CFPB loses appeal in case involving for-profit colleges

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A federal appeals court on Friday rejected the Consumer Financial Protection Bureau's appeal to investigate an accreditor of for-profit colleges, citing the agency's subpoena as both vague and overly broad.

The decision marked the first time in decades that a federal appeals court has struck down an administrative subpoena issued by the federal government, said Allyson Baker, a trial attorney at the law firm Venable.

The decision also may have broad implications for financial companies that are subject to CFPB civil investigative demands. Some lawyers said the ruling could force the CFPB to be more specific in citing what conduct is under investigation when it files a subpoena, particularly for claims citing "unfair, deceptive or abusive acts or practices," known as UDAAP.

A three-judge panel of the U.S. Court of Appeals for the District of Columbia affirmed a district court's ruling last year that found the CFPB had no jurisdiction to investigate the Accrediting Council for Independent Colleges and Schools.

ACICS was the accrediting agency for two now-shuttered for-profit colleges, Corinthian Colleges and ITT Technical Institute. The CFPB had sought broad authority to examine the college accreditor, which typically falls to the Department of Education. The CFPB has alleged that for-profit schools have induced students to take out private student loans.

Judge David Sentelle went further than the lower court's ruling, writing that the CFPB did not meet statutory requirements when it issued a civil investigative demand to the college accreditor in August 2015.

"The notification of purpose gives no description whatsoever of the conduct the CFPB is interested in investigating," Sentelle wrote in a 15-page opinion. "We need not and probably cannot accurately determine whether the inquiry is within the authority of the agency and whether the information sought is reasonably relevant."

CFPB Director Richard Cordray said in a statement that he understood the court's decision.

"We will make careful efforts to conform to the ruling in our further investigations, whether in this case or any other case," Cordray said.

Financial firms have long criticized the CFPB for issuing broad and burdensome civil investigative demands, and this ruling might change that.

"I do suspect it will change how they describe their purpose and give recipients [of CIDs] more insight into what the CFPB is actually looking for," said Ori Lev, a partner at Mayer Brown.

The DC Circuit held that the CFPB failed to state "the specific conduct under investigation," when it issued a subpoena to ACICS. The court also said that provisions that cover unfair, deceptive and abusive conduct 'stand broadly alone,' and that the CFPB's inclusion of broad language, such as "any other federal consumer financial protection law" was an "uninformative catch-all phrase," that "does nothingy to cure the CID's defects."

Sentelle appeared to urge the CFPB to narrow its description of investigations.

"Congress limited the bureau’s CID authority with notice requirements, and framing the applicable law in such a broad manner does not satisfy Congress’s clear directive," the judge wrote. "Indeed, were we to hold that the unspecific language of this CID is sufficient to comply with the statute, we would effectively write out of the statute all of the notice requirements that Congress put in."

In February, a district court upheld the Department of Education's decision to strip ACICS of its authority over 245 colleges that enroll up to 800,000 students.

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