Biden Administration Unveils Plan to Remove Medical Debt from Credit Reports – Forbes Advisor – Technologist

The Biden Administration has proposed a rule that would ban medical debt from credit reports, a move that could help Americans boost their credit scores.

Vice President Kamala Harris and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra unveiled the proposal on Tuesday, June 11. The change would prevent lenders from considering medical information when making credit decisions.

Harris said the rule, which has been planned since September and would also cover existing medical debt and dental debt, could be implemented as soon as next year.

In addition, the move aims to stop debt collectors from pressuring consumers to pay inaccurate or false medical bills.

“The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe,” said CFPB Director Rohit Chopra in a statement.

How Will the Rule Help Consumers with Medical Debt?

The proposal would assist consumers with medical debt in three key ways:

1. Lenders would be prevented from using medical debt information to make credit decisions, though they could still consider medical information related to disability income and similar benefits under certain circumstances.
2. Credit reporting companies would be prohibited from including medical debt on reports sent to creditors who cannot consider it.
3. Lenders would no longer be allowed to use medical devices, like wheelchairs or prosthetic limbs, as collateral or repossess them if loans are unpaid.

A CFPB analysis revealed that 15 million Americans still have medical bills on their credit reports despite reporting changes made by Equifax, Experian and TransUnion since 2022.

These consumers have more than $49 billion in outstanding medical bills appearing on their credit reports. These debts can cause credit scores to drop, making loans, including mortgages, car loans and small business loans, harder to obtain or available only at higher interest rates.

Credit Scores Could Rise By An Average of 20 Points

By removing medical debts from credit reports, the CFPB expects more accurate underwriting and an increase in loan approvals, benefiting both consumers and lenders. CFPB Director Rohit Chopra said that credit scores will get a 20-point bump, on average, once medical debt is wiped from credit reports.

Shmuel Shayowitz, president and chief lending officer at Approved Funding, a mortgage lender headquartered in New Jersey, agrees that removing medical debt from credit reports may help consumers qualify for loans and obtain lower interest rates.

“Consumers can expect to get a rate of 0.25% to 0.50% higher if their credit scores are below 680, depending on down payment and other loan parameters,” Shayowitz says.

In December 2014, the CFPB reported that medical debts offer less predictive value than other debts. In March 2022, the CFPB estimated medical bills accounted for $88 billion of reported debts and began assessing whether unpaid medical debt should be included on credit reports.

“We consistently found that medical billing data on a credit report is not predictive of future repayment,” Chopra said.

The CFPB is taking public comment on the proposal through August 12, 2024.