The Consumer Financial Protection Bureau (CFPB) recently unveiled a significant proposal aimed at reshaping the landscape of credit reporting by suggesting the removal of medical bills from credit reports. This initiative seeks to overhaul the existing system, preventing lenders from considering medical debts when making lending decisions. The proposal also aims to introduce enhanced privacy safeguards, improve credit scores, and curb abusive practices by debt collectors.
Rohit Chopra, the director of the CFPB, underscored the importance of addressing what he termed the “senseless practice” of leveraging the credit reporting system for medical debts. Chopra emphasized that these debts are often inaccurately reported and offer little insight into an individual’s ability to repay other types of loans. The proposed rule change has the potential to eliminate a staggering $49 billion worth of medical debts that currently weigh down the credit scores of around 15 million Americans, according to estimates provided by the bureau.
The genesis of this proposed rule dates back to 2003 when Congress enacted legislation restricting lenders from accessing or utilizing medical information, including medical debts, as part of the Fair and Accurate Credit Transactions Act. However, subsequent regulatory exceptions permitted creditors to factor medical debts into their credit decisions. The CFPB’s current proposal seeks to close this regulatory loophole, with the rulemaking process initiated in September.
While the credit reporting landscape has seen voluntary actions by major credit reporting agencies and credit scoring companies to remove many medical debts, significant challenges persist. Despite industry efforts, billions of dollars in outstanding medical bills continue to plague the credit reporting system, often due to inaccuracies stemming from the intricate nature of medical billing and collections.
Should the proposed rule be implemented, individuals with medical debt on their credit reports could experience a notable improvement in their credit scores, with estimates suggesting an average increase of 20 points. Moreover, the CFPB projects that approximately 22,000 additional mortgages could be approved annually, as medical debts currently contribute to erroneous underwriting decisions and unjustly deny credit to deserving borrowers.
The proposed rule is currently undergoing a period of public comment until August 12, allowing stakeholders and interested parties to provide feedback and insights before any final decisions are made. This open dialogue underscores the collaborative approach taken by the CFPB to address systemic issues and enact meaningful reforms within the realm of consumer financial protection.