The White House wants to remove medical debt from credit scores

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 these debts when making decisions about whether to grant loans.

The proposed rule The change, announced Tuesday, would also increase privacy protections, help boost credit scores and prevent debt collectors from using the credit reporting system to force people to pay.

“The CFPB is working 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 to no predictive value when it comes to repaying other loans.”

If finalized, the rule would eliminate as much as $49 billion in medical debt, which currently drags down the credit scores of 15 million Americans, the agency said.

How did we get here?

Congress in 2003 restricted lenders from obtaining or using medical information, including medical debt, through the Fair and Accurate Credit Transactions Act. But federal agencies then issued a special regulatory exception to allow creditors to use medical debt in their lending decisions.

Now the agency is proposing to close this regulatory loophole. It started the regulations trial in September.

Hadn't the medical debt already been removed from many credit reports?

Yes. In March 2022, the CFPB issued a report estimated that medical bills accounted for $88 billion in reported debt on credit reports and announced it would review 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 withdraw many of those bills.

And FICO and VantageScore, the two largest credit scoring companies, have reduced the extent to which medical bills affect a consumer's score.

If that is the case, why is the proposed rule necessary?

Despite the voluntary industry changes, Americans still have billions of dollars in outstanding medical bills in collections that show up in the credit reporting system, the agency 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, it added.

Additionally, the changes made by FICO and VantageScore have not eliminated the credit score difference between people with and without medical debt on their credit reports.

By how much would credit scores improve?

According to an estimate from the agency, Americans with medical debt on their credit reports would see their credit scores increase by an average of 20 points if the proposed rule takes effect.

How would this help homeowners?

If finalized, the rule would lead to the approval of about 22,000 additional mortgages per year, the CFPB said.

According to the report, an internal analysis shows that medical debt harms consumers by making their underwriting decisions less accurate, leading to thousands of denied applications for mortgages that consumers would otherwise have repaid.

What happens now?

The proposed rule is open to public commentary through Aug. 12, with the agency working on a final rule that will take effect next year.

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