Biden Administration Proposes Rules to Remove Medical Debt from Consumer Credit Reports

The Biden Administration Aims to Remove Medical Debt from Credit Reports

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The Biden administration wants to completely remove medical debt from consumer credit reports, and the Consumer Financial Protection Bureau (CFPB) has outlined proposed rules to achieve this on Thursday.

According to the CFPB, one in five Americans have medical debt on their credit reports. This debt can lead to a debt spiral for some consumers, limiting their options for housing, loans, and credit cards.

“We know credit scores determine whether a person can have economic health and wealth,” said Vice President Kamala Harris. “Credit scores determine whether a person can buy a home, whether they can buy a car, rent an apartment, or own a small business.”

Medical debt is the most common type of debt in collections, with 58% of all third-party debt collection on consumer credit reports being for medical bills. Additionally, the complexity of medical billing makes it prone to errors, with an estimated 80% of medical bills containing mistakes according to the Medical Billing Advocates of America.

“These bills, even ones where the patient doesn’t owe anything further, can end up being reported on the patient’s credit report,” said Rohit Chopra, director of the CFPB. “Millions of people have spent millions of hours disputing these errors, often while dealing with serious illness.”

The CFPB’s proposed rules aim to prohibit consumer reporting companies such as Equifax, TransUnion, and Experian from including medical debts and collection information on consumer credit reports. Starting from July 2022, these companies will no longer include medical debt in collection under $500 on credit reports. The new rules would make this approach mandatory and extend it to all medical debt.

Stopping Creditors’ Reliance on Medical Bills for Underwriting Decisions

In addition, the CFPB wants to prevent creditors from considering medical bills when making underwriting decisions for loan applications. The agency aims to ensure that only non-medical information is used in assessing borrowers’ creditworthiness.

Vantage Score and newer FICO score models already reduce the weight given to medical debt and medical collections in credit score calculations.

“If credit bureaus are already excluding much of this information because it’s not a good predictor of risk, why should creditors see your medical bills at all?” questioned Chopra. “And if creditors don’t need to see your medical-billing history, why are we continuing to allow debt collectors to use credit reports to pressure people into paying questionable bills?”

The rulemaking process will take time, and CFPB officials anticipate issuing a formal rule sometime next year.

Scott Purcell, CEO of debt collection industry group ACA International, expressed concern about potential consequences for medical providers compared to other professions or industries. However, Senator Elizabeth Warren, a vocal supporter of the CFPB, praised the announcement and highlighted the goal of reducing costs for hardworking Americans burdened by medical debt.

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