The Biden administration is set to propose a rule that could significantly improve the ability of millions of Americans to own a home or buy a car by banning medical debt from credit reports. The rule, which has been in development since September, is expected to be implemented next year.
Vice President Kamala Harris and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra will announce the rule. Chopra, in an interview with ABC News, stated, "Our research shows that medical bills on your credit report aren’t even predictive of whether you’ll repay another type of loan. That means people’s credit scores are being unjustly and inappropriately harmed by this practice."
The report further added that according to CFPB estimates the new rule would enable 22,000 more people to get approved for safe mortgages each year. This could also benefit lenders, as they could approve more borrowers due to the positive impact on people’s credit scores.
Major credit report companies such as Equifax, TransUnion and Experian have already stopped using medical debt to calculate people’s creditworthiness. FICO and VantageScore have also recently started factoring medical debt less heavily into their scores. However, 15 million Americans still have $49 billion of medical debt that is affecting their scores. The new rule would extend the practice to all credit reporting in the US.
Medical debt is a widespread issue in the US, affecting two in every five Americans. Once these debts go to collections, credit scores take a hit, making car and home loans harder to come by or only offered with high interest rates.
The new CFPB rule also seeks to address the issue of incorrect, confusing and complicated medical bills, which often lead to long disputes between patients and billing departments. Chopra said, “Too often, we see that people are receiving bills that are inaccurate. Many patients are fighting over these bills for months, only to find that it then appears on their credit report.”
Experts who support the CFPB’s proposed rule also point to the already-low success rate for collecting on medical bills. Matt Notowidigdo, a professor at the University of Chicago’s Booth School of Business who studies health economics, said, “We know empirically that the repayment rates are incredibly low for medical debt and so it’s already the case that people aren’t really paying it down. So I don’t think this policy change is going to change the behaviour that dramatically.”
However, some experts warn that if the CFPB rule leads to fewer people paying the bills, it could be the patients who suffer. Ge Bai, a professor who studies accounting health policy at Johns Hopkins University, predicted that hospitals will have to make up for that loss in other ways. More stringent payment efforts, like requiring payment before patients receive medical care, could leave low-income patients worse off.
Industry groups, like the Association of Credit and Collection Professionals, have echoed Bai’s concerns. ACA CEO Scott Purcell said, “There’s too much at stake for Americans’ access to quality health care by taking actions that only negatively affect the cash flow to the health care community without finding ways to replace those funds.”
Despite these concerns, Chopra rejected the notion that more people will default on their health care debts as a result of the rule, saying they’ll still have to face other penalties that come with debt. He said, “Those individuals will still be subject to collection actions, lawsuits and more. There are plenty of ways that people get penalised for not paying their bills. I just don’t want to see the credit reporting system be weaponised against people who already paid them.”
