There is some dubious data behind CFPB's medical debt reporting rule

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On June 11, 2024, the Consumer Financial Protection Bureau announced a proposed rule to stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical information. The CFPB's announcement used characteristically over-the-top rhetoric to describe medical debt reporting as a "senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills." This practice, the CFPB asserts, "unjustly lowers credit scores" because, according to agency Director Rohit Chopra, "[m]edical bills on credit reports … have little to no predictive value when it comes to repaying other loans."

In support of the director's statement, the CFPB cites a short research paper issued by two of its researchers in 2014. The CFPB claims that this paper showed that "medical debts provide less predictive value to lenders than other debts on credit reports." But, in fact, the paper makes no such definitive claim; the researchers concluded only that differentials in observed data "suggest that medical and non-medical collections are not equally predictive of delinquency." The researchers also noted a significant caveat to their analysis, which was that due to data limitations they examined only a single 2011-2013 performance period and were unable to analyze other time periods. Credit conditions have changed significantly since then, but the CFPB did not conduct additional testing to determine whether the tentative conclusions of its researchers a decade ago still hold up today. Nor did the CFPB make available the underlying data on which the original paper relied so that independent researchers could evaluate its methodology and analysis.

That the CFPB pins its entire rulemaking on outdated research backed by nonpublic data is remarkable. Add to this the fact that even if additional research corroborated the researchers' original conclusions, it would establish only that medical collections may be relatively less predictive than other collections, not that medical collections have no predictive value whatsoever. Only a finding that medical collections lack any predictive power would logically justify a complete ban; otherwise, the CFPB would artificially exclude predictive information from the credit decision process, which would degrade the credit reporting system and increase risks for creditors and costs for borrowers.

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Equally remarkable is the fact that the CFPB's proposed rulemaking identifies no market failure necessitating government intervention. Historically, the CFPB has sought to identify market failures and then justify its rulemakings as necessary to address those failures. But in the case of medical debt reporting, the CFPB admits that credit bureaus and credit scoring companies have already taken steps in recent years to address unseasoned and small-dollar collections and adjust score weighting. Such responsive market developments tend to undercut claims of market failure. Perhaps that is why the CFPB ignores the question in its proposal, and therefore why the rule reads like a solution in search of a problem.

 More remarkable still is the CFPB's lack of statutory authority to promulgate its rule. Sections 1681b(g)(2) and 1681c(a)(6) of the Fair Credit Reporting Act make clear that a creditor may obtain and use medical information pertaining to a consumer in connection with a credit decision, provided that the information is coded to prevent the identification of the medical provider or the medical procedures that gave rise to the debt. This careful delineation by Congress ensures that creditors are made aware of the financial details of a debt but not the medical details in order to protect patient privacy. The CFPB seemingly elides this fact and instead asserts that it has the rulemaking authority to prohibit medical debt reporting altogether. But such a claim cannot withstand scrutiny. Congress surely did not delegate to the CFPB the power to ban by rule that which Congress specifically permits by law.

Comments on the CFPB's proposal were due on August 12. Here is hoping the CFPB carefully reads them and reconsiders its flawed proposal. As currently drafted, it will be unlikely to survive legal challenge.