June 11, 2024
Your medical debt may soon be removed from your credit report which could in turn — help the credit scores of about 15 million Americans.
That’s according to a new proposed rule from the Consumer Financial Protection Bureau. Now – it’s important to know two things. One – this would not eliminate the debt it would just remove it from the credit report. You’d still be required to pay it. And two — this is just a proposal and it still needs to go through the lengthy federal rulemaking process. But it’s now underway.
So here’s what’s happening. Today the CFPB proposed this new federal rule that would stop credit reporting companies from sharing medical debts with lenders and would prohibit lenders from making lending decisions based on medical information. The bureau says these medical debts are often times wrong and when push comes to shove research shows someone’s medical debt is not a good predictor of how they will repay their loans. Plus if this rule is finalized, this rule would also prohibit lenders from using medical devices as collateral and would ban lenders from repossessing those medical devices if people are unable to pay the loan.
But why is this happening? The CFPB says of course it would increase privacy protections for Americans and would prevent debt collectors from using the credit reporting process to go after medical debtors. But also — by removing this debt from the reports, it will increase the credit scores of these Americans who then can secure loans and mortgages.
Now I’m sure you’re wondering how the consumer financial protection bureau has the authority to propose a rule like this. Well congress actually did it back in 2003. They passed the Fair and Accurate Credit Transactions Act — a law that did a lot of things — including restricting lenders from obtaining or using medical information including debt information. But in the years after 2003, other government agencies issued special regulatory exceptions to allow creditors to use medical debts in their credit decisions.
So now – the CFPB wants to close that loophole. The government says this move could take away about $49 billion dollars of medical debt from reports that has already lowered the credit scores for 15 million Americans…and it could allow about 22,000 additional people to qualify for a mortgage every year.
It’s important to know that since March of 2022 three of the biggest reporting agencies Equifax, Experian and TransUnion have announced they would take “many” of the medical bills off credit reports. But this new rule – if it is finalized will take “all” of them off. It’s going to be a while before this rule is finalized, it has to go through a public comment process and waiting periods.
Read more from the Consumer Financial Protection Bureau on medical debt here.
