CFPB Advances Proposal to Exclude Medical Debts from Credit Reports: A Catalyst for Higher Credit Scores and Loan Approvals

Consumer Financial Protection Bureau

WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) is moving forward with a proposed regulation designed to eliminate medical bills from a significant portion of credit reports. This significant development could bolster privacy protections, stimulate credit score growth and loan approval rates, and deter debt collectors who manipulate the credit reporting system to pressurize people into paying dues.

CPFB Director Rohit Chopra stated that the bureau aims to terminate the unscrupulous use of the credit reporting system as a tool to extort payments from patients for medical bills they do not owe. He further noted that medical bills on credit reports often reflect inaccuracies and fail to predict loan repayment capabilities accurately.

In 2003, the Fair and Accurate Credit Transactions Act inhibited lenders from obtaining or using medical information, such as debt records. However, in the years that followed, federal agencies enacted a unique regulatory exception, permitting creditors to consider medical debts in their credit decisions.

The CFPB attempts to close this loophole with its proposed rule, thereby preventing medical information from unfairly influencing credit scores. This measure also aims to hinder debt collectors from extracting payments related to incorrect or false medical invoices.

The CFPB’s investigations reveal that a medical bill on a person’s credit report does not accurately imply their likelihood of loan repayment. Their assessment shows that medical debts negatively impact consumers, leading to numerous incorrect rejections of mortgage applications that consumers would repay. Therefore, if the proposed rule is enforced, approximately 22,000 additional safe mortgages could be approved annually.

In 2014, the CFPB identified that medical debts offer less predictive value to lenders compared to other debts listed on credit reports. Then, in March 2022, medical bills accounted for $88 billion of reported debts on credit reports. The CFPB then indicated it would assess whether credit reports should feature unpaid medical bills data.

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Since then, the three nationwide credit reporting conglomerates—Equifax, Experian, and TransUnion—have pledged to eliminate many of these bills from credit reports. FICO and VantageScore, the primary credit scoring companies, decreased the impact of medical bills on consumers’ scores.

Despite these industry changes, 15 million Americans still have $49 billion in unsettled medical bills listed in credit reporting systems. Medical billing, insurance coverage, reimbursement, and collections bear a high level of complexity, leading to inaccurate or overpriced medical debts. If the proposed rule becomes law, it’s estimated that Americans with medical debts on their credit reports would witness an average score increase of 20 points.

Currently, debt collectors improperly use the credit reporting system to pressure people into paying debts they may not owe, engaging in “debt parking,” where debt collectors buy medical debt and list it on credit reports, often unbeknownst to the consumer.

The proposed rule, if enacted, would eliminate the general permission for lenders to obtain and use information regarding medical debt to decide credit eligibility. It would also establish guardrails for credit reporting companies, prohibiting them from including medical debt on credit reports sent to creditors. In addition, it would ban lenders from taking medical devices as collateral for a loan or repossessing medical devices if repayments are not met, upholding the dignity of patients in financial distress.

Initiated in September 2023, this rulemaking is propelled by the CFPB with objectives to terminate coercive debt collection practices and limit the role of medical debt in the credit reporting system. The ramifications of medical debt and the legal obligations for credit reporting companies and debt collectors under the No Surprises Act have also been highlighted by the CFPB through a 2022 bulletin and report.

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