The Consumer Financial Protection Bureau (CFPB) has proposed a rule that would remove medical bills from most credit reports. In addition, it will increase privacy protections and help to increase credit scores and loan approvals. It will also prevent debt collectors from using the credit reporting system to coerce people to pay.

The proposal would stop credit reporting companies from sharing medical debts with lenders. And it will prohibit lenders from making lending decisions based on medical information. The rule is part of the CFPB’s efforts to address the burden of medical debt and coercive credit reporting practices.

Medical bills: little or no predictive value as regards repaying other loans

“The CFPB is seeking to end the senseless practice of weaponising 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. They have little to no predictive value when it comes to repaying other loans.”

In 2003, Congress restricted lenders from obtaining or using medical information. This includes 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 decisions.

The CFPB proposes to close the regulatory loophole keeping amounts of medical debt information in the credit reporting system. The proposed rule would help ensure that medical information does not unjustly damage credit scores. It would also help keep debt collectors from coercing payments for inaccurate or false medical bills.

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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 penalise consumers by making underwriting decisions less accurate and leading to thousands of denied applications on mortgages that consumers would repay.

Rule change to enable 22,000 additional mortgages every year

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.

In 2014, the CFPB reported that medical debts provide less predictive value to lenders than other debts on credit reports. Then in March 2022, the CFPB estimated that medical bills made up $88bn of reported debts on credit reports. In that report, the CFPB announced that it would assess whether credit reports should include data on unpaid medical bills.

Since the March 2022 report, the three nationwide credit reporting conglomerates – Equifax, Experian, and TransUnion – announced that they would take many of those bills off credit reports. FICO and VantageScore, the two major credit scoring companies, decreased the degree to which medical bills impact a consumer’s score.

Despite these voluntary industry changes, 15 million Americans still have $49bn in outstanding medical bills in collections appearing in the credit reporting system.