'Weaponizing the credit reporting system': Federal agency moves to erase medical debt from credit reports (2024)

A broken arm could just as easily break someone's credit score. An unexpected surgery has left many credit reports scarred for years in the current system.

But help may be on the way.

The Consumer Financial Protection Bureau is aiming to revolutionize the way Americans bounce back from health-related setbacks.

The federal agency has proposed a rule that would remove unpaid medical bills from credit reports, stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical debt.

"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," bureau Director Rohit Chopra said.

"Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans," he said.

The rule, which has been in the works since last fall, could go into effect by early next year. It would remove as much as $49 billion of medical debt that is holding down credit scores for 15 million people, according to the bureau.

TheConsumer Financial Protection Bureau supervises banks, lenders and large nonbank entities, such as credit reporting agencies and debt collection companies. The agency is requesting comments on its proposed rule by Aug. 12.

"Nobody asks to get sick, injured or to have a chronic illness. So, overdue medical bills aren't the typical form of credit or loans, yet these past-due health expenses have been treated like they are traditional credit accounts," said Lynnette Khalfani Cox, founder and CEO of TheMoneyCoach.net.

"Removing medical debt and health care collection accounts that are found on millions of Americans' credit reports will be a big help for many consumers".

22k additional mortgages a year

Bureau research indicates that a medical bill on a person's credit report is not a good predictor of whether they will repay a loan.

Medical debts also penalize consumers by making underwriting decisions less accurate and leading to thousands of denied applications on mortgages, car loans and other purchases that consumers would repay.

For that reason, theConsumer Financial Protection Bureau expects lenders also will benefit from improved underwriting and increased volume of safe loan approvals. In terms of mortgages, the bureau expects the proposed rule would lead to the approval of about 22,000 additional safe mortgages each year.

Steps already have been taken by the three major credit reporting agencies — Equifax, TransUnion and Experian — to stop using certain medical debt to calculate consumer's creditworthiness. FICO recently began giving less weight to medical debt in its scoring model. Vantage Score doesn't use medical debt in its newer credit scoring models.

But critics of the proposed rule say it could increase the cost of medical care and have broad negative consequences for businesses and health care providers if people are less motivated to pay their medical bills.

If there aren't any consequences for not paying medical bills, some in the financial services industry predict hospitals could start requiring payment before providing medical care, which would hurt patients — especially low-income patients — the most.

Credit expert Bill Hardekopf said banning medical debt from credit reports is a positive step for people in difficult financial situations, but it will not really solve the financial problems that medical debt can create.

"While this proposal will stop the debt from initially being reported to a credit agency, it may not stop debt from being sent to collections, or your wages from being garnished," said Hardekopf, CEO of www.BillSaver.com. "Both of those situations could eventually cause serious damage to your credit report."

'A tremendous boost'

Shadyside financial coach Shay Port knows how devastating medical debt can be on credit reports. She supports removing it.

"Medical debt only shows up if you're not paying it," Port said. "It doesn't show up otherwise.

"If it's even showing up that means the debt is in collections and that kills people's scores. It literally drops it by like 150 points. So, this would be a tremendous boost to people's credit."

Medical debt is often unavoidable and has caused people to file for bankruptcy, she said.

"They shouldn't also have to have their credit scores ruined because they can't pay medical debt they weren't expecting and can't really afford," Port said.

In 2003, Congress restricted lenders from obtaining or using medical information, including information about debts, through the Fair and Accurate Credit Transactions Act. However, federal agencies subsequently issued a special regulatory exception to allow creditors to use medical debts in their credit reports.

"The CFPB is seeking to close the regulatory loophole that has kept vast amounts of medical debt information in the credit reporting system," the federal agency said in its statement.

"The proposed rule will help ensure that medical information does not unjustly damage credit scores, and would keep debt collectors from coercing payments for inaccurate or false medical bills," the statement added.

The proposed rule also 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.

The rule would prohibit credit reporting agencies from including medical debt on credit reports sent to creditors. Lenders, however, 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 as long as certain conditions are met.

'Debt parking'

TheConsumer Financial Protection Bureau expects that Americans with medical debt on their credit reports will see their credit scores rise by 20 points, on average, if the proposed rule is finalized.

The complex nature of medical billing, insurance coverage and reimbursem*nt, and collections, leads the bureau to believe that medical debts that continue to be reported are often inaccurate and inflated.

Under the current system, debt collectors improperly use the credit system to coerce people to pay debts they may not owe," the bureau said.

"Many debt collectors engage in a practice known as 'debt parking', where they purchase medical debt and then place it on credit reports, often without the consumer's knowledge," the statement said.

"When consumers apply for credit, they may discover that a medical bill is hindering their ability to get a loan," the agency said. "Consumers may then feel forced to pay the medical bill in order to improve their credit score and be approved for a loan regardless of the debt's validity."