CFPB to Require Credit Reporting Agencies to Name Bad Actors

WASHINGTON — The Consumer Financial Protection Bureau is calling on the biggest credit reporting agencies to submit reports regularly on how they handle consumer disputes, and produce lists that name the furnishers and industries which have the most complaints.

The agency will announce the new mandate Thursday along with a study that found that 43 million Americans have overdue medical debt marked on their credit report and consumers largely complained such debt was difficult to understand or erroneous. Further, more than half, or 52%, of all the debt on credit reports is tied to medical debt, the study said.

With such a large amount of medical debt held by consumers, the CFPB is questioning the systems used to gather and report debt, whether it's coming from reporting agencies, creditors, debt collectors or another third party.

"Today's study found that many consumers are affected by medical debt, that medical debt dominates collections trade lines in the credit reporting system, and that the appearance of medical debt information on credit reports can reflect the complexity, confusion, and delays that characterize medical billing and insurance reimbursement rather than the consumer's ability or willingness to pay their debts," said CFPB Director Richard Cordray, in prepared remarks for a field hearing on the study Thursday.

In response, the CFPB will require that the major credit reporting agencies provide information showing how they handled consumer disputes, particularly when those disputes are tied to a certain furnisher. The CFPB wants to have a peer comparison to top furnishers with the most complaints. The report by the credit agencies must also list the top industries the agencies are reporting on as well as the volume of information and total complaints received from each industry.

"This is fundamental because disputes are an important indicator of risk. If a credit reporting company has a furnisher that continuously experiences an outsized rate of consumer disputes relative to its peers, we expect the company to do something about it," Cordray said. "We expect it to investigate the source of the disputes, identify any problems, and take necessary action. This may include declining to accept information from the troubled furnisher where that step is justified. Access to this required reporting information on a regular basis will help us prioritize our work, and it will help us protect consumers even more effectively in this field."

The CFPB's study received immediate praise from consumer groups. The National Consumer Law Center further requested that the CFPB ramp up protections for consumers buried in medical debt.

"The CFPB's report documents the enormous harm that medical debt wreaks on consumers' credit reports," said Chi Chi Wu, staff attorney at NCLC, in a press release following the CFPB's study. "The credit reporting system needs fundamental reform, including better standards for accuracy and real, meaningful investigation of consumer disputes that don't automatically defer to the debt collector or creditor in a dispute."

Credit scoring developers Fair Isaac Co. (FICO) and VantageScore have already changed their scoring models to lower the impact medical debt has on a consumer's credit score. And some bankers previously told American Banker that they often don't include medical debt when calculating the person's credit worthiness if it's a small balance.

The CFPB study found that the average unpaid medical debt on a credit report is $579, often smaller than other debts owed on a credit report.

"By contrast, products like credit cards or student loans that become delinquent or are subject to debt collection efforts are usually for several thousand dollars apiece," Cordray said.

The study also said that 15 million consumers, or 7% of the national population, have solely medical debt on their reports, indicating they are more likely to pay their bills and other debt on time.

"Most importantly, about half of those with only medical collections show no other evidence of financial distress and generally appear to be paying their other financial obligations on time," Cordray said. "In other words, roughly seven million people who are otherwise good paying consumers may be treated as greater risks and have lower credit scores solely because of medical debt. If a credit score is supposed to be a predictor of a consumer's likelihood of paying back a debt, these findings raise serious questions about how medical debt collections items affect a consumer's credit score."

There are other issues likely to be raised at the hearing Thursday. NCLC and industry observers have noted that the changes made by two credit scoring developers to lower the medical debt in scoring will not necessarily help consumers who apply for a mortgage that is designed to be bought by Fannie Mae and Freddie Mac. The government-sponsored enterprises require lenders to use an older FICO scoring model that counts medical debt. NCLC urged the CFPB to insist that Fannie and Freddie change their policies.

The CFPB is hosting a field hearing Thursday afternoon in Oklahoma City to discuss the study with the public, consumer groups and industry representatives.