The proposed rule change, announced Tuesday, would also increase privacy protections, help raise credit scores and prevent debt collectors from using the credit reporting system to coerce people to pay.
“The CFPB is seeking 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 too often are inaccurate and have little to no predictive value when it comes to repaying other loans.”
If finalized, the rule would remove as much as $49 billion of medical debts that currently lower the credit scores for 15 million Americans, the bureau said.
How did we get here?
Congress in 2003 restricted lenders from obtaining or using medical information, including medical debts, through the Fair and Accurate Credit Transactions Act. But federal agencies subsequently issued a special regulatory exception to allow creditors to use medical debts in their credit decisions.
Now the bureau is proposing to close that regulatory loophole. It began the rulemaking process in September.
Wasn’t medical debt already erased from many credit reports?
Yes. In March 2022, the CFPB released a report estimating that medical bills made up $88 billion of reported debts on credit reports and announced that it would assess whether credit reports should include data on unpaid medical bills.
After that, the three nationwide credit reporting conglomerates — Equifax, Experian and TransUnion — announced that they would voluntarily remove many of those bills.
And FICO and VantageScore, the two major credit scoring companies, have decreased the degree to which medical bills affect a consumer’s score.
If that’s the case, why is there a need for the proposed rule?
Despite the voluntary industry changes, Americans still have billions of dollars in outstanding medical bills in collections appearing in the credit reporting system, the bureau 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?
Americans with medical debt on their credit reports would see their credit scores rise by 20 points on average if the proposed rule goes into effect, according to an estimate by the bureau.
How would this help homeowners?
If finalized, the rule would lead to the approval of about 22,000 additional mortgages every year, the CFPB said.
It said an internal analysis showed that medical debts penalize consumers by making underwriting decisions less accurate, leading to thousands of denied applications on mortgages that consumers would otherwise have repaid.
What happens next?
The proposed rule is open for public comment through Aug. 12.