Proposal would end exception permitting use of medical debt info in credit decisions, could remove some $49 billion debt from consumers’ credit reports

A proposal to remove a regulatory exception that allows creditors to obtain and use medical debt information for credit eligibility decisions was issued for comment Tuesday by the federal consumer financial protection agency.

The proposal would reportedly remove the estimated $49 billion in medical debts still reflected across the credit reports of about 15 million consumers and result in an average 20-point improvement in those consumers’ credit scores.

The Consumer Financial Protection Bureau (CFPB) said its proposed rule would revise the bureau’s Regulation V, which implements the Fair Credit Reporting Act (FCRA), by removing the regulatory exception from the FCRA’s limitation on creditors obtaining or using information on medical debts for credit eligibility determinations. The proposed rule would also provide that a consumer reporting agency generally may not furnish to a creditor a consumer report containing information on medical debt that the creditor is prohibited from using, it said.

The CFPB noted it has been researching the issue of unpaid medical debt in consumer credit reports for years, finding in 2014 that medical debts provide less predictive value to lenders than other debts on credit reports. It noted that in a March 2022 report, which found that medical bills made up $88 billion of reported debts on credit reports, it said that it would assess whether credit reports should include data on unpaid medical bills.

Since that report, it noted, the three nationwide credit reporting firms Equifax, Experian, and TransUnion announced that they would take many of those bills off credit reports, and FICO and VantageScore, the two major credit scoring companies, have decreased the degree to which medical bills impact a consumer’s score.

“The CFPB’s research reveals that a medical bill on a person’s credit report is not a good predicter of whether they will repay a loan. In fact, the CFPB’s analysis shows that medical debts penalize consumers by making underwriting decisions less accurate and leading to thousands of denied applications on mortgages that consumers would repay. Since these are loans people will repay, the CFPB expects lenders will also benefit from improved underwriting and increased volume of safe loan approvals. In terms of mortgages, the CFPB expects the proposed rule would lead to the approval of approximately 22,000 additional, safe mortgages every year.,” it said.

The CFPB said its proposal would:

  • Eliminate the special medical debt exception: The proposed rule would remove the exception that broadly permits lenders to obtain and use information about medical debt to make credit eligibility determinations. Lenders would continue to be able to consider medical information related to disability income and similar benefits, as well as medical information relevant to the purpose of the loan, so long as certain conditions are met.
  • Establish guardrails for credit reporting companies: The proposed rule would prohibit credit reporting companies from including medical debt on credit reports sent to creditors when creditors are prohibited from considering it.
  • Ban repossession of medical devices: The proposed rule would prohibit lenders from taking medical devices as collateral for a loan, and bans lenders from repossessing medical devices, like wheelchairs or prosthetic limbs, if people are unable to repay the loan.

Comments are due Aug. 12. If finalized, the rule would take effect 60 days after its publication in the Federal Register, the agency said.

CFPB Proposes to Ban Medical Bills from Credit Reports