About 20% of U.S. households are grappling with some form of medical debt. Federal officials are fashioning a rule to keep it out of credit reports.

       (Ashley Landis / Associated Press)

       By Paige Smith and Evan Weinberger

       Bloomberg

       Sept. 21, 2023 2:55 PM PT

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       Medical debt would be scrubbed from consumers’ credit reports under a proposal financial regulators are considering, an effort to aid millions of U.S. households grappling with hefty outstanding bills.

       The Consumer Financial Protection Bureau said Thursday it’s starting to fashion a rule that would ban credit-reporting companies from including the debt, while also stopping lenders from considering it when deciding whether to allow a consumer to borrow. The rule would also halt coercive repayment practices, according to a CFPB statement Thursday.

       “Research shows that medical bills have little predictive value in credit decisions, yet tens of millions of American households are dealing with medical debt on their credit reports,” CFPB Director Rohit Chopra said in the statement.

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       Medical debt in the U.S. has swelled in recent years, with a March 2022 CFPB report indicating that about 20% of U.S. households reported having it in some form.

       The report was the agency’s first in which it publicly considered such debt, and Chopra said at the time the medical billing process in the U.S. often leaves consumers in a “doom loop.” Billing can be chaotic, insurance payouts can be slow and debt collectors may not have sufficient documentation to know if a reported debt is correct, the CFPB found.

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       Chopra said debt collectors can often use the threat of a hit to a person’s credit report — which can increase interest rates they pay on mortgages, car loans and other credit, or even make it harder to get a job or rental housing — to get them to pay a debt the person may not even owe. The report found that medical obligations made up around 58% of all uncollected debts reported to consumer credit-reporting bureaus.

       The White House has also shown interest in the topic, and the CFPB has continued to look at it since 2022. The consumer watchdog agency requested information in July on medical payment options such as credit cards, to learn more about how prevalent the sometimes-harmful products are and what damage some of their features can inflict on consumers.

       “Access to healthcare should be a right, not a privilege just for those who can afford it,” Vice President Kamala Harris told reporters on a call announcing the Biden administration’s efforts. “These measures will improve the credit scores of millions of Americans so that they will better be able to invest in their future.”

       The three consumer credit bureaus mentioned in the CFPB’s 2022 report — Experian, Equifax Inc. and TransUnion — headed off the regulators by proactively removing more than 70% of existing medical-debt entries on credit reports.

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       But eliminating all of it could make it harder for lenders, landlords and others to have a full picture of a potential borrower, employee or tenant’s creditworthiness, debt-collection and credit-reporting groups say.

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       The Consumer Data Industry Assn., which represents the consumer credit bureaus, said it plans to “constructively engage” with the CFPB on the issue, but added, “We have concerns that some of the proposals may push the limits of the bureau’s authority under federal law.”

       The CFPB’s move Thursday is part of a broader effort to update the Fair Credit Reporting Act, a 1970 law governing the credit-reporting industry.

       Along with the coming proposal on medical debt credit reporting, the CFPB also plans to propose a rule curtailing data brokers’ sales of consumer information without permission in a bid to stop them from feeding people’s personal data to artificial-intelligence and advertising firms.

       The CFPB aims to issue a notice of proposed rulemaking at some point in 2024, a senior agency official said.