It is a truth universally acknowledged that holding up the head of a car dealer makes for good press.
That’s according to Leonard Bellavia, senior partner at law firm Bellavia Blatt & Crossett. He represents 12 of the 20 or so dealerships expected to settle with New York State’s attorney general in the coming months for “jamming” questionable F&I products into consumers’ auto loans.
On June 17, a dealer group claiming to be the nation’s largest collective Honda dealer, Paragon Motors of Woodside, settled with Attorney General Eric Schneiderman’s office for more than $13.5 million. Bellavia, who doesn’t represent Paragon, says the settlement should be the biggest in a string of settlements likely to result from an investigation launched by the regulator in February of last year.
At issue are the sales of credit-repair and identity-theft services offered by a now-defunct company called Credit Forget It (CFI). Paragon sold the products to approximately 15,000 New York customers between March 2010 and April 2014, for upwards of $1,495 per contract — a 400% markup, according to the attorney general’s office.
“They were the highest-volume seller of Credit Forget It products,” Bellavia notes. “The rest of the dealerships are much, much lower in terms of dollar exposure because they didn’t charge as much as Paragon, and they didn’t sell as many as Paragon did.”
Another dealership, Long Island’s Generation Kia, settled with the regulator earlier this year for $41,000.
The attorney general’s allegations against Paragon were extensive: The dealer group was accused of charging consumers for the credit repair product without their knowledge or consent and failing to disclose the price of the product. The operation was also charged with failing to properly describe the nature of the services being purchased. But Bellavia isn’t convinced dealers offering CFI’s services should shoulder the majority of the blame.
“[CFI] did a hard sell on the dealers, suggesting that the product was perfectly valid and legitimate and in compliance,” Bellavia says. “It was not.”
Compared to Paragon’s six-figure settlement, and an additional payment of $325,000 in penalties, fees and costs to the state, the fines levied against CFI seem somewhat trivial. The product provider was shut down in March after entering into a consent order with the attorney general. It was also ordered to pay $50,000. But another $2 million in fines were suspended, subject to CFI’s compliance with the requirements set forth in the consent order, which included dissolving the company and notifying dealers with which it had contracts.
The provider told Schneiderman’s office that it sold its services to 37,000 customers in New York and other states. But the regulator called these services “frequently worthless” — at best providing a small portion of promised credit remedies like fixing errors on credit reports and mediating collections and past due accounts. In fact, the AG alleged that 75% to 80% of CFI customers received no services at all.
“… A lot of consumers were unaware they were even being deceived by CFI,” says a spokesperson for the attorney general. “After an initial tipoff we received from a complaint, we helped to uncover a lot of this fraud, which many did not know was occurring.”
But as Schneiderman sets his sights on the dealers that sold CFI contracts — his office has announced it intends to file lawsuits against 11 more dealerships — CFI’s cofounder, Damien Bullard, is still at the helm of training and F&I product provider IDDS Group. And in the same month Paragon settled with the attorney general, IDDS was pitching a program to certify finance managers.
“What’s crazy about this business is if you start at a dealership today as a finance manager, you are conducting finance that day,” Bullard told F&I and Showroom two weeks before the Paragon settlement was announced. “You are hanging paper that day; you are seeing customers that day. And there’s no guidelines or, really, standardized practices that you have to follow.”
Among other violations, CFI failed to adhere to the state’s prohibition on collecting upfront fees for credit repair services. The attorney general also alleged that CFI instructed its staff to tell customers its services were “included in the price of the car” and to refer them back to the dealership. Bullard declined to comment on any of the company’s activities.
“I would say that it’s going to be very hard for new-car dealers to continue to sell [credit repair products] in New York,” says Mark Schienberg, president of the Greater New York Automobile Dealers Association (GNYADA). “You’ve got to pay attention to how they are structured.”
Paragon wasn’t the only dealership meriting Schneiderman’s attention in June. The attorney general’s office filed a motion on June 9 to compel Staten Island-based Manfredi Auto Group to comply with an investigatory subpoena it had issued three months earlier. Between its 14 stores, Manfredi sold 1,475 CFI contracts to car buyers from 2009 to 2014, generating $445,667 in total revenue. The regulator’s office declined to comment on its ongoing investigation of the group.
