Debt collectors defend doctors in skewering CFPB medical debt plan

Bloomberg News

Debt collectors are not usually discussed in the same breath with doctors, but both industries face billions in lost income under a plan by the Consumer Financial Protection Bureau to ban medical debt from credit reports.

A new report financed by the debt collection industry claims that debt collectors will face higher litigation costs and will sue consumers more often under a plan by the White House and the CFPB to eliminate medical debt from credit reports.

Credit experts and consumer advocates think the report will be used to support litigation against the CFPB once a final rule is issued. The report claims the CFPB failed to conduct adequate research and didn't take into account the economic impact that its proposed rule would have on medical providers, particularly small doctors' practices. Industry also claims that the 60 day period for public comment on the proposed rule is inadequate. Comments are due by August 12. 

"The argument for banning medical debt from credit reports is that people don't choose to get sick or be uninsured or to have massive amounts of medical debts," said John Utzheimer, president of Ulzheimer Group in Atlanta, and a longtime credit industry expert. "But don't doctors deserve to get paid?" 

Debt collectors — who recognize they have little sympathy from the public — are painting the CFPB's plan as dire for small and rural physician practices that stand to lose an estimated $24 billion once the plan goes into effect. Debt collectors themselves are estimated to lose 8% of their annual revenue under the plan. 

Debt collectors cannot attempt to collect a debt that is not actually owed, Ulzheimer said, adding that the $24 billion estimate in the report "really is $24 billion that is owed to doctors."

"To suggest that all of that debt or any meaningful percentage of that debt is not actually owed is untrue. It's owed," he said. "This other myth is that lenders don't care about medical debt, and that is very much not true. They care."

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The CFPB's proposal would prohibit creditors from using medical information in connection with underwriting decisions or any credit determination. Credit bureaus also would be limited from providing medical debt information to creditors to support credit decisions. 

Kim Phan, a partner at the law firm Troutman Pepper, said multiple industries are working on research on medical debt that could be used in litigation against the CFPB. She also said that the 2024 election could have a major impact on all the CFPB's upcoming rulemakings.

"As this is only a proposed rule, a Trump-appointed CFPB director could easily choose not to move this rulemaking forward," said Phan. "Trump's return to presidency would almost certainly change things."

The CFPB's proposed rule comes with an even bigger caveat: While medical debts would no longer appear on credit reports, consumers would still owe debt. Though debt collectors could no longer use the threat of reporting a medical debt as a prod to get a consumer to pay their bills, collectors can still contact consumers through mail and by phone. And many will be forced to sue to recoup the debts.  

"We all know that sometimes firms will litigate in order to establish the reputation that they're going to get paid," said Andrew Nigrinis, an economist at Legal Economics LLC, and a former enforcement economist at the CFPB, who wrote the report. "If you take away [debt collectors'] ability to credit-report, do you think they'll just forgive the debt or do you think they're going to litigate?"

He said the CFPB's proposal should be challenged for several reasons.

"Any major change that is going to cause this much loss to industry and the economy in general should be carefully researched and reviewed before being implemented," Nigrinis said. Medical providers would suffer $24 billion in losses the first year and anywhere from $82 billion to $655 billion in losses over time, Nigrinis found.

He also criticized the CFPB for failing to analyze the proposed rule's impact on small business healthcare service providers and whether private-market healthcare providers will respond by refusing to provide credit to consumers or by cutting off access to healthcare services. The report claims that healthcare providers may request more up-front cash payments and higher co-pays.

For decades, medical debt was "a non-controversial issue," said Ulzheimer, who previously worked at FICO and Equifax. 

"This is one of those topics that seems to have become very political and has been dragged into the quicksand of politics," he added.

Consumer advocates also are weighing in, claiming the CFPB has the legal authority to enforce the ban on medical debt from appearing on credit reports despite recent Supreme Court rulings that have eliminated deference to regulatory agencies. 

"This is about legal interpretation, not fact-finding," said Chi Chi Wu, a senior attorney at the National Consumer Law Center. She cited multiple CFPB studies including a 2014 report  showing that medical debts provide less predictive value to lenders than other debts on credit reports. A report in 2022 estimated that medical bills made up $88 billion of reported debts but since then the three major credit bureaus — Equifax, Experian, and TransUnion — have taken most medical bills off credit reports. FICO and VantageScore, the two major credit scoring companies, no longer use medical collections in their scoring models. 

Ulzheimer said he is trying to debunk the CFPB's claim that consumers can expect a 20-point increase in their credit score, an issue that Vice President Kamala Harris repeated on a call with reporters last month. 

"The scoring models have already bypassed medical debts," said Ulzheimer. "The CFPB's plan is not going to improve anybody's credit score."

Instead, the industry is highlighting the dangers not just to lenders but to the credit scoring system as a whole of not having medical debt reported. Lending will be restricted, costs will increase and low- and moderate-income consumers can expect to be rejected for credit or obtain it at higher rates. 

"Basic math tells you that if someone owes a large medical debt, that's going to impact their ability to pay a mortgage or a car loan," said Leah Dempsey, a shareholder at the law firm Brownstein Hyatt Farber Schreck, which funded the industry's study. Dempsey is a former vice President and senior counsel at ACA International, the trade group representing debt collectors.

The CFPB proposal would amend Regulation V and remove a regulatory exception that federal agencies gave to lenders under the Fair Credit Reporting Act allowing them to use medical debts for credit underwriting. Wu at NCLC said the CFPB is "on solid legal ground" in removing the regulatory exception that federal regulatory agencies created roughly 20 years ago. 

"Factually, the CFPB is on solid ground because Congress gave the CFPB the authority to interpret this provision about medical information," said Wu. She also cited a comment letter sent last year from the American Hospital Association supporting the CFPB's proposed rule. 

"The posturing going on is all made by debt collectors, not health care providers," she said.