Consumer Financial Protection Bureau proposes ban on medical bills from credit reports
The proposal would attempt to stop credit reporting companies from sharing medical debts with lenders.
Photo: Jose Luis Pelaez/Getty Images
The Consumer Financial Protection Bureau (CFPB) has proposed a rule intended to remove medical bills from most credit reports, increase privacy protections, help to increase credit scores and loan approvals and prevent debt collectors from using the credit reporting system to coerce people to pay.
The proposal would attempt to stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical information.
CFPB framed the proposed rule as part of its efforts to address the burden of medical debt and what it called manipulative credit reporting practices.
WHAT'S THE IMPACT?
In 2003, Congress restricted lenders from obtaining or using medical information, including information about debts, through the Fair and Accurate Credit Transactions Act. But federal agencies then issued a special regulatory exception to allow creditors to use medical debts in their credit decisions.
The CFPB is proposing to close the regulatory loophole it said has kept vast amounts of medical debt information in the credit reporting system. The proposed rule is intended to ensure that medical information does not unjustly damage credit scores, and would help keep debt collectors from coercing payments for inaccurate or false medical bills.
Internal research from CFPB shows that a medical bill on a person's credit report is not a good predictor of whether they will repay a loan. In fact, the analysis shows that medical debts penalize consumers by making underwriting decisions less accurate and leading to thousands of denied applications on mortgages that consumers would repay.
Since these are loans people will repay, the CFPB expects lenders will also benefit from improved underwriting and increased volume of safe loan approvals. In terms of mortgages, the CFPB expects the proposed rule would lead to the approval of approximately 22,000 additional, safe mortgages every year.
In December 2014, the CFPB released a report showing that medical debts provide less predictive value to lenders than other debts on credit reports. Then in March 2022, it released a report estimating that medical bills made up $88 billion of reported debts on credit reports. In that report, the CFPB announced that it would assess whether credit reports should include data on unpaid medical bills.
Since the March 2022 report, the three nationwide credit reporting conglomerates – Equifax, Experian and TransUnion – announced they would take many of those bills off credit reports, and FICO and VantageScore, the two major credit scoring companies, have decreased the degree to which medical bills impact a consumer's score.
Despite these voluntary industry changes, 15 million Americans still have $49 billion in outstanding medical bills in collections appearing in the credit reporting system. The complex nature of medical billing, insurance coverage and reimbursement, and collections means that medical debts that continue to be reported are often inaccurate or inflated, CFPB said.
Additionally, the changes by FICO and VantageScore have not eliminated the credit score difference between people with and without medical debt on their credit reports. CFPB expects that Americans with medical debt on their credit reports will see their credit scores rise by 20 points, on average, if the proposed rule is finalized.
Specifically, 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.
The rule would also prohibit credit reporting companies from including medical debt on credit reports sent to creditors when creditors are prohibited from considering it. Additionally, it 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 LARGER TREND
The CFPB began its rulemaking in September 2023 with the goals of ending coercive debt collection practices and limiting the role of medical debt in the credit-reporting system.
The CFPB also published in 2022 a report describing the effects of medical debt, along with a bulletin on the No Surprises Act to remind credit reporting companies and debt collectors of their legal responsibilities under that legislation.
Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.
