Medical debt will be removed from credit reports and cannot be used in credit decisions under a proposal issued Tuesday by the Consumer Financial Protection Bureau announced at the White House.
Vice President Kamala Harris announced the CFPB's
"No one should be denied access to economic opportunity simply because they experienced a medical emergency," Harris said on a call Tuesday afternoon with reporters. "Americans will see an increase in their credit score by an average of 20 points, which will mean every year an estimated 22,000 more American families will be approved for a mortgage and able to buy a home."
The Biden administration has forgiven $650 million in medical debt and has plans to forgive another $7 billion by 2026, due to passage of the American Rescue Plan Act of 2021, Harris said. She also called for states, cities and hospitals to forgive medical debt generally.
The CFPB did not address
CFPB Director Rohit Chopra said that debt collectors use credit reports as a "weapon" to unjustly coerce payments from consumers that they may not owe.
"Billing errors are widespread," Chopra said. "Our action today is an important step toward reducing some of the unnecessary costs of getting sick in America."
Chopra said the proposed rule would create guardrails for credit reporting companies, prohibiting them from including medical debt on credit reports sent to lenders. The proposed rule also would prohibit lenders from repossessing medical devices like wheelchairs or prosthetic limbs as collateral to repay a loan.
Last year the three credit reporting bureaus — Equifax, Experian and TransUnion — removed medical debts of up to $500 from credit reports. The CFPB's proposal would scrub the remaining 30% of medical debts that have not been removed affecting roughly 15 million Americans that still owe $49 billion in medical debt, Chopra said.
"We find that these Americans disproportionately reside in the South and in low income areas," Chopra said.
The CFPB has been studying the issue of medical debt for years with a focus on inaccuracies on credit reports.
"Medical debt is the easiest, most explainable part of the rules and they wanted to get something out quickly because of the election," said Kim Phan, a partner at Troutman Pepper. "There are a ton of Americans with medical debt and most of them are located in the south and are lower income minorities that Democrats want to attract to their platform by pushing the benefits of eliminating medical debt from credit reports."
The CFPB's research has found that half of all debt collections were for medical bills and that most debt collectors have no way of verifying the accuracy of medical debt due. Prices charged for medical debt often are inflated and arbitrary, with many experts blaming skyrocketing medical debt on insurance companies that deny claims.
Still, banks and creditors are concerned that without medical debt listed on credit reports they will not have a full understanding of a consumer's debt load. Moreover, the third-party debt collection market is a $17.9 billion industry with more than 6,300 collection agencies.
"The bureau is ignoring the overwhelming evidence provided during the Small Business Review Panel meetings that medical debt does have a predictive value and that their efforts will harm medical providers, consumers, and patients," said Jennifer Whipple, president of Collection Bureau Service in Missoula, Montana, who served on the small-business panel last year. "These actions are telling the medical community that they don't deserve the same options in receiving payment for their services as other professions. It also risks patients having to pay a significant portion of or all of their bill in advance so their medical provider can continue to offer affordable access to care."
House Financial Services Committee Chair Patrick McHenry said the proposal would negatively impact both the credit and health care systems, calling the proposal "regulatory overreach."
"This proposed rule will severely impair the accuracy and completeness of credit reports — raising the cost and reducing the availability of credit for all Americans," McHenry said in a statement. "It is badly misguided to remove consequences for consumers who do not pay a debt by wiping out an entire category of debt from credit reports. The CFPB's regulatory overreach will harm the very consumers the agency was created to protect."
Meanwhile, Senate Banking Committee Chairman Sherrod Brown said that "no one should be forced to pay higher rates for a mortgage or a car loan or deal with aggressive debt collectors, just because their family member got sick or they had a medical emergency."
In 2003, Congress amended the Fair Credit Reporting Act to prohibit medical bills from appearing on credit reports but federal regulators created an exception for medical bills. The CFPB said its proposal would close a regulatory loophole and that it has explicit authority under the FCRA to make the changes, a CFPB official said.
There are some limited circumstances under which medical information could be considered by creditors, including disability payments that may be used to verify income or information to verify whether someone is eligible for medical forbearance. The proposal does not affect debts that are on general purpose or specialty credit cards, a CFPB official said.
The CFPB will be accepting comments on the proposal through August 12 and plans to finalize the rule early next year, a CFPB official said.
