Richard Leon.
Richard Leon. (Photo: Diego M. Radzinschi/NLJ)

A federal judge in Washington dealt a blow on Thursday to the Consumer Financial Protection Bureau’s investigative authority, ruling that the agency strayed outside its jurisdiction when it demanded information last year from an accreditor of for-profit colleges.

Judge Richard Leon struck down the bureau’s petition to enforce a civil investigative demand that had been issued in August to the Accrediting Council for Independent Colleges and Schools, a nonprofit organization that accredited several Corinthian Colleges campuses.

In an eight-page ruling, Leon wrote that bureau lacks “statutory authority” to investigate the accreditation process of for-profit schools.

“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 [headlong] into fields not clearly ceded to them by Congress,” Leon wrote.

The bureau declined to comment. Leon’s ruling came just days after the resignation of Albert Gray, the president and CEO of ACICS. Earlier this month, a dozen state attorneys general called for the Department of Education to deny ACICS federal recognition, citing “extreme” failures in its evaluation of for-profit colleges, according to recent media reports.

Gray’s acting replacement, Anthony Bieda, said in a prepared statement that he was “pleased” with the ruling.

“Judge Leon agreed with our argument that the CFPB did not have authority to issue the CID,” Bieda said. “ACICS is a federally recognized accreditor of higher education institutions. It does not provide loans or any other financial service to the institutions that it accredits, or to the students that they enroll.

In the civil investigative demand, the bureau asked ACICS to turn over the names of all of the schools it had accredited since Jan. 1, 2010, and to identify the individuals involved in the reviews of 21 schools, whose names were blacked out in court documents. The agency also asked the council to designate a representative to testify before the bureau on the “policies, procedures and practices” for accrediting certain for-profit colleges.

But ACICS, represented by Venable partner and former CFPB attorney Allyson Baker, argued that it falls solely under the Department of Education’s jurisdiction and has no involvement in student lending.

In the U.S. District Court for the District of Columbia, the bureau had argued that, because it has the authority to investigate the lending and financial services of for-profit colleges, it could also investigate whether any entity engaged in unlawful conduct related to the accreditation of those schools. But Leon rejected that argument, noting the nonprofit accrediting agency’s argument that it does not provide financial services.

“Put simply, this post-hoc justification is a bridge too far!” he wrote. “As ACICS has repeatedly and accurately explained, the accreditation process simply has no connection to a school’s private student lending practices.”

CFPB attorney Benjamin Konop argued during a February proceeding that the agency could not simply accept ACICS’s assertions at face value.

But, in his ruling Thursday, Leon was unconvinced.

“Please,” he wrote. “Although it may be that the CFPB is entitled to learn whether ACICS is connected in any way to potential violations of the consumer financial laws by the schools it accredits, the statement of purpose and the CFPB’s actual requests belie any notion that its inquiry is limited in this way. Indeed, the statement of purpose says nothing about an investigation into the lending or financial-advisory practices of for-profit schools.”

The case had been closely followed as a test of the bureau’s authority. Before the bureau went to federal court, Rep. John Kline and Sen. Lamar Alexander, the respective chairmen the House and Senate education committees, called for an end to the ACICS inquiry, criticizing it as an “overreach.”

Richard Cordray, the director of the CFPB, publicly defended the agency in October, saying just a day before the petition was filed that the agency has investigative authority over “those who provide financial products and services, or provide material substantial assistance to those who do.””If an accrediting agency is facilitating for-profit colleges at misleading consumers, treating them unfairly and deceptively, then that’s something we should look at,” Cordray said at an event hosted by Politico.

The ruling in Consumer Financial Protection Bureau v. Accrediting Council for Independent Colleges and Schools is posted below.