straighten up and do things right or they’re going to pay a heavy penalty that’s not going to make it economically attractive. I think that’s the message here,” Henrick said.

Henrick also has anecdotally heard about the FTC currently “hammering our consent decrees for deceptive advertising” with multiple dealerships out West. Earlier this year, Operation Ruse led to millions in penalties against dealerships.

The furor of the FTC as well as the Consumer Financial Protection Bureau potentially is fueling enforcement officials such as Schneiderman as well as New York City Department of Consumer Affairs Commissioner Julie Menin, who were both quoted in this week’s settlement announcement. Henrick resides in New York so has a closer vantage point of both officials.

“Julie Menin is a very aggressive prosecutor. She’s been on a mission against auto dealers,” said Henrick, referencing a program Menin’s department announced back in April. It’s a new initiative to create what she called a “safer” loan product for qualified secondhand auto borrowers and to help them “avoid financial ruin by predatory loans.”

When asked about New York’s attorney general, Henrick said, “Schneiderman is showing himself to be one, as well. He’s been very active in the securities markets and certain other areas. This is a major foray into consumer protection and the dollars are large. I think the message he’s sending is clear: If New York auto dealers violate the law, particularly if they violate it in ways that are indefensible, they’re going to pay a hefty price and it’s not going to be just a cost of doing business.”

Henrick cautions dealers who might be far from New York about taking the approach that what happened in the Empire State won’t occur elsewhere. He suspects that other attorneys general will be discussing Schneiderman’s actions when they gather multiple times per year for their association events.

Henrick also mentioned plaintiff’s associations also might be examining this settlement to see if any class action suits can be brought.

“You’ve got a lot of aggressive attorneys general. Many states have unfair and deceptive acts and practices laws that give consumers the right to sue and rights to bring private attorneys general actions. I think Schneiderman doing something like this is going to be looked at very carefully,” Henrick said.

“Many dealers will say, ‘I don’t have to worry about all that because I have an arbitration clause in my contract,’” he continued. “But I think unfair and deceptive acts and practices claims can be separated from contract claims and they’re essentially statutory and tort actions. They’re not necessarily covered by the arbitrary class action waiver clauses. This puts it out there.”

Henrick left SubPrime Auto Finance News with one last point about this settlement and what the future implications could be.

“It’s an extreme case, but it’s not an extreme case because there are a small number of dealers, but in absolute numbers they’re not necessarily that small,” he said. “It’s not like the old days where the fines were $1,000 or $10,000. But we’re talking here at $325,000 penalty and a $13.5 million in restitution, albeit some of which will be spent on services at the dealership. But to the extent that the money is not all used up I think it’s going to be forwarded to the state. This is a multi-million loss for these dealerships even under the best of circumstances.

“This is the FTC’s and to a certain extend the CFPB’s approach in assessing penalties,” Henrick went on to say. “They’ve ratcheted up the numbers substantially from where they were just a few years ago. That causes people to sit up and take notice. Hopefully, it will indicate that the cost of compliance or the practice of compliance can put a dealer in a much better financial place than schemes like this do.”