Must dealers steer clear of credit repair?

Offering credit-repair products in the dealership? Forget it.

That might be the lesson for dealers in last week's crackdown by New York Attorney General Eric Schneiderman over the alleged unlawful sale of credit-repair and identity-theft prevention products from vendor Credit Forget It.

The attorney general's office announced multimillion-dollar settlements with some dealerships, saying they sold the products for as much as $6,000 and often without the customer's knowledge. The products in question cost the dealerships either $179 or $279.

Dozens of additional dealership groups remain under investigation, and the New York attorney general's office is looking more widely into the practice by dealerships of "jamming" or unlawfully charging consumers for hidden purchases.

Credit Forget It and the settling dealerships -- high-volume New York City dealership Paragon Honda and its two sister stores, plus Generation Kia in Bohemia, N.Y. -- violated state and federal statutes prohibiting the collection of upfront fees for credit-repair services, the attorney general's office said.

Lawyers for some of the dealerships say their clients were duped by the vendor and are being unfairly targeted. They also complained about the penalties for Credit Forget It, which include dissolution of the company, immediate payment of $50,000 and an additional $2 million fine if settlement terms are violated.

"They feel they were misled and don't understand why Credit Forget It was allowed by the AG to walk away with a gentle slap on the wrist," said Leonard Bellavia, a New York dealer lawyer representing 12 dealership groups under investigation. "This is hardly a garden variety consumer fraud or deception case yet is being spun as one."

Representatives for Paragon said the dealerships -- one Acura and two Honda stores -- pulled Credit Forget It products as soon as they learned of problems. But 15,000 Paragon customers bought the products between 2010 and 2014 for an average of about $1,000, according to the attorney general.

"Our dealerships stopped offering [Credit Forget It] credit services to our customers in early 2014," Brian Benstock, general manager of Paragon Honda and Paragon Acura, said in a 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."

Paragon agreed to a $13.5 million restitution deal, plus $325,000 in penalties, fees and costs to the state of New York. It could have been much worse. The attorney general's initial demand for relief was in the high tens of millions of dollars.

In addition to Paragon and Generation Kia -- the latter is paying restitution and penalties of $41,000 -- the attorney general's office said last week it has served notice of intent to sue 11 dealerships that allegedly engaged in similar practices. Plus, the office continues to investigate other New York dealerships that sold such services, including Manfredi Auto Central on Staten Island, which allegedly sold more than 1,400 Credit Forget It contracts.

Sources told Automotive News as many as 36 dealership groups have been targeted in the investigation into Credit Forget It.

Credit Forget It co-founder Damien Bullard refused comment last week. Bullard continues to work with dealers as co-founder of IDDS Group, which offers finance-and-insurance consulting among other services. According to Bullard's website, he also operates a company called Modern Day Financial, which offers "credit optimization" and "identity theft solutions."

Credit Forget It's other named principal, Michael E. Morgan, could not be reached. A website for Morgan was active early last week but had been taken down by Thursday.

The phone number for Credit Forget It during part of last week was being answered with an automated message for a company called Identity Theft Protectors. The New York attorney general's office says it is looking into Identity Theft Protectors. By the end of the week, the number went unanswered for several rings before going to a busy tone.

Credit Forget It's principals told investigators it sold the products outside New York. It's not clear where or whether other regulators are investigating the company or dealers who may have sold the product elsewhere.

The federal Credit Repair Organizations Act makes any credit-repair product with upfront fees illegal anywhere in the U.S., the New York attorney general's representative told Automotive News.

Lawyers who advise dealers say such products may be legal if structured and sold very carefully to comply with the law -- but it's probably just not work the risk.

"It's quite possible they can" be sold legally, said Tom Hudson, a partner in the Hudson Cook law firm in Hanover, Md., and a specialist in dealership finance-and-insurance matters. "I'm just not smart enough to figure it out."

Credit-repair queries to his office always throw up a red flag, said Hudson, who is not representing any clients involved in the New York investigation. If such a product is designed to generate revenue for the dealership, "how are you going to do that if the credit repair services are paid for as they are rendered months or even years down the road or maybe even never?"

Russell Shanks, a New York City lawyer representing three dealership groups under investigation, said the Credit Forget It product morphed from the company's initial pitch of no upfront payment.

"And I don't think the dealers focused on that or understood," Shanks said.

Dale Schreiber, lawyer for Paragon, said federal and state regulations make credit repair a risky category.

"There's a high risk of litigation, and it's just not a worthwhile undertaking for a dealer whose main business is to sell and lease cars," Schreiber said.

Mark Schienberg, president of the Greater New York Automobile Dealers Association, says New York law allows only not-for-profits to offer credit-repair services.

"The lesson on a lot of these programs is that dealers need to pay attention to what they're offering for sale," Schienberg said. "A lot of companies are offering products that don't help consumers and don't help dealers."

The settlement requires Paragon to pay $6 million to a restitution fund to be distributed by a third-party administrator to consumers who bought Credit Forget It contracts. That would provide average restitution of $400 or about 40 percent of the $1,000 paid on average.

In addition, Paragon must provide each of the 15,000 consumers with a $500 "settlement card" that can be applied to future vehicle purchases at Paragon, accessories purchases or certain services such as oil changes and tire rotations.

That puts the dealers on the hook for far more than Credit Forget It had to pay. But the reason the vendor's payment was so small? The company ran out of money, according to the attorney general's office.

With regard to the grumbles about uneven penalties, the attorney general's representative noted: We put Credit Forget It out of business. We're not putting any dealers out of business.

Hannah Lutz contributed to this report.