The Consumer Financial Protection Bureau issued a final rule to prohibit medical debt from being included on credit reports used by lenders to make credit determinations. The rule is expected to clear approximately $49 million in medical bills from about 15 million Americans’ credit reports.
The rule will make amendments to the implementing rule for the Fair Credit Reporting Act (FCRA), Regulation V, and aim to increase privacy protections and prevent debt collectors from using the credit reporting system to coerce people into paying on debt they do not owe.
“People who get sick shouldn’t have their financial future upended,” CFPB Director Rohit Chopra said in a press release. “The CFPB’s final rule will close a special carveout that has allowed debt collectors to abuse the credit reporting system to coerce people into paying medical bills they may not even owe.”
What is prohibited?
The CFPB’s new rule amends Regulation V to end a regulatory carveout implemented in a 2005 rule issued by the federal financial regulatory agencies that previously allowed creditors to use certain medical information to determine credit eligibility.
“The financial information exception currently permits a creditor to consider certain medical information related to a consumer’s debts in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit,” the rule stated. “Such medical information related to medical debt includes, for example, ‘[t]he dollar amount, repayment terms, repayment history, and similar information regarding medical debts to calculate, measure, or verify the repayment ability of the consumer, the use of proceeds, or the terms for granting credit’ and ‘[t]he identity of creditors to whom outstanding medical debts are owed in connection with an application for credit, including but not limited to, a transaction involving the consolidation of medical debts’ (collectively referred to herein as financial information).”
This financial information will no longer be eligible for such medical information related to a consumer’s medical debt, unless a specific exception is applicable.
Consumer reporting agencies will be banned from including medical debt information on consumer credit reports and credit scores provided to lenders. By doing so, the bureau hopes to end the practice used by some debt collectors to coerce consumers into paying bills regardless of their accuracy.
In addition to medical billing information, lenders also will be prohibited from considering information about medical devices that have, in some instances, been used as collateral for a loan and subject to repossession.
What is permissible?
Lenders will still be permitted to consider medical information to verify medical-based forbearances, verify medical expenses that a consumer needs a loan to pay, consider certain benefits as income when underwriting, and other legitimate uses.
The rule listed several exceptions to the prohibition in which lenders may consider a consumer’s medical information.
“FCRA section 603(i)’s definition of ‘medical information,’ incorporated in Regulation V at § 1022.3(k), informs the types of medical debt that creditors are generally prohibited from considering, but for which the financial information exception currently applies,” the rule stated. “Medical information is defined as ‘[i]nformation or data, whether oral or recorded, in any form or medium, created by or derived from a health care provider or the consumer’ that relates to, among other things, ‘[t]he payment for the provision of health care to an individual.’ In its proposal, the CFPB explained that with regard to ‘[t]he payment for the provision of health care to an individual’ — i.e., the subset of ‘medical information’ concerning debt — the CFPB proposed to interpret FCRA section 603(i) to mean that medical information about a consumer’s debt must relate to a debt the consumer owes, or at one time owed (for example, in the case of paid medical debt), directly to a health care provider or to the health care provider’s agent or assignee. Specifically, the CFPB stated that the statute provides that medical information is information or data ‘created by or derived from a health care provider or the consumer’ that relates to ‘the payment for the provision of health care to an individual.’ And, as a result, the CFPB preliminarily interpreted the statute’s use of the phrase ‘provision of health care,’ following the requirement that the medical information must be ‘created by or derived from a health care provider or the consumer,’ to mean that for information on a debt to be medical information under the FCRA, the information must relate to a debt arising from a payment obligation that the consumer owes (or at one time owed) directly to a health care provider for the provision of the health care underlying the payment obligation.”
Background
The CFPB cited research indicating that medical bills are a poor predictor of whether a consumer will repay a loan, therefore contributing to thousands of denied applications on mortgages that consumers would be able to repay. The rule includes the following points:
- “First, when the agencies issued the financial information exception to the statutory prohibition, they did so without providing evidence or reasoning to support their main conclusion that an exception from a congressionally created legal requirement was warranted.
- “Second, research has shown that medical debt has limited predictive value in predicting future default for credit underwriting purposes. Questions about the reliability of information about medical debt, as compared to information about other types of consumer debt, have been raised based on research performed by the CFPB and others. Medical debt may be less predictive of whether a consumer will pay a future loan, because medical debts can occur and are collected through unique circumstances and practices. For example, consumers often have limited ability to control the timing and types of medical services that are required.
- “Third, market participants, including in the consumer reporting industry and those most financially incentivized to assess the predictive value of medical debt, have reduced their reliance on medical debt in recognition of its limited utility. Consumer reporting agencies have removed certain medical debts from consumer reports. Major credit scoring companies have accorded less weight to, or excluded entirely, medical debt information in their newer scoring models. Similarly, some creditors have adjusted how their underwriting standards treat medical debt information.”
The CFPB said it expects the rule to lead to approximately 22,000 additional, affordable mortgage loan approvals annually. Additionally, Americans with medical debt on their credit reports could see their credit scores increase by an average of 20 points.
A guidance the bureau issued in October last year stated that debt collectors who collect on inaccurate or legally invalid medical debts are in violation of federal law. In 2022, the CFPB published a report describing the extensive and debilitating effects of medical debt along with a bulletin on the No Surprises Act to remind credit reporting companies and debt collectors of their legal responsibilities under the legislation.
The rule will be effective 60 days after publication in the Federal Register.