New rule bans medical debt in credit scoring — maybe

New rule bans medical debt in credit scoring — maybe

Medical debt will no longer appear on credit reports used for mortgages and other loans under a federal rule finalized in the last days of the Biden administration, but it remains to be seen whether the change will ever go into force.

The Consumer Financial Protection Bureau (CFPB) announced this week a final rule that bans the reporting of medical debt in credit scores and reports. That would remove an estimated $49 billion in medical debt from the credit reports of roughly 15 million Americans, according to the CFPB.

Lenders also will not be permitted to make certain lending decisions based on a consumer’s medical debt.

The CFPB predicted the change would spur about 22,000 more approved mortgages each year, and the credit scores of Americans with medical debt could rise by an average of 20 points, the agency said.

It is unclear, however, if the Trump administration and a Republican-controlled Congress will allow the Democrat-driven rule to proceed once Donald Trump takes office later this month.

Congress could potentially use the Congressional Review Act to overturn pending Biden-era regulations. Trump is expected to replace the CFPB director and possibly freeze pending actions underway at the CFPB. The rule change is not scheduled to go into effect until 60 days after its publication in the Federal Register. 

In August, Republicans on the House Financial Services Committee expressed “serious concerns” with a rule that they said would result in “critical debt information being withheld from creditors.”

There’s formidable popular support for the measure, however. The American Medical Association and numerous consumer advocacy groups favor the ban on medical debt reporting, noting medical debt tends to most burden the nation’s vulnerable populations and is a leading cause of bankruptcy.

The Kaiser Family Foundation (KFF) estimates from government data that people in the U.S. owe at least $220 billion in medical debt. About 14 million owe more than $1,000 apiece and roughly 3 million owe more than $10,000.

“Medical debt disproportionately affects Black and Latino communities as well as consumers with disabilities,” the National Consumer Law Center wrote in its comment letter to the CFPB.

The agency received over 74,000 comments on the proposed rule, with roughly 2,000 of those being unique comments.

The CFPB says its research suggests that medical debt is not a good predictor of whether a person will pay other debts. Consumers are also frequently billed for care that should have been covered by an insurer or through financial assistance.

Lending groups, however, argued in written comments this summer that the CFPB was overreaching its authority, and that medical debt should be made available to ensure proper underwriting and safe mortgages. 

The changes “will increase credit risk and reduce credit availability,” the American Bankers Association wrote in August in its comment letter.

“Fundamentally, the less information creditors have regarding a consumer’s existing debt obligations and repayment history, the less they can account for credit risk and the consumer’s ability to repay,” ABA wrote.

The rule was also opposed by the Consumer Bankers Association, The Bank Policy Institute and ACA International, which represents the collections and credit industry.

Mortgage Bankers Association Chief Economist Mike Fratantoni told Scotsman Guide last year that there might be better alternatives.

“It becomes more of a decision point of, do you exclude it altogether or do you just allow the data to speak and sort of ‘down weight’ it?” he said. “My instinct as a modeler would be, continue to include it, but just sort of recognize it as not a great predictor.”

The CFPB’s action follows changes made by the credit bureaus Equifax, Experian and TransUnion, which are already excluding medical debt collections under $500 from credit reports. FICO and VantageScore, the two major credit scoring companies, previously announced that they were reducing the impact of a medical debt on credit score modeling.

  • Victor Whitman is a contributing writer for Scotsman Guide and a former editor of the publication’s commercial magazine. 

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