Consumer group proposes new rules to remove medical bills credit reports

The Consumer Financial Protection Bureau (CFPB) has introduced a new rule aimed at removing medical debt from most credit reports. It would also provide more privacy protection, improve credit scores, and stop debt collectors from exploiting the credit reporting system to pressure payments.

Key points of the proposed rules include:

1. Ending the medical debt exception: The rule would eliminate the current allowance that lets lenders use medical debt information in credit assessments. Lenders would still be able to consider medical data related to disability income or relevant to the loan’s purpose, under specific conditions.
2. Setting limits for credit reporting companies: Credit reporting agencies would be barred from including medical debts in reports to creditors who are not allowed to consider such debts.
3. Prohibiting repossession of medical devices: The rule would forbid lenders from using medical devices as collateral or repossessing them, such as wheelchairs or prosthetic limbs, if the loan is not repaid.
4. The Fair and Accurate Credit Transactions Act of 2003 restricted lenders from accessing or using medical information, including debts. However, later regulations allowed creditors to use medical debts in their decisions. The CFPB’s proposal aims to close this loophole, ensuring that medical debts do not unfairly harm credit scores and protecting consumers from coercive debt collection practices.

The CFPB’s research indicates that medical bills are not reliable indicators of a person’s ability to repay loans. Analysis shows that medical debts decrease the accuracy of underwriting decisions, resulting in many unjust denials of mortgage applications that would otherwise be repaid.

With these new rules, the CFPB anticipates that lenders will benefit from more accurate underwriting and a higher volume of safe loan approvals. For mortgages alone, the proposed rule is expected to enable the approval of about 22,000 additional safe mortgages annually.

A December 2014 CFPB report demonstrated that medical debts are less predictive for lenders than other types of debt. A March 2022 report estimated that medical bills comprised $88 billion of reported debts on credit reports. Following this report, the CFPB evaluated whether unpaid medical bills should appear on credit reports.

In response, the three major credit reporting agencies—Equifax, Experian, and TransUnion—agreed to remove many medical debts from credit reports. FICO and VantageScore, the main credit scoring companies, also reduced the impact of medical bills on credit scores. 

Despite these changes, 15 million Americans still have $49 billion in medical debts in collections shown on their credit reports, often inaccurately or inflated due to the complex nature of medical billing and insurance.

The new rule could raise the average credit score for Americans with medical debt by 20 points. Currently, debt collectors misuse the credit reporting system to coerce payments for potentially invalid debts, a practice known as “debt parking.” This involves placing purchased medical debt on credit reports without the consumer’s knowledge, forcing them to pay to improve their credit score when they apply for loans.