Biden Admin Proposes Banning Medical Debt From Credit Reports

By Bill Pan

The Biden administration is rolling out proposed rules that would stop medical debt from being used in credit score reports, a change that could help many consumers qualify for auto loans or mortgages.

The proposal was announced June 11 by the Consumer Financial Protection Bureau (CFPB). It would stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical information.

The federal regulator estimates that the new rule would allow 22,000 more people to get approved for safe mortgages each year. Since these are loans people will repay, the lenders could also benefit from improved underwriting by being able to approve more borrowers.

“The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe,” said CFPB Director Rohit Chopra. “Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans.”

The new rule, which will now undergo a 60-day public comment period lasting until Aug. 12, is expected to affect millions of Americans.

In an April 29 analysis, the CFPB said some 15 million patients continue to have medical bills on their credit reports, even after some of the largest national credit reporting companies—namely Equifax, Experian, and TransUnion—took steps to remove medical bills from their scoring process.

According to the analysis, those 15 million Americans disproportionately live in the South and low-income communities. Collectively, their outstanding medical bills in collections total more than $49 billion.

“Experian, Equifax, and TransUnion took steps to remove many medical bills in part because of the recognition that they hold little predictive value,” Mr. Chopra said in April. “Findings from our latest research reveal the impact of these changes and the need for further reforms.”

State Action

At state level, a handful of states are seeking to pass laws aimed at minimizing the impact of medical debt on families’ finances. In 2023, Colorado became the first state to ban credit reporting agencies from listing medical debt. The Colorado law also allows consumers to remove medical debt from their credit report if the reporting agencies fail to do so.

More recently, a bill similar to the Colorado law was introduced in the California state Senate, a legislative effort applauded by Mr. Chopra.

“The purpose of the credit reporting system is to assess credit risk, not to coerce people to pay debts they may not owe,” he wrote in a letter in support of the California bill. “Unfortunately, the CFPB has heard from consumers across the country, including in California, that many people do not find out that they have an erroneous medical bill in collections until they apply for a mortgage or car loan.”

The June 11 announcement comes after Democrat legislators urged the CFPB to remove medical debt from consumer credit reports. In March, a group of 10 Democrat Senators penned a joint letter to Mr. Chopra, asking that he speed up the rulemaking process.

“Medical debt does not reflect spending habits or help lenders predict risk; instead, it is evidence of either health issues or a medical emergency. Medical debt places patients at risk of downgraded credit and falling victim to predatory practices,” wrote the Democrats, led by Senate Banking Committee Chairman Sherrod Brown (D-Ohio).

The election-year action also comes as President Joe Biden highlights his administration’s commitment to reduce financial burdens on voters, especially those of low-income households, along the campaign trail.

In recent months, President Biden has taken actions to combat what he calls “junk fees,” or hidden fees that make products or services more expensive than their stated price. Those actions come at a time when many Americans continue to name the economy as their most critical issue, while low confidence in the president’s handling of the economy hurts his overall rating.

In March, the CFPB announced a rule that would force most banks and credit card issuers to cap late fees at $8. The federal regulator said that late fees represent more than 10 percent of the $130 billion issuers charged consumers in interest and fees, and that bringing down late fees to $8 from the current average of $30 could save consumers more than $10 billion a year.

The credit card rule, originally set to take effect on May 14, was blocked by a federal judge who found CFPB’s funding mechanism unconstitutional.