WASHINGTON -- The Consumer Financial Protection Bureau on Wednesday filed a lawsuit against ITT Educational Services, accusing the large for-profit higher education company of engaging in predatory lending and other abusive practices.

The bureau’s lawsuit marks its first enforcement action against a for-profit college and is an indication, some observers said, of how seriously and aggressively the watchdog agency -- which officially turns three years old this July -- plans to use its enforcement powers in this contentious, politically charged sector of higher education.

The complaint accuses ITT of pressuring students into predatory loans and misleading consumers about their colleges’ job placement rates, accreditation and the transferability of credits. The CFPB alleges that the company developed a private loan program that coerced borrowers into high-interest loans that ITT knew were likely to fail and, by the company’s own projection, had default rates as high as 64 percent.

“We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default,” CFPB Director Richard Cordray said in announcing the lawsuit. “Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics.”

The CFPB said the abuses at ITT took place between mid-July and December 2011 and violated the Dodd-Frank Act’s ban on unfair, deceptive or abusive practices as well as the Truth in Lending Act. The suit seeks an unspecified amount in civil penalties and restitution for victims as well as an injunction against the company.

The bureau’s action Wednesday had been foreshadowed by disclosures in recent months and years that the CFPB was investigating for-profit colleges’ institutional loan programs. Corinthian Colleges has also said it is the subject of an investigation by the bureau.

Cordray declined to discuss those other investigations but called the lawsuit "a first step for the consumer bureau."

“An important message being sent today is there are numerous [enforcement] pipelines now focused on this problem,” he said, referring to the CFPB and the state attorneys general investigating the sector.

Officials at ITT, whose share price fell more than 9 percent on Wednesday, declined to discuss the lawsuit in detail.

“We don’t comment on pending litigation other than to say that we believe the bureau’s claims are without merit and we intend to vigorously defend ourselves against the charges,” said Nicole Elam, a company spokeswoman.

A Shift in Federal Consumer Protection

Consumer advocates applauded the lawsuit, as did Senator Tom Harkin, the Iowa Democrat, who has been an outspoken critic of the for-profit sector.

Harkin, who chairs the Senate education committee, said in a statement he was “encouraged by the agency’s vigilance over lending practices that take advantage of students seeking to further their education.”

Advocates have previously said that the CFPB is needed to fill what they see as significant gaps in the federal government’s ability to regulate for-profit colleges and non-federal student loans.

Federal scrutiny of for-profit colleges, which has ramped up during the Obama administration, has largely been focused on how the institutions use the tens of billions of federal dollars they receive each year.

For instance, the Education Department has said its aim in pushing so-called “gainful employment” regulations is to make sure that taxpayer money flows only to vocational programs that produce graduates who can land jobs that pay well enough to repay their student loans. Similarly, President Obama’s executive order in 2012 was aimed at cracking down on how for-profit colleges recruit and enroll students using veterans’ benefits and servicemember tuition assistance.

The sector has also faced federal litigation from whistle-blowers, sometimes joined by the Justice Department, who allege a fraudulent use of the federal dollars that for-profit colleges accept.

The Federal Trade Commission, which does have consumer protection powers that are broader than protecting federal aid, last fall published stricter guidelines on deceptive marketing practices at for-profit colleges but has so far not played an aggressive enforcement role in the sector.

Wednesday’s CFPB lawsuit, meanwhile, signals new federal enforcement of consumer protection laws against for-profit colleges. The complaint focuses on how ITT allegedly pushed students into private loans and misled students about the overall product they were offering with deceptive job placement rates and representations about the transferability of credits.

“The consumer bureau will subject the financial products and services offered by for-profit colleges and their partners to the same standards as any other consumer financial product or service,” Cordray noted Wednesday.

Deanne Loonin, a staff lawyer at the National Consumer Law Center, who represents low-income student loan borrowers, said the CFPB lawsuit “represents a shift” in federal enforcement of for-profit colleges.

“It’s exactly the kind of consumer protection focused actions that the CFPB was created to do,” she said. “The Department of Education has done some important work in the last few years in trying to investigate for-profit schools, but they are, understandably, focused on federal aid. A lot of these problems are in the private student lending area, so there’s definitely been a huge gap in federal enforcement.”

Loonin also said she would be watching carefully to see how the CFPB uses its discretion, in concert with other federal agencies, to push for relief for individual borrowers.

She said that a “huge problem” in federal action against for-profit colleges has been in cases where fraud or abuses have been proven to take place. Navigating court settlements and avenues for relief through the Education Department, she said, are often administratively difficult and very belated for those who've been wronged.

Another consumer advocacy group, the New York Legal Aid Group, for instance, filed a class-action lawsuit on Wednesday against Education Secretary Arne Duncan, insisting that the department forgive the federally-backed loan debt of borrowers who attended a for-profit college that went out of business in the early 1990s. The group says that the department’s inspector general long ago concluded that Wilfred American Education Corporation fraudulently pushed students into loans, and that, as a result, its clients are entitled to debt forgiveness.

Growing State Involvement

In announcing the action against ITT, CFPB Director Cordray was flanked by the attorneys general from four states, who are among the dozens of state officials who have been also probing, and in some cases suing, for-profit colleges.

New Mexico Attorney General Gary K. King announced Wednesday that he was also suing ITT for similar violations under New Mexico law. His lawsuit alleges, among other things, that ITT’s nursing program in the state misled students about its accreditation status. The company, King’s complaint says, told students and prospective students that its nursing program would allow them to sit for the licensing exam for nursing when, in fact, the program’s lack of appropriate accreditation precluded that.

The attorneys general, which included Lisa Madigan of Illinois and Tom Miller of Iowa, noted the importance of federal and state cooperation in investigating for-profit colleges. Earlier in the day, Cordray told an annual conference of attorneys general that combating unfair and deceptive practices was an important area of “mutual engagement.”

Kentucky Attorney General Jack Conway also noted that his efforts on for-profit colleges have not proceeded without opposition.

"There is a lobbying front that has been put forward by this particular industry that is very formidable," he said adding that his coalition of attorneys general and CFPB "are going to try to overcome that lobbying front, and we're going to try to have federal-state partnerships that really make some substantial changes in this particular business model, amongst the worst actors."

Joseph D’Angelo, a partner at Carl Marks Advisory Group LLC, which advises for-profit colleges on a wide range of practices, said that the CFPB lawsuit against ITT was likely to be unsurprising to those in the industry, and that he believes that much of the regulatory risk has already been factored into the stock prices of publicly traded higher education companies, driving them down.

Still, he said, that the probes by the state attorneys general could pose significant risk to the sector.

Given all of the previous scrutiny that for-profit colleges have faced from a range of sources -- the Education Department, False Claims Act lawsuits, accrediting agencies, and state regulators -- he said that the increasing interest from state attorneys general could be viewed as worrisome for the industry.

“In the past, settlements have been pretty nominal, and it’s been part of the cost of doing business,” he said. “Now that they’re coming through to look at for-profit colleges a second time, it makes me wonder whether there is something more significant that has been discovered.”

“If they have discovered and have hard evidence of something more serious in the industry, the monetary damages for these schools could put some of them out of business,” he said.