A federal district judge on Thursday dismissed a lawsuit brought by the Consumer Financial Protection Bureau against the embattled accreditor of for-profit colleges, saying the agency lacked the authority to investigate.
The ruling by Judge Richard J. Leon of the U.S. District Court for the District of Columbia marks the first time a court has said the bureau has no jurisdiction and overreached its statutory authority.
Leon denied CFPB Director Richard Cordray's request to investigate the Accrediting Council for Independent Colleges and Schools, whose president and CEO separately resigned on Monday amid increased scrutiny.
The judge rejected the CFPB's theory that it has the power to examine the for-profit college accreditation process.
"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 Leon wrote in an eight-page opinion.
It is unclear whether the CFPB will appeal or drop the case. A spokeswoman for the agency declined to comment.
Cordray has sought to play an active role in the student loan debt crisis largely by policing for-profit colleges. But in trying to investigate the accreditor of such colleges, the bureau may have gone too far.
"It's really the first time a court has determined that the CFPB lacked jurisdiction," said Alan Kaplinsky, a partner and leader of the consumer financial services group at the law firm Ballard Spahr. "Hardly ever does a court tell a federal agency that a [civil investigative demand] is invalid. To get rebuked as sharply as they did was a surprise."
The accreditor, known by its acronym ACICS, had petitioned the bureau in October to either drop or modify its investigation, claiming it is regulated solely by the Department of Education.
The CFPB issued a civil investigative demand in August to determine whether anyone at ACICS had engaged in unlawful acts or practices "in connection with accrediting for-profit colleges."
Judge Leon said the case boiled down to the answer to one question: "Did the CFPB have the statutory authority to issue the [civil investigative demand] in question? Unfortunately for the CFPB, the answer is no," he wrote.
The judge criticized the broad scope of the CFPB's request, citing a tenuous connection between the accreditation process and the student lending practices at for-profit schools.
The CFPB had asked for testimony on ACICS' policies, procedures and practices related to the accreditation of seven schools. The bureau also sought to identify all schools ACICS had accredited since 2010, and the individuals who conducted accreditation reviews of 21 different schools.
"ACICS is not involved in the financial aid decisions of the schools it accredits, which means that it plays no part in deciding whether to make or fund a student loan," Leon wrote.
ACICS' accreditor status is up for review in June. Earlier this month, a dozen state attorneys general led by Massachusetts Attorney General Maura Healey asked Education Secretary John King to revoke ACICS' accreditor status. The Department of Education does not directly assess colleges and universities. It relies on accreditors to ensure schools provide minimum standards of quality.
The CFPB has alleged that for-profit schools have induced students to take out private student loans.
In October, the CFPB won a $531 million judgment against defunct Corinthian Colleges for using illegal tactics to collect on student loan debt. In 2014, the CFPB sued ITT Educational Services for allegedly luring students into taking out student loans with false promises of future employment.
In August, Bridgepoint Education, a publicly traded for-profit college in San Diego, disclosed that the CFPB was investigating the company and one of its colleges, Ashford University. The CFPB is investigating whether the company engaged in unlawful act or practices related to the advertising, marketing or origination of private student loans.
The CFPB also is taking a closer look at companies that service student loans to determine whether there are patterns of abuse or misconduct.
Americans held $1.19 trillion in student loan debt, of which 11% were 90 days or more delinquent, in the third quarter, according to the Federal Reserve Bank of New York.