The Consumer Financial Protection Bureau (CFPB) announced on Thursday that it is considering a rule that would prohibit consumer credit companies from including medical debt and collection information on credit reports. The rule, which is expected to be proposed next year, would also prevent creditors from using medical bills for underwriting decisions and debt collectors from using credit reports as leverage to pressure consumers into paying questionable bills.
Medical debt affects millions of Americans
According to the CFPB, one in five Americans have medical debt on their credit reports, which can lower their credit scores and limit their access to loans, mortgages, credit cards, and other financial products. Medical debt is the most common type of debt in collection, accounting for 58% of all third-party debt collection on consumer credit reports.
However, the CFPB also found that medical bills have little predictive value in credit decisions and often contain errors or disputes. The agency cited a study by the Medical Billing Advocates of America that estimated up to 80% of medical bills have mistakes. The CFPB director Rohit Chopra said that many consumers are dealing with confusing and error-ridden bills that can end up on their credit reports even if they do not owe anything further.
“Research shows that medical bills have little predictive value in credit decisions, yet tens of millions of American households are dealing with medical debt on their credit reports,” Chopra said. “When someone gets sick, they should be able to focus on getting better, rather than fighting debt collectors trying to extort them into paying bills they may not even owe.”
The proposed rule would protect consumers from unfair practices
The CFPB said that the proposed rule would protect consumers from unfair and abusive practices by consumer reporting companies, creditors, and debt collectors. The rule would:
- Ban consumer reporting companies from including medical debt and collection information on consumer credit reports. This would apply to all medical debt, regardless of the amount or the age of the debt.
- Prohibit creditors from relying on medical bills for underwriting decisions. This would ensure that only non-medical information is used when considering a borrower’s loan application.
- Stop debt collectors from using the listing of medical debt on credit reports as leverage to pressure consumers into paying questionable bills. This would prevent debt collectors from threatening or misleading consumers about the impact of medical debt on their credit scores or their ability to obtain credit.
The CFPB said that the proposed rule would align with the existing practices of some consumer reporting companies and credit scoring models that already limit or exclude the use of medical debt and collection information. For example, as of July 2022, Equifax, TransUnion, and Experian no longer include medical debt in collection under $500 on credit reports. VantageScore also does not use medical debt or medical collection in its credit score calculation, and newer FICO score models put less weight on that information.
The Biden administration aims to reduce the burden of medical debt
The proposed rule is part of the Biden administration’s efforts to reduce the burden of medical debt on Americans and help them cope with inflation and higher costs of living. The White House has also outlined a four-point plan to help protect consumers from medical billing practices, including:
- Having the CFPB investigate credit reporting companies and debt collectors that violate patients’ and families’ rights.
- Having the Department of Health and Human Services (HHS) issue guidance to hospitals and health care providers on how to improve their billing practices and increase transparency.
- Having HHS work with states and local governments to expand access to health insurance and lower health care costs.
- Having HHS partner with consumer groups and advocates to educate consumers about their rights and options when facing medical bills.
Vice President Kamala Harris said that the administration is offering a solution to fix the problem of medical debt that affects millions of Americans.
“We know credit scores determine whether a person can have economic health and well-being, much less the ability to grow their wealth,” Harris said. “Today, we are offering a solution to fix this problem …”