The Consumer Financial Protection Bureau (CFPB) has proposed a new rule to help people with medical debt. This rule would take medical bills off most credit reports, protect privacy, boost credit scores, and stop debt collectors from using credit reports to force payments.

What the New Rule Means

1. No More Medical Bills on Credit Reports: Credit reporting companies would not be allowed to share medical debts with lenders. Lenders also wouldn't be able to use medical information to make lending decisions.

2. Stopping Unfair Practices: This rule is designed to stop unfair credit reporting practices and reduce the burden of medical debt.

Background on Medical Debt and Credit Reports

In 2003, Congress passed a law to prevent lenders from using medical information, including debts, for credit decisions. But later, federal agencies made an exception, allowing creditors to use this information.

Closing the Loophole

The CFPB wants to close this loophole. The proposed rule aims to keep medical debt from unfairly hurting credit scores and stopping debt collectors from pressuring people to pay inaccurate or false medical bills.

Why This Change Matters

The CFPB's research shows that medical bills on credit reports don't predict if someone will repay a loan. In fact, these debts make lending decisions less accurate and result in many loan denials. By removing medical debts from credit reports, the CFPB expects safer loan approvals and more accurate underwriting.

Positive Impact on Mortgages

With this new rule, the CFPB expects about 22,000 more safe mortgages to be approved each year. Lenders would benefit from better underwriting and more loan approvals.

Past Reports and Industry Changes

• 2014 Report: The CFPB found that medical debts are less useful to lenders than other types of debt.
• 2022 Report: The CFPB estimated $88 billion in medical bills on credit reports and considered if this data should be included.

Since 2022, Equifax, Experian, and TransUnion agreed to remove many medical bills from credit reports. FICO and VantageScore also reduced the impact of medical bills on scores.

Remaining Challenges

Despite these changes, 15 million Americans still have $49 billion in medical debt on their credit reports. Medical billing is complicated, often leading to incorrect or inflated debts. Changes by FICO and VantageScore haven't fully closed the credit score gap between those with and without medical debt. The CFPB estimates that credit scores could rise by 20 points on average if the new rule is finalized.

Debt Collector Practices

Debt collectors often use the credit reporting system to force payments. A practice called “debt parking” involves placing purchased medical debt on credit reports without the consumer's knowledge. This can block people from getting loans unless they pay these questionable debts.

Details of the Proposed Rule

1. End the Medical Debt Exception: Lenders wouldn't be able to use medical debt information to decide on credit. They can still consider medical information for disability income and related benefits under certain conditions.

2. Set Rules for Credit Reporting Companies: These companies can't include medical debt on reports sent to creditors who aren't allowed to consider it.

3. Ban Repossession of Medical Devices: Lenders can't take medical devices like wheelchairs or prosthetic limbs as collateral or repossess them if loans aren't repaid.

Conclusion

The CFPB's new rule is a big step toward protecting consumers from the negative effects of medical debt on their credit reports. By removing these debts, the CFPB aims to help people improve their credit scores and get fair access to loans.