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Medical Debt Relief Act Impasse Hindering Homeownership?

Robert Ottone
Oct 14, 2013

Faith in politicians is at its worst in a very long time. Republicans, especially, are feeling the squeeze, with the party’s popularity at an all-time low. While many are (rightly) concerned with the government shutdown, there was one issue that was brought to our attention by an industry insider that has since gone unheralded in the media. That issue is the Medical Debt Relief Act. The Medical Debt Relief Act, in simple terms, would allow any paid medical debt under $2,500 to be removed 45 days after it was paid. As Consumerist pointed out back in March, having a blemish on one’s credit report pertaining to a medical bill is by no means a proper measure of an individual’s line of credit. The bill (which is a mere four pages in length) states that “medical debt is unique and Americans do not choose when accidents happen or when illness strikes; medical debt collection issues affect both insured and uninsured consumers; according to credit evaluators, medical debt collections are more likely to be in dispute, inconsistently reported and of questionable value in predicting future payment performance because it is atypical and nonpredictive; nevertheless, medical debt that has been completely paid off or settled can significantly damage the credit score of a consumer for years; as a result, consumers may be denied credit or pay higher interest rates when buying a home or obtaining a credit card.” While the bill continues on for three additional pages, the issue is plain and simple. Medical debt is not an indicator of an individual’s ability to pay credit-related charges. FICO has determined that any credit infraction that results from an unpaid debt or credit could result in an immediate dash of 100 points off one’s credit score. Even if made in error. The 111th and 112th Congresses both put the Act forward only to see it die once it reached the United States Senate Committee on Banking, Housing & Urban Affairs, headed by Sens. Tim Johnson (D-SD) and Mike Crapo (R-ID). It’s worth noting that the 111th Congress who voted on the Act saw the bill co-sponsored by 23 Republicans. The 112th Congress saw the bill co-sponsored by 11 Republicans and 44 Democrats. While the 112th Congress’ numbers saw over a 5o percent decrease in Republican support, the surge of Democrat support for the bill was drastically higher than the previous Congress. In that same Consumerist article, an open letter, penned by various advocacy groups (including the NAHB, NAMB, MBA and NCRA) reads: “Dear Chairman Johnson & Ranking Member Crapo: The undersigned organizations strongly support S.160, the Medical Debt Responsibility Act of 2013, introduced in the U.S. Senate. The bill requires credit agencies to remove FULLY paid or settled medical debt from credit reports within 45 days. Annually, approximately 73 million Americans experience medical billing problems or accrue medical debt. Medical debt is unique in that it is not typically reported to the credit bureaus when it is paid on time since virtually no healthcare providers report to the credit bureaus. When medical bills are sent to collection agencies, they are generally reported to the credit bureaus and identified as accounts in arrears, which drags down credit scores. The medical billing system is fraught with errors and confusion, further compounding the situation for consumers. When information is inaccurate, markets make decisions on less than perfect information. With regard to medical debt, this can mean significantly reducing a consumer’s credit score and subsequently impeding economic activity and consumer borrowing capacity. According to the Fair Isaac Corp., any unpaid debt sent to collections, whether for $100 or $10,000, can shave up to 100 points off a person’s credit score – even if this collection is a mistake, made in error, paid or settled, or is in dispute. This can have a dramatic impact on an individual’s ability to obtain a mortgage, a car loan, or any other form of credit, thereby limiting economic activity. A 2012 Federal Trade Commission report found that as many as 40 million Americans have mistakes on their credit report. The current system punishes consumers regardless of the underlying facts (e.g., mistakes or errors). Congress can create equity in the current system and dramatically increase economic activity and growth by amending the Fair Credit Reporting Act to require the removal of medical collection accounts that are paid in full or settled. Creditworthy consumers are being denied credit or are paying higher interest rates or higher fees when purchasing a home loan or obtaining credit for credit-related products, due to medical debt on consumer credit reports. The Medical Debt Responsibility Act goes a long way in ensuring that creditworthy consumers obtain the credit they have earned. The Medical Debt Responsibility Act will prevent the credit records of millions of consumers from being unfairly tarnished. Credit records will show that these hard-working consumers, who successfully paid off or settled their medical bills, are more creditworthy than their credit report would otherwise indicate to a prospective lender. This important legislation recognizes that the current credit reporting system contributes to artificially constrained credit and allows consumers to participate in our economy from a market-oriented policy basis. We urge Congress to pass this common sense legislation to help responsible consumers and reignite the economy.” Now, the implications of such a blemish on one’s credit are obvious. If you need a mortgage, why should you be penalized with higher interest rates for breaking your wrist a few years ago? How does a hospital bill that has since been paid off reflect an otherwise flawless line of credit? A sane person would argue that these credit-related dings of one’s credit shouldn’t have any bearing on an individual’s ability to repay. Having marks against an individual’s credit not only affects that individual’s ability to repay a loan, but also the potential to obtain gainful employment. As background checks are becoming more and more important in this day and age of employment, with the job market still in shambles, a mark against one’s credit could kill an opportunity. “Every consumer needs to be aware of medical billing errors, especially in the wake of the Affordable Care Act (Obamacare),” said John H.P. Hudson, vice president of regulatory affairs for Premier Nationwide Lending. “Another reason we need to pass this is so erroneous medical billing doesn’t end up hindering the American dream of homeownership.” Why would the Committee on Banking, Housing & Urban Affairs kill the Act on two separate occasions? What possible reason could they have in denying Americans a potential improvement to their credit scores? Sean Oblack, Communications Director for the Committee on Banking, Housing & Urban Affairs stated in an e-mail exchange: “In this political environment, bills need to be bipartisan to pass and currently this bill only has democratic cosponsors.” That comment doesn’t shine any light on why the bill, during the 112th Congress, didn’t get passed with bipartisan support. Oblack failed to respond to follow-up inquiry as of the date of publication.
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