Amid a regulatory push ahead of the White House transition, the Consumer Financial Protection Bureau (CFPB) unveiled a new rule on Tuesday to eliminate medical debt from credit reports. The regulation is expected to raise the number of mortgage approvals by about 22,000 loans per year.
The rule amends Regulation V, which enforces the Fair Credit Reporting Act (FCRA), and prohibits credit reporting companies from including medical bills in reports provided to lenders. Lenders, in turn, are barred from factoring medical debt into their underwriting decisions. The rule is effective 60 days after publication in the Federal Register.
Lenders, for example, cannot use information about medical devices that could be repossessed as collateral for a loan. But they can consider medical information for legitimate purposes, such as verifying medical-based forbearances, assessing loans intended to cover medical expenses, or including certain benefits as income during underwriting.
Additionally, debt collectors will no longer be able to leverage credit reports to “coerce people into paying bills they don’t owe.”
“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.”
Sen. Tim Scott (R-S.C.), who leads the Senate Banking Committee, released a statement that was critical of the announcement. After Donald Trump won the election in November, Scott sent a letter to President Joe Biden that called on his administration to cease rulemaking activity.
“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. “Medical debt is a serious challenge for many Americans, but the CFPB’s final rule will do nothing to address the underlying issues. Instead, the rule will reduce access to credit and important health care services while putting lenders and medical providers at risk.
“I look forward to working with the next CFPB Director to undo the damage caused by the Biden administration’s policies, and to find real solutions to support families across the country.”
The CFPB estimates its new rule will eliminate $49 billion in medical debt from the credit reports of 15 million Americans. It is expected to boost credit scores by an average of 20 points, potentially improving access to credit for millions of consumers.
The agency said that medical bills are a poor predictor of a borrower’s ability to repay loans, despite their use in mortgage denials. The CFPB also cited issues such as inaccurate bills and those that should have been covered by insurance as key justifications for the change.
This move builds on recent efforts by the three major credit reporting companies —Equifax, Experian and TransUnion — to remove certain medical debts, including collections of less than $500, from credit reports in 2022. Credit scoring companies FICO and VantageScore have also updated their methodologies to reduce the impact of medical debt on credit scores.
Consumer advocacy groups commended the new rule but requested more restrictive uses of medical bills. The CFPB’s final rule, for example, does not apply to medical debts on credit cards, including specialized credit cards. It also does not apply to credit reports used for non-lending purposes, such as employment and tenant screening.
“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, senior attorney at the National Consumer Law Center (NCLC).
“Medical debt shouldn’t harm credit records regardless of how it shows up,” said April Kuehnhoff, senior attorney at NCLC. “And it shouldn’t damage the ability of Americans to get a job or an apartment.”
Editor’s note: This story was updated with comments from Senate Banking Committee leader Tim Scott.