Unlike Paragon, which charged consumers, on average, $1,495 for a CFI product, Manfredi sold the company’s credit repair services for $302 a pop. It’s discrepancies like this that have regulators up in arms.
In fact, New York City Mayor Bill de Blasio signed into law on May 18 an amendment to the city’s administrative code that requires used-car dealers to display not only the total selling price of a car, but the total selling price of any add-on product offered for sale. The signage must also advise buyers that any F&I product they are offered is optional.
“The used-car industry frequently incurs a high number of consumer complaints,” Mayor de Blasio said. “Why? Because in too many cases there’s been deceptive advertising, high-pressure sales tactics, undisclosed fees and add-ons that raise the listed price.
“In the future, as a result of this legislation, the price tag will include all fees,” he added. “This bill will protect consumers by ensuring transparency in the city’s used-car industry.”
The new mandate was to take effect within 120 days of its signing.
“[Legislation like this is] very difficult, obviously, because there are hundreds and hundreds of products that are out there,” GNYADA’s Schienberg says. “They originally wanted it on the windshield of the car. And I said, ‘They don’t make a windshield that big.’”
F&I product pricing isn’t just the concern of municipal and state regulators. Also in May, U.S. Bank informed its dealer partners that it would begin monitoring “unexplained differences in pricing or excessive add-on product financing” due to the regulatory actions in the auto lending market by the Consumer Financial Protection Bureau (CFPB).
As the CFPB finalized a rule in June giving it authority over nonbank auto finance companies that make, acquire or refinance 10,000 or more loans or leases annually, it also added new examination procedures for auto finance to its Supervision and Examination Manual. The procedures included a section on ancillary products, establishing that GAP insurance, vehicle service contracts and add-ons are subject to review by CFPB examiners.
The manual also lists biweekly payment plans, payment protection, credit protection and extended warranties as risks to consumers. It asks examiners to determine whether the servicer they are examining “offers or finances” those products, suggesting that lenders who provide financing could be on the hook — not just product providers.
“[The CFPB’s oversight] may make the margins on F&I products much, much thinner, or maybe products will go away — but then something’s got to give,” Bellavia says. “And that just means the gross profit on the front end of cars will be much higher. And that hurts dealers. It hurts manufacturers, because manufacturers don’t like dealers making big grosses on the front end of cars. And, ultimately, it hurts consumers.”
The CFPB does not have regulatory authority over dealers, but industry stakeholders such as the National Automobile Dealers Association (NADA) believe the bureau is using its oversight of auto lenders to turn the screws on dealerships. On July 27, the bureau rejected the NADA’s Freedom of Information Act request for an internal CFPB memo. The memo supposedly proved that the CFPB’s “goal” in the indirect auto financing channel was to limit dealers’ ability to mark up interest rates as compensation for arranging financing, which goes against the bureau’s Congressional mandate not to regulate dealers.
“The CFPB appears to be way outside the swim lane Congress authorized it to swim in,” NADA President Peter Welch said of the memo.
But discrepancy in F&I product pricing was not among the risks listed in the CFPB’s latest auto finance examination procedures. Instead, the focus was largely on whether consumers provided written confirmation that they opted for products and knew those products were optional.
Both of those issues came into play in Schneiderman’s settlements with dealers who sold CFI products. Generation Kia, for instance, paid $16,000 to reimburse 24 consumers who purchased CFI contracts, but the majority of the fines the dealership paid were related to the attorney general’s allegations that the operation jammed the products into customer deals.
“The AG was targeting the product without regard to jamming or payment packing claims,” Bellavia argues. “… The AG is only looking at other potential violations to force dealers into a costly settlement to generate a favorable press release.”
But even if the other 20 or so dealerships made the proper disclosures, Schienberg says they’ll still be on the hook for selling a product the state deems illegal. “Ignorance is no defense,” he says, “especially with this attorney general in New York State.”