After suing two of the nation’s largest for-profit school chains, ITT and Corinthian, the Consumer Financial Protection Bureau (CFPB) is continuing its push to police the for-profit school industry. Bridgepoint Education, Inc. recently disclosed that on August 10, 2015, Bridgepoint and Ashford University received Civil Investigative Demands (CIDs) from the CFPB related to the CFPB's investigation to determine “whether for-profit post-secondary-education companies” have engaged in unlawful acts or practices related to the advertising, marketing or origination of private student loans. And on October 29, 2015, the CFPB filed a lawsuit to compel the Accrediting Council for Independent Colleges and Schools (ACICS) to comply with a CID that the CFPB had issued to it on August 25, 2015. That CID concerns an investigation into possible legal violations “in connection with accrediting for-profit colleges.” These two actions suggest the CFPB will continue to pursue the for-profit industry, including associated entities such as ACICS that provide accreditation to such schools, apparently without concern over possibly exceeding its jurisdictional limits. This alert reviews the CFPB’s cases against for-profit schools to date and discusses the implications of the CIDs issued to Bridgepoint and ACICS.
To date, the CFPB has taken action against two for-profit schools. First, in February 2014, the CFPB filed suit against ITT Educational Services, Inc. The legal claims in ITT all revolve around private student loans taken out by ITT students. That makes sense, in light of the fact that the CFPB’s jurisdiction is limited to consumer financial products or services. But parts of the lengthy complaint in ITT recount facts not directly related to the origination of the private student loans that form the core of the legal claims. Instead, the CFPB’s complaint is replete with allegations concerning ITT’s alleged deceptive practices concerning other aspects of its programs. Thus, one section of the complaint, captioned “To Convince Consumers to Take out Loans to Pay ITT’s High Tuition, ITT Represented That It Would Work in Their Interest to Place Them in Desirable Jobs With Good Salaries,” sets forth allegations about ITT’s allegedly deceptive marketing practices with respect to graduates’ job placement rates and salaries. Another section of the complaint, captioned “To Convince Consumers to Take out Loans to Pay ITT’s High Tuition, ITT Made Misleading Representations About ITT’s Accreditation and Transferability of Credits,” sets forth allegations about allegedly misleading claims made by ITT with respect to its accreditation and the transferability of credits earned at ITT schools. As the quoted captions suggest, the CFPB’s theory is that these facts — over which the CFPB could not assert jurisdiction even if they were deceptive, as alleged — are relevant to the CFPB’s actual claims because the conduct at issue served to induce students to take out the loans that are subject to the CFPB’s jurisdiction.
The CFPB’s complaint against Corinthian Colleges, Inc., filed in September 2014, pursues a similar strategy. Indeed, the second paragraph of the complaint makes clear the CFPB’s theory of why facts not directly related to the student loans that necessarily form the basis of the CFPB’s claims are relevant at all:
Since at least July 2011, it has been Corinthian’s practice to induce prospective students to incur the loan obligations necessary to enroll by promising career training and graduate employment opportunities of the type that would enable a consumer to repay his or her debt upon completing Corinthian’s program. As detailed below, Corinthian induced students to enroll in its programs through false and misleading representations about its graduates’ career opportunities, including representations suggesting Corinthian would provide assistance in helping students find a job, and that students were likely to obtain a permanent job upon graduation.
And, indeed, a large part of the Corinthian complaint is devoted to alleging that Corinthian misrepresented its career services offerings and its graduates’ career opportunities and job placement rates on the theory that those misrepresentations induced students to take out the private student loans at the legal core of the case. The CFPB has thus not felt itself constrained by the fact that it lacks jurisdiction over claims that for-profit schools misrepresented their job placement statistics or other aspects of their educational programs, so long as it could tie such allegations to the private student loans over which the agency does have jurisdiction.
To date, the CFPB’s strategy has been successful. It survived a motion to dismiss in ITT (currently on appeal), in which the district court held that the CFPB had pled sufficient facts to state a claim that ITT provided “financial advisory services” given its alleged role in the student loan origination process and also that ITT was a service provider to the originators of the loans given its alleged role in operating and maintaining the student loan program. Those two conclusions each render ITT subject to the CFPB’s authority to enforce the Dodd-Frank Act’s prohibition on unfair, deceptive or abusive conduct.
In Corinthian, the CFPB recently obtained a $530 million default judgment against Corinthian (a sum the CFPB itself recognizes likely will not be paid as a result of the company’s bankruptcy). More importantly, the CFPB separately obtained more than $480 million in debt relief for current and former Corinthian students by working together with the purchaser of some Corinthian schools.
