The Consumer Financial Protection Bureau has proposed a rule that would remove medical bills from credit reports, a ban that would prevent lenders from considering such debts when making loan-writing decisions.
The proposed rule change, announced Tuesday, would also increase privacy protections, help raise credit scores and prevent debt collectors from using the credit reporting system to force people to pay.
“The CFPB seeks to end the senseless practice of weaponizing the credit reporting system,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a statement. “Medical bills on credit reports are too often inaccurate and have little or no predictive value when it comes to repaying other loans.”
If finalized, the rule would eliminate up to $49 billion in medical debt that currently lowers the credit scores of 15 million Americans, the bureau said.
How do we get here?
In 2003, Congress restricted lenders from obtaining or using medical information, including medical debt, through the Fair and Accurate Credit Transactions Act. But federal agencies later issued a special regulatory exception to allow creditors to use medical debt in their credit decisions.
Now the office proposes closing that regulatory loophole. It began the rulemaking process in September.
Hadn't medical debt already been removed from many credit reports?
Yes. In March 2022, the CFPB released a report estimating that medical bills accounted for $88 billion of debt reported on credit reports and announced that it would evaluate whether credit reports should include data on unpaid medical bills.
After that, the three national credit reporting conglomerates (Equifax, Experian and TransUnion) announced that they would voluntarily eliminate many of those bills.
And FICO and VantageScore, the two major credit scoring companies, have reduced the degree to which medical bills affect a consumer's score.
If that is the case, why is the proposed rule necessary?
Despite the industry's voluntary changes, Americans still have billions of dollars in outstanding medical bills in collections that appear in the credit reporting system, the bureau said. 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, he added.
Additionally, the changes made by FICO and VantageScore have not eliminated the difference in credit scores between people with and without medical debt on their credit reports.
How much would credit scores improve?
Americans with medical debt on their credit reports would see their credit scores rise by 20 points on average if the proposed rule takes effect, according to a bureau estimate.
How would this help homeowners?
If finalized, the rule would lead to the approval of about 22,000 additional mortgages each year, the CFPB said.
It said an internal analysis showed that medical debt penalizes consumers by making underwriting decisions less accurate, leading to thousands of denied applications on mortgages that consumers would have otherwise paid.
What happens next?
The proposed rule is open to public comment until Aug. 12, and the office is working toward a final rule that would take effect next year.
