The Consumer Financial Protection Bureau (CFPB) today announced a final rule banning the inclusion of medical debt in credit scoring.
The final rule is expected to remove an estimated $49 billion in medical bills from credit reporting for some 15 million Americans, according to the consumer watchdog. Those with medical debt on their credit reports could see their credit ratings rise by an average of 20 points.
The CFPB also said it expects the change will result in an additional 22,000 mortgages annually.
The three national credit reporting companies, Equifax, Experian, and TransUnion, had previously removed all paid medical debts from consumer credit reports and those less than a year old, CFPB noted. The companies also took steps to remove medical collections under $500.
A Contentious Rulemaking Process
The CFPB claims its research shows that a medical bill on a person’s credit report is “a poor predictor of whether they will repay a loan, and contributes to thousands of denied applications on mortgages that consumers would be able to repay.”
“Medical debt may be less predictive of whether a consumer will pay a future loan, because medical debts can occur and are collected through unique circumstances and practices. For example, consumers often have limited ability to control the timing and types of medical services that are required,” the final rule reads.
Signaling the gravity of the issue to myriad stakeholders, the CFPB received more than 74,000 public comments during the rulemaking process. There’s been some controversy surrounding the rule, since medical debt can, indeed, be part of a borrower’s credit and payment obligations. One commenter, Total Recovery Services, Inc., is a debt collection agency primarily serving medical providers.
“The credit report was created to determine credit history and credit worthiness,” Total Recovery stated. “Debt and historic debt are part of that credit worthiness based on [consumers] paying, or not paying. Lenders need to know about these debts to make accurate determinations on the consumer’s ability to pay when they are borrowing money. Debt is debt regardless of the type or how it was incurred.”
Some medical providers also opposed the rule in comments, implying that the rule may result in medical bills going unpaid. Dallas County Medical Center noted, “We oppose this rule as our margins are already slim.”
Thousands of individuals also provided comments in support of CFPB’s rule, including Melissa Morgenson. “Medical debt – usually due to sickness or accidents – burdens people nationwide. When these debts appear on credit reports, people have trouble securing employment, housing, mortgages, or other necessary services,” Morgenson commented. “They may avoid needed medical care in the future.”
What The Rule Requires
This final rule is set to take effect 60 days from its publication in the Federal Register. Specifically, it:
- Prohibits lenders from considering medical information. The rule will end a “regulatory carveout” that allowed creditors to use certain medical information in making lending decisions. Lenders will also be barred from using information about medical devices, such as prosthetic limbs, that could be used to require that the devices serve as collateral for a loan for the purposes of repossession.
- Bans medical bills on credit reports. The rule bans consumer reporting agencies from including medical debt information on credit reports and credit scores sent to lenders. Lenders will continue to be able to consider medical information to verify medical-based forbearances, verify medical expenses that a consumer needs a loan to pay, and consider certain benefits as income when underwriting.
U.S. Vice President Kamala Harris, who helped spearhead this CFPB rulemaking, said in a statement issued today that the rule “will reduce the burden of medical debt” and help ensure patients aren’t denied access to credit for home mortgages, car loans, or small business loans due to unpaid medical bills.
“More working people will qualify for a home mortgage from a local bank instead of continuing to pay rent or resorting to a predatory lender,” Harris previously said concerning this CFPB rule.
Another Take
However, the Republican-led House Committee on Financial Services expressed “serious concerns” and disagreed with this rulemaking process in a letter last year to the CFPB explaining potential consequences, even terming the effort a “proposal to upend American credit and health care systems” in a release. The committee claimed the rule would cause:
- More consumers to be approved for mortgages, “some of whom will pose default risks hidden from credit underwriters”;
- Medical providers to require additional upfront payments for procedures, since "they will have less assurance of payment after the procedure occurs";
- Many high-risk borrowers to be rejected for credit or find credit to be prohibitively expensive; and
- Consumers to be encouraged to take on more medical debt, because the consequences of such debt will be ignored in underwriting decisions.