Apparently emboldened by these successes, and undeterred by claims that the Department of Education is the more appropriate regulator to pursue such claims, the CFPB has now launched at least two additional investigations related to for-profit schools. The CID to Bridgepoint appears to be in line with the CFPB’s investigations of ITT and Corinthian. It is directed to a for-profit school itself and is part of an investigation to determine whether “for-profit post-secondary-education companies... have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans.” The investigation thus appears to be consistent with the legal claims brought in ITT and Corinthian — focused on the origination of private student loans. Information about the content of the CIDs issued to Bridgepoint and Ashford is not publicly available. If the complaints that the CFPB filed against ITT and Corinthian are any guide, however, one can surmise that the CIDs seek information not just about the advertising, marketing, and origination of private student loans, but about the companies’ conduct more generally, including representations it made to students concerning the quality of its education and job placement rates.
The CID issued to ACICS, however, represents a substantial departure from the CFPB’s prior actions in this space. Rather than target a for-profit school involved in private student lending, the ACICS investigation appears to be targeted at ACICS itself, in its role as an accrediting agency recognized by the Department of Education. The Statement of Purpose in the CID issued to ACICS makes clear that the purpose of the CFPB’s investigation is to determine whether any person has engaged in unlawful acts or practices “in connection with accrediting for-profit colleges.” Unlike the Bridgepoint investigation (and the ITT and Corinthian complaints), therefore, the CFPB is not even pretending to be focused on the provision of a consumer financial product or service (private student loans) in its investigation of ACICS. Rather, it is focused on conduct “in connection with accrediting for-profit colleges.” Indeed, the substance of the CID seeks information not about for-profit schools, but about ACICS’s accreditation activities. Thus, the CID seeks the identity of all schools that ACICS has accredited since 2010, the identification of individuals who conducted accreditation reviews of 21 different schools, as well as testimony concerning ACICS’s policies, procedures, and practices relating to the accreditation of seven schools.
The CFPB, of course, lacks jurisdiction to police accrediting agencies directly. That authority, as ACICS pointed out in its petition to set aside the CID, resides with the Department of Education.[1] The CFPB, however, is undeterred and appears to be proceeding based on a theory that accreditation of a for-profit school may constitute the provision of “substantial assistance” to such a school’s unlawful conduct related to private student loans. Thus, CFPB Director Richard Cordray has commented that “[i]f an accrediting agency is facilitating for-profit colleges’ misleading consumers, treating them unfairly and deceptively, then that’s something that we should look at” (emphasis added). Similarly, the CFPB has argued in federal court that its CID is appropriate, among other reasons, because the CFPB is empowered to take action against those who “knowingly or recklessly provide substantial assistance to a covered person” who engages in unfair, deceptive or abusive acts or practices in connection with providing a consumer financial product or service.
There is very little case law on what constitutes “knowingly or recklessly provid[ing] substantial assistance” under Dodd-Frank. The only court to rule on the issue to date appears to have set a high bar, adopting the Eleventh Circuit’s “severe recklessness” standard:
Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.
In addition, that court held that in order to successfully plead a substantial assistance claim, the CFPB must allege that “the defendant in some sort associated himself with the venture, that the defendant participated in it as something that he wished to bring about, and that he sought by his action to make it succeed.”
Applying that test to the CFPB’s likely theory in ACICS suggests the agency may have a difficult road ahead of it. The CFPB’s theory appears to be as follows: by accrediting certain for-profit schools, ACICS may have knowingly or recklessly substantially assisted those schools in engaging in unfair, deceptive or abusive acts or practices regarding the origination of private student loans. That theory is a step removed from the CFPB’s allegations in ITT and Corinthian. There, as discussed, the CFPB asserted that allegedly deceptive conduct unrelated to student loans induced students to take out those loans and thus fell within the CFPB’s jurisdiction. In ACICS, the CFPB’s theory appears to be that merely accrediting a school may constitute substantial assistance to that school’s separately actionable conduct. Whether that separate actionable conduct would in turn be directly related to private student lending, or, instead, be one step removed as it was in the ITT and Corinthian allegations, remains to be seen. It seems unlikely, however, that an accrediting agency would have the kind of knowledge of private student lending necessary to establish a substantial assistance claim directly tied to a private student loan program. To the extent that the CFPB’s theory is that (a) ACICS knew about deceptive conduct by schools it accredited (related to, e.g., job placement rates); (b) those schools engaged in that deceptive conduct regarding non-financial products or services; and (c) that conduct induced students to take out private student loans, the CFPB may be in danger of pushing its authority too far. Such a theory, if accepted, could allow the CFPB to police conduct two steps removed from the consumer financial products or services it was created to regulate. Whether it will succeed remains to be seen, but the mere fact that it issued a CID to ACICS and is pursuing enforcement of that CID in federal district court demonstrates again that the agency is not afraid to test the limits of its jurisdiction.
Notes:
[1] See 20 U.S.C. § 1099b.
