WASHINGTON (Legal Newsline) - For the first time, a court has ruled the Consumer Financial Protection Bureau attempted to exceed the power given to it by Congress -- but the ruling may not prevent it from continuing an investigation into the accreditation of for-profit colleges.
In its April 21 opinion, the U.S. District Court for the District of Columbia held that the CFPB -- established by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and tasked with overseeing the financial services industry -- did not have the authority to issue a civil investigative demand to the Accrediting Council for Independent Colleges and Schools.
The CFPB issued the demand to ACICS, an accreditor of for-profit colleges, in August to determine “whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges.”
ACICS successfully argued that this language demonstrated that the agency was trying to conduct an investigation outside of its statutory authority, which should be limited to potential violations of consumer financial laws.
“Although it is understandable that new agencies like the CFPB will struggle to establish the exact parameters of their authority, they must be especially prudent before choosing to plow head long into fields not clearly ceded to them by Congress,” Judge Richard Leon wrote.
A spokesperson for ACICS declined to comment on the decision.
Ashley Elmore Drew, an attorney in the Tampa office of Burr & Forman and a member of its financial services litigation group, contends that even though the CFPB lost this case, the takeaway for the agency is likely related to the drafting of its CID language rather than the actual limitation of its scope of authority.
“The general consensus of the people who reviewed this opinion was that it was kind of like a slap on the hand, to restrain the CFPB,” Elmore Drew said. “I read it as a lesson on how to word the CFPB’s statement of purpose.”
The court’s opinion states the CFPB might be entitled to find whether ACICS is connected to potential violations of consumer financial laws at the schools it accredits, though its statement of purpose and actual requests belied the notion that the investigation is limited to those potential violations.
“Indeed, the statement of purpose says nothing about an investigation into the lending or financial-advisory practices of for-profit schools,” Leon wrote.
“Moreover, the CFPB’s requests -- for a list of all schools ACICS has accredited since 2010, for a list of all individuals involved in the accreditation of twenty-one enumerated schools, and for representatives to attest to the overall approach to accrediting seven enumerated schools -- clearly reveal its investigation targets the accreditation process generally. This the CFPB was never empowered to do.”
The CFPB has also recently been criticized by some for allegedly overreaching its authority in actions against mobile phone providers, collection law firms and data security companies.
Elmore Drew points out that while the court’s definition of the CFPB’s boundaries is important, the door was left open for the agency to limit the scope of its initial request and potentially determine a connection between ACICS and student lending.
“It was the right decision by the court, but for people who are concerned about overreach, it wasn’t the slam dunk that perhaps they were expecting or wanting to see,” she said.
John Culhane Jr., a partner in the Philadelphia office of Ballard Spahr and contributor to its CFPB Monitor blog, says the case is significant because it marked the first time a court has rejected the CFPB’s attempt to assert its jurisdiction.
In October, the CFPB won its lawsuit against Corinthian Colleges, Inc., a now defunct for-profit post-secondary education company, for convincing students to take out private loans to cover expensive tuition costs by advertising false job prospects and career services.
The CFPB has a similar lawsuit pending against ITT Educational Services, Inc., a for-profit provider of post-secondary technical education, for allegedly pushing students into high-cost private loans and misleading them on future job prospects and salaries.
“This seemed to be an attempt to assert further jurisdiction in the for-profit school space, presumably, on the theory, that there was something deficient in the accreditation process,” Culhane said.
But in ACICS’ case, he says, the CFPB failed to connect the accreditation and school lending practices.
“The court said in effect, ‘You haven’t articulated any basis for jurisdiction here,’” Culhane said. “‘You can’t just go look at the accreditation process just because you want to look at the accreditation process.’”
A CFPB spokesperson, when asked about the decision, provided this statement to Legal Newsline: “The Bureau continues to be concerned about the predatory lending practices at some for-profit colleges and will remain vigilant to protect consumers in this space, including by addressing conduct that illegally facilitates these practices.”
Donnelly McDowell, an attorney in the Washington, D.C., office of Kelley Drye & Warren who focuses on consumer financial protection matters, adds that this case marks the first time a respondent has challenged the scope of a CFPB CID through litigation.
He says since the court ruled in favor of ACICS, its decision could potentially embolden other groups to challenge the CFPB’s broad-sweeping CIDs in the future.
“The decision may cause the CFPB to tread a little more carefully when it describes the scope and purpose of CIDs, particularly in investigations that relate to conduct that may be in a gray area of the bureau’s jurisdiction,” McDowell said.
Culhane agrees the CFPB will be more careful in drafting its CIDs so that it creates an actual connection between the company it wants to investigate and the areas where it has authority.
“If you step back from this case, you might see that they are trying to treat the accreditation counsel as if it was like a rating agency, contributing to problems that rating agencies were alleged to have done with mortgage-backed securities,” he said. “But they didn’t lay out the foundation for that kind of a claim.”