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Consumer Financial Protection Bureau proposes ban on medical bills on credit reports
Photo: José 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 boost credit scores and loan approvals, and prevent debt collectors from using the credit reporting system to coerce people into paying.
The proposal would attempt to prevent credit reporting companies from sharing medical debts with creditors and would prohibit creditors from making lending decisions based on medical information.
The 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 IS THE IMPACT?
In 2003, Congress restricted creditors from obtaining or using medical information, including debt information, through the Fair and Accurate Credit Transactions Act. But federal agencies then issued a special regulatory exception to allow creditors to use medical debt in their credit decisions.
The CFPB proposes to close the regulatory gap that it says has kept large amounts of medical debt information in the credit reporting system. The proposed rule is intended to ensure that medical information does not unfairly harm credit scores and would help prevent debt collectors from coercing inaccurate or false medical bill payments.
Internal CFPB research shows that a medical bill on a person’s credit report is not a good indicator of whether they will repay a loan. In fact, analysis shows that medical debt penalizes consumers, making underwriting decisions less accurate and leading to thousands of denied applications for mortgages that consumers would otherwise pay off.
Since these are loans that people will repay, the CFPB expects that lenders will also benefit from better underwriting and a greater volume of secure loan approvals. In terms of mortgages, the CFPB expects the proposed rule to lead to the approval of approximately 22,000 additional secure mortgages each year.
In December 2014, the CFPB released a report showing that medical debts provide less predictive value to creditors than other debts on credit reports. Then, in March 2022, it launched a report estimating that medical bills accounted for $88 billion in debt reported on credit reports. In that report, the CFPB announced that it would evaluate whether credit reports should include data on unpaid medical bills.
Since the March 2022 report, the three national credit reporting conglomerates – Equifax, Experian and TransUnion – announced they would remove many of these accounts from 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 changes in the industry, 15 million Americans they still have $49 billion in medical bills outstanding from collections that show up in the credit reporting system. The complex nature of medical billing, insurance coverage, and reimbursementand collections means that medical debts that continue to be reported are often inaccurate or inflated, the CFPB said.
Additionally, the FICO and VantageScore changes have not eliminated the credit score gap between people with and without medical debt on their credit reports. The CFPB expects Americans with medical debt on their credit reports to see their credit scores increase by 20 points, on average, if the proposed rule is finalized.
Specifically, the proposed rule would eliminate the exception that broadly allows creditors to obtain and use information about medical debts 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, as long as certain conditions are met.
The rule would also prohibit credit reporting companies from including medical debts in credit reports sent to creditors when creditors are prohibited from considering them. Furthermore, it would prohibit creditors from taking medical devices as collateral for a loan and prohibits lenders from repossessing medical devices, such as wheelchairs or prosthetics, if people are unable to repay the loan.
THE BIGGEST TREND
The CFPB began its regulation in September 2023 with the goal 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 report card about 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 Publication in the media.