The Consumer Financial Protection Bureau (CFPB) announced a finalized rule on Tuesday that will prohibit unpaid medical bills from appearing on Americans’ credit reports. This significant move, part of the agency’s final efforts under the Biden administration, aims to provide financial relief to millions of Americans burdened by medical debt.
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The regulation, a priority for both CFPB Director Rohit Chopra and Vice President Kamala Harris, is estimated to immediately benefit approximately 15 million people by potentially raising their credit scores by an average of 20 points. “People who get sick shouldn’t have their financial future upended,” Chopra stated, emphasizing the rule’s intent to prevent debt collectors from leveraging the credit reporting system to coerce payment for potentially disputed medical bills.
Major Credit Reporting Agencies Already Limiting Medical Debt Impact
Major credit reporting agencies have already taken steps to mitigate the impact of medical debt on credit scores by excluding debts under $500 or less than a year old. This has contributed to a decline in the percentage of adults with medical debt on their credit reports from 16% in 2019 to 5% in 2023, according to the Urban Institute. States like California, New Jersey, and Rhode Island have also enacted laws barring medical debts from credit reports, joining Minnesota and Colorado. Other states have implemented less stringent restrictions.
National Ban Offers Significant Consumer Protection
Despite these existing measures, a nationwide ban represents a substantial victory for consumers, according to Christine Chen Zinner, chief policy counsel at Americans for Financial Reform. By eliminating the threat of credit score damage from medical debt collections, the rule empowers individuals to challenge unfair or inaccurate hospital bills. “If you have a medical debt over $500 on your credit report, that’s going to be a big hit,” Zinner stated, highlighting the significant impact on the 15 million affected Americans.
Financial Industry Expresses Concerns Over Lending Risk
Financial industry groups have opposed the CFPB’s rule, contending that it hinders banks’ ability to assess borrower risk. The American Bankers Association argued that excluding medical debts from credit underwriting could lead to increased consumer delinquencies and defaults, potentially impacting banks’ stability and consumers’ access to credit. They suggest that lenders might compensate for the perceived reduced risk by tightening lending standards.
CFPB Disputes Industry Claims, Citing Research
The CFPB counters these concerns, asserting that unpaid medical debt is a poor predictor of loan repayment behavior. The agency cited a 2014 study indicating that credit bureaus overpenalized individuals for medical debt, finding that consumers with primarily medical debt on their reports had delinquency rates similar to those with credit scores 8 to 10 points higher.
Rule’s Future Uncertain Amid Potential Legal and Political Challenges
The rule’s implementation faces potential obstacles. The financial industry may pursue legal challenges, as they have with other CFPB regulations under Chopra’s leadership. Furthermore, Republicans in Congress could attempt to repeal the rule using the Congressional Review Act, which allows for the reversal of regulations within 60 legislative days of publication. This same threat looms over other recent CFPB rules concerning overdraft fees and simplifying bank or credit card provider switching. While the Congressional Review Act prevents revived regulations in similar form, Chopra’s continued finalization of regulations suggests a belief that rescinding them would be politically unfavorable for the new GOP majority.
The future of this impactful ruling remains uncertain, subject to potential legal battles and political maneuvering. However, the CFPB’s decisive action underscores its commitment to consumer protection and financial fairness in the healthcare sector.
