CFPB proposal would ban medical debt from credit reports

The Consumer Financial Protection Bureau (CFPB) announced Tuesday that it was proposing a rule to remove medical bills from most credit reports. In doing so, this would prevent credit-reporting companies from sharing medical debts with mortgage lenders while prohibiting lenders from making lending decisions based on such information.

Additionally, the CFPB said the proposed rule would 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.

According to the bureau, the proposed rule is part of its efforts to address issues with coercive credit-reporting practices and the burdens of medical debt.

“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,” CFPB Director Rohit Chopra said in a statement. “Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans.“

In 2003, the Fair and Accurate Credit Transaction Act began to restrict lenders from obtaining or using consumer medical information, including information about health care debts. Since then, however, some federal agencies have issued special regulatory exceptions to allow creditors to use medical debts in their credit decisions.

According to the CFPB, the proposed rule would close this loophole and “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.”

In explaining its rationale for the proposal, which began its rulemaking process in September 2023, the CFPB said its research 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 CFPB’s 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,” a statement from the bureau reads.

The CFPB also said it expects lenders to benefit from the improved underwriting and the increased volume of loan approvals through this proposed rule. It anticipates the rule would lead to the approval of roughly 22,000 additional “safe mortgages“ each year. Additionally, the CFPB said it expects the credit scores of Americans with medical debt on their credit reports to rise by an average of 20 points if the rule is finalized.

In March 2022, a report from the CFPB found that medical bills accounted for an estimated $88 billion of reported debts on credit reports. Since then, Equifax, Experian and TransUnion announced that they would take many of these bills off credit reports, while FICO and VantageScore announced that they would decrease the degree to which medical bills impact a consumer’s score.

But the CFPB recently reported that despite these changes, 15 million Americans still have a total of $49 billion in outstanding medical bills in the credit-reporting system. The bureau also noted that the changes made by FICO and VantageScore have not succeeded in getting rid of the credit-score difference between people with and without medical debt.

The CFPB is seeking comments on the proposed rule, which must be submitted on or before Aug. 12, 2024.

If approved, the CPFB said the rule would eliminate the special medical-debt exemption for lenders, establish guardrails for credit-reporting companies and ban the repossession of medical devices.