In a major win for consumers, the Consumer Financial Protection Bureau (CFPB) has finalized a rule that will strip an estimated $49 billion in medical debt from the credit reports of approximately 15 million Americans. This move is set to increase privacy protections and put an end to aggressive debt collection practices that have used credit reporting to pressure individuals into paying disputed or erroneous medical bills.
Removing Medical Bills from Credit Reports
The CFPB’s newly finalized rule marks a significant shift in how medical debt is treated within the credit reporting system. By banning credit reporting agencies from including medical debt information in reports sent to lenders, the rule aims to rectify a long-standing issue where medical debt—often stemming from unexpected or disputed medical expenses—was used to determine a borrower’s creditworthiness. The CFPB recognizes that medical bills are frequently inaccurate or misleading and do not reliably indicate a person’s ability to repay loans.
CFPB Director Rohit Chopra emphasized the broader implications of this change. “People who get sick shouldn’t have their financial future upended,” he stated. This move addresses the misuse of medical debts by debt collectors who have previously leveraged these debts to coerce payments, regardless of their accuracy or the consumer’s ability to dispute them effectively.
A Boost to Credit Scores and Loan Approvals
The CFPB’s research further supports the removal of medical debt from credit reports, highlighting that such debts are poor predictors of a person’s ability to manage other financial obligations. The expected outcome of this rule is substantial, with an average increase of 20 points in credit scores for affected individuals. This increase could be a game-changer for many, leading to the approval of approximately 22,000 more affordable mortgages each year. This development is particularly significant for potential homeowners who have been held back by medical debt on their credit reports, opening doors to new financial opportunities and stability.
Shifting Industry Standards
The rule aligns with recent steps taken by major credit reporting agencies—Equifax, Experian, and TransUnion—to phase out the reporting of certain types of medical debt, such as collections under $500. These changes, coupled with the adjustments by credit scoring giants FICO and VantageScore to reduce the weight of medical debt in credit scoring models, signal a broader industry trend toward more consumer-friendly practices.
Ending Coercive Practices
Historically, a loophole in regulations allowed medical debts to be considered in credit assessments, giving debt collectors undue influence over consumers. This often resulted in people being pressured into paying off medical debts that were either incorrect or should have been covered by insurance or assistance programs. The CFPB’s rule closes this loophole, ensuring that consumers are no longer subjected to these coercive tactics, and helps to protect them from the financial strain imposed by questionable medical billing practices.
Effective Soon
Set to take effect 60 days after its publication in the Federal Register, this rule is poised to bring much-needed relief to millions of Americans. By removing medical debt from credit reports, the rule helps create a fairer and more accurate credit reporting system, ultimately supporting the financial well-being and creditworthiness of consumers across the country.