A rule that would exclude medical bills from the majority of credit reports, strengthen privacy rights, improve credit scores and loan approval rates, and stop debt collectors from exploiting the credit reporting system to force people to pay was recently proposed by the Consumer Financial Protection Bureau (CFPB).
The idea would forbid lenders from basing lending choices on medical information and restrict credit reporting companies from disclosing medical debts to lenders. As part of its efforts to alleviate the burden of medical debt and coercive credit reporting practices, the CFPB has proposed a rule.
“The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe,” said CFPB Director Rohit Chopra. “Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans.”
Through the Fair and Accurate Credit Transactions Act, passed in 2003, Congress placed restrictions on lenders’ access to and use of medical information, including debt-related information. Federal agencies did, however, later provide a specific regulation exception allowing creditors to consider medical bills when determining creditworthiness.
The regulatory gap that has allowed a significant quantity of medical debt data to remain in the credit reporting system is to be closed, according to the CFPB’s proposal. The proposed rule would prevent debt collectors from forcing payments for erroneous or fraudulent medical bills, and it would assist in ensuring that medical information does not unfairly harm credit ratings.
According to a CFPB study, a person’s credit report containing a medical bill is not a reliable indicator of their ability to repay a loan. As evidenced by the CFPB’s investigation, medical debt actually hurts consumers by lowering the accuracy of underwriting determinations and resulting in thousands of mortgage applications that would otherwise be approved but were denied. The CFPB anticipates that lenders will gain from enhanced underwriting and a rise in the number of safe loan approvals as these are loans that borrowers will repay. Regarding mortgages, the CFPB anticipates that the new rule will result in the annual approval of around 22,000 more safe mortgages.
A report published by the CFPB in December 2014 demonstrated that medical debts on credit reports have less predictive value for lenders than other types of debt. Then, in a report published in March 2022, the CFPB estimated that $88 billion of reported debts on credit reports were medical expenditures. The CFPB stated in that report that it would evaluate whether information about unpaid medical bills ought to be included in credit reports.
The three national credit reporting conglomerates, Equifax, Experian, and TransUnion, announced that they would remove many of those bills from credit reports following the March 2022 report. Additionally, the two major credit scoring companies, FICO and VantageScore, have reduced the amount that medical bills affect a consumer’s score.
Approximately fifteen million Americans still owe $49 billion in unpaid medical bills that are listed as collections on their credit reports, despite these voluntary industry improvements. Medical debts that are still being recorded are frequently exaggerated or comprise errors due to the intricate nature of medical billing, insurance coverage and reimbursement, and collections.
Furthermore, the distinction in credit scores between those who have medical debt on their credit reports and those who do not has not been eradicated by the modifications made by VantageScore and FICO. If today’s proposed regulation is approved, we anticipate that Americans who have medical debt on their credit reports will experience an average increase in credit scores of 20 points.
Incorrectly using the credit reporting system, debt collectors force people to pay debts they may not even be responsible for under the current system. A common technique among debt collectors is “debt parking,” whereby they buy medical debt and then, frequently without the consumer’s knowledge, record it on credit reports. Customers may find that their inability to obtain a loan is hampered by a medical debt when they ask for credit. Regardless of the authenticity of the debt, customers could subsequently feel pressured to pay the medical bill in order to raise their credit score and get approved for a loan.
Specifically, the proposed rule, if finalized would:
- Eliminate the special medical debt exception: The proposed rule would remove the exception that broadly permits lenders to obtain and use information about medical debt to make credit eligibility determinations. Lenders would continue to be able to consider medical information related to disability income and similar benefits, as well as medical information relevant to the purpose of the loan, so long as certain conditions are met.
- Establish guardrails for credit reporting companies: The proposed rule would prohibit credit reporting companies from including medical debt on credit reports sent to creditors when creditors are prohibited from considering it.
- Ban repossession of medical devices: The proposed rule would prohibit lenders from taking medical devices as collateral for a loan, and bans lenders from repossessing medical devices, like wheelchairs or prosthetic limbs, if people are unable to repay the loan.
The CFPB started its rulemaking process in September 2023 with the intention of minimizing the impact of medical debt on credit reports and putting an end to coercive debt collection methods. In 2022, the CFPB also released a bulletin on the No Surprises Act and a report detailing the widespread and crippling impacts of medical debt, which serves as a reminder to debt collectors and credit reporting firms of their legal obligations under the law.
To read the full report, click here.
