In the final weeks of the Biden Administration, the Consumer Financial Protection Bureau (CFPB) issued a rule intended to protect consumers from the credit implications of medical debt. The ruling, finalized in January, is an amendment to Regulation V under the Fair Credit Reporting Act (FCRA). It would remove medical debt from credit reports and prevent lenders from using medical information in their decision making.
While this may sound like a good idea to the consumer with medical debt, do not be fooled, the future consequences are costly. Removing medical bills from credit reports can prevent lenders from predicting credit scores. Thus, it will limit credit availability and create a domino effect that goes far beyond the consumer’s credit score.
The CFPB reports 15 million Americans have up to $49 billion in medical debt that would be removed from credit reports. These numbers can appear staggering. But the CFPB released research showing that in 2020, “62 percent of medical collections were under $490.” To put that in perspective, the Bureau of Labor Statistics (BLS) reported Americans spent $950 on personal care products and services and $370 on tobacco products and smoking supplies in 2023.
A modified version of this rule has already been implemented and has failed. In 2022, three of the National Credit Reporting Agencies (NCRAs) announced they would voluntarily remove medical collection debt under $500 from consumer credit reports. This action was supposed to “support consumers faced with unexpected medical bills.” But the numbers do not show much support.
In response to the NCRA’s announcement, the Fair Isaac Corporation (FICO) conducted research and found that the changes made by the NCRAs would have no significant impact on credit score. In fact, it would affect just 3 percent of consumers with existing poor credit report information. Additionally, only 30 percent of a consumer’s overall FICO score is based on amounts owed. Credit utilization is a much more significant contribution to a FICO score.
The same holds true for the CFPB rule. According to a National Bureau of Economic Research (NBER) report, it concluded, “[there would be] a modest improvement in credit access for persons whose debt would have otherwise been reported to the credit bureaus, but no credit market effects for all others.”
Should the CFPB rule be implemented, the consequences would be much higher for the consumer. Score predictability is critical for accurate underwriting. Access to and cost of credit will increase to account for the unknown. Additionally, should credit be offered, this could result in improper lending and higher defaults.
The implications do not stop at credit. It also affects and influences healthcare costs. Removing medical debt decreases the likelihood of debt to be repaid. The incentive is no longer there to pay the bill. And since hospital in-patient and out-patient care is where most medical debt originates, it will only make those costs rise. Additionally, removing medical debt could pressure doctors and hospitals to require upfront medical costs to ensure they receive payment for services.
The future of the CFPB’s rule is uncertain. Right now, the CFPB ruling is at a standstill with a U.S. District Judge in Texas. The CFPB’s rule was challenged in January when two trade associations, Cornerstone Credit Union League and the Consumer Data Industry Association, filed suit against the CFPB claiming this rule was outside of their authority. The new CFPB leadership under the Trump administration joined the plaintiffs in a motion to vacate the ruling on grounds that it exceeds the bureau’s authority. A decision is expected by a Texas U.S. District Judge, Sean Jordan, by August 11.
In the meantime, the CFPB rule has gotten the attention of Congress with the introduction of the Congressional Review Act (CRA). Senator Mike Rounds (R-SD) introduced S.J. Res. 36 and Representative Ralph Norman (R-SC) introduced a companion resolution, H.J. Res. 74, disapproving of the CFPB ruling. Should it be enacted, it would limit an agency’s ability to issue similar rules in the future unless authorized by law.
Medical costs are concerning for Americans especially if someone is afraid they cannot pay for a medical bill. Some would argue this rule would deal with the issue of non-transparent healthcare billing and collections processes, but this would be treating a symptom of a very different issue. The data is not there to justify support of this rule and would not result in significant benefits. Consumers will instead be hurt by this rule from the long-term, negative effects on credit access and healthcare costs. It is time to treat real issues with real solutions.
Leah Locke is a policy analyst at the American Consumer Institute, focusing on finance and insurance policy. Prior to joining ACI, she worked in various operations roles in property and casualty insurance. She holds a Master of Education degree in history from Liberty University. She is pursuing a Ph.D. in history at Liberty University. The American Consumer Institute is a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.