Medical Debt Struck From Credit Reports in Final CFPB Rule (1)

Most medical debt will be scrapped from consumer credit reports under a final US rule implementing a Biden administration priority, but Republican lawmakers and the credit reporting industry will likely push to overturn the changes.

The Consumer Financial Protection Bureau’s rule, finalized Tuesday, eliminates an exemption in the Fair Credit Reporting Act that’s allowed third-party debt collectors to get medical debt placed on credit reports. The rule, should it go into force, will improve affected Americans’ credit scores by an average of 20 points, the CFPB says.

“People who get sick shouldn’t have their financial future upended,” CFPB Director Rohit Chopra said in a statement. “The CFPB’s final rule will close a special carveout that has allowed debt collectors to abuse the credit reporting system to coerce people into paying medical bills they may not even owe.”

More than 15 million people in the US have medical bills on their credit reports, with over $49 billion in outstanding debt subject to collection, the CFPB has reported.

“This will be lifechanging for millions of families, making it easier for them to be approved for a car loan, a home loan, or a small-business loan,” Vice President Kamala Harris said in a statement.

Industry groups gearing up for a likely legal fight have said the CFPB exceeded its authority on the medical debt plan.

“Congress established a detailed framework governing the content of credit reports as set out in the Fair Credit Reporting Act, which does not give the CFPB discretionary authority to determine what should or should not be included in a credit report,” said Dan Smith, the president and CEO of the Consumer Data Industry Association, which represents credit reporting companies.

Biden Priority

Harris joined Chopra to unveil the CFPB’s proposal in June.

The CFPB and its supporters say medical debt isn’t predictive of a customer’s ability to repay a mortgage or other loan, cover rent payments, or maintain a job, because in many instances the financial obligations come in an emergency. Chaos in the medical billing process and insurance payment delays also make medical debt an imperfect tool for measuring a person’s credit, the CFPB has said.

“Medical debt has damaged the financial record of tens of millions for far too long, causing credit rejections and pushing costs even higher for Americans struggling financially,” said Chi Chi Wu, a senior attorney at the National Consumer Law Center who focuses on credit reporting issues.

Credit reports can be used to determine a person’s credit worthiness as part of rental housing and employment checks.

The rule, which takes effect 60 days after publication in the Federal Register, also bars the use of medical information in lending decisions, preventing lenders from using prosthetic limbs and other medical devices as collateral that can be repossessed if a borrower goes into default.

New York and Colorado have already barred hospitals and others from reporting medical debt to credit reporting companies.

Facing CFPB pressure, the three largest nationwide credit reporting companies—Equifax Inc., Experian Plc, and TransUnion—in March 2022 said they would remove more than 70% of all medical debt from credit reports.

FICO and VantageScore, the two dominant credit scoring companies, separately announced they have reduced the importance of medical debt on credit scores, the CFPB said.

The rule is part of a broader CFPB effort to reshape the credit reporting industry. The agency in December proposed subjecting data brokers to the federal credit reporting law, and it also kicked off rulemaking to make it easier for domestic violence and elder abuse victims to remove “coerced debt” from their credit reports.

The CFPB also issued an advisory opinion limiting when debt collectors can pursue medical debt, though that guidance has been challenged in court.

Industry, GOP Opposition

Republican lawmakers, credit reporting companies, banks, and debt collectors have all lined up to oppose the medical debt rule.

Sen. Tim Scott (R-S.C.), the incoming Senate Banking Committee chairman, blasted the CFPB for continuing to move forward with new rules in the final days of President Joe Biden’s term.

“With just days left in the Biden administration, CFPB Director Chopra is pressing forward in his pursuit of headlines and political talking points over sound policy decisions,” Scott said in a Tuesday statement.

Chopra at a Banking Committee hearing last month said he didn’t think the CFPB should be a “dead fish” during the lame-duck period.

With Republicans set to control Congress and the White House, they could use the Congressional Review Act to repeal the rule. The law requires a simple majority vote in both chambers of Congress and the president’s signature to repeal federal regulations that were adopted near the end of the previous administration.

A Trump-appointed CFPB director could also opt to put the rule on hold and modify or repeal it using the formal notice-and-comment process.

Separately, the credit reporting and debt collection industries are expected to sue to block the rule. Companies have said the CFPB lacked the authority to exempt classes of debt from credit reporting, and they accused the agency of relying on outdated research to justify the rule on economic grounds.

“The arbitrary nature of this final rule will harm medical providers, patients, consumers, and creditors, not to mention the larger economy,” Scott Purcell, CEO of debt collection trade association ACA International, said in a statement.