U.S. consumer agency proposes to ban medical debt from credit reports, loan decisions

The Biden administration Tuesday announced rules to block medical debt from being used to evaluate borrowers’ fitness for mortgages and other types of loans.

The proposed rules from the Consumer Financial Protection Bureau arrive less than five months before Election Day and are poised to be part of President Biden’s closing argument that he is addressing pocketbook issues as voters rank the economy as their top concern. The White House has repeatedly focused on the issue of medical debt, saying it disproportionately harms low-income Americans and communities of color.

“Medical debt makes it more difficult for millions of Americans to apply for a car loan, a home loan or a small-business loan, all of which makes it more difficult to just get by, much less get ahead,” Vice President Harris said on a call with reporters. “No one should be denied access to opportunity simply because they have experienced a medical emergency.”

The rules would ban credit reporting agencies from incorporating medical debt when calculating credit scores. They would also bar lenders from using medical debt to determine loan eligibility.

The proposal will undergo public comment until Aug. 12 before officials begin drawing up a final version—meaning November’s election will probably determine the rules’ fate. Administration officials have said the rules would probably be finalized next year. Republican presidential candidate Donald Trump did not seek to remove medical debt from consumers’ credit reports during his four years in the White House.

Adam Rust, an expert with the Consumer Federation of America, said the new rules would have significant impact because they would directly affect millions of people, many of whom took on involuntary or errant debts.

“When medical debt can affect credit scores, it leads to downstream harms in very important parts of our lives, like the ability to get housing or find a job,” Rust said.

Roughly 15 million Americans have medical bills on their credit reports, according to a study released in April by the CFPB. The figure used to be significantly higher—the agency in March 2022 found that medical bills appeared on about 43 million credit reports—but major credit bureaus voluntarily adopted limits on which medical bills were included in reports.

Those limitations removed medical collections under $500 and those that were less than a year past due; the proposed rules from the CFPB would cover all medical debts.

People affected by medical debt disproportionately live in the South or in low-income communities, according to the CFPB.

Experts have warned that medical debt is linked to numerous health and financial harms, such as worse mental health or delays in obtaining additional medical care.

Medical debt “can lead to other kinds of financial vulnerability,” Cynthia Cox, vice president at KFF, a nonpartisan health-care research organization that has analyzed medical debt, wrote in a text message. “It’s a difficult cycle for people to pull themselves out of, especially at a time when they may be sick and less able to work.”

In a September briefing about the administration’s intent to focus on the issue, Harris and CFPB Director Rohit Chopra argued that unpaid medical bills and the related debts have little predictive power in determining whether a consumer will pay down an unrelated loan.

Harris and Chopra have chastised debt collectors, who they say are known to use credit reports as a cudgel to manipulate debtors into paying bills they know are incorrect.

“The credit reporting system is more closely resembling a weapon for debt collectors, rather than a tool for determining someone’s eligibility for a loan,” Chopra said Tuesday in a call with reporters.

The amount of debt consumers have, and their history of making timely payments, can significantly affect the interest rate offered by lenders, which in turn influences how much consumers must pay monthly to service the loan.

Samantha Reid, 32, who works as a digital director for the left-leaning think tank Center for American Progress, said it took six years to repair her credit score after she was diagnosed with Crohn’s disease at age 18.

She said a problem with mail forwarding during her first year of college caused her to miss many medical bills, before she got a phone call warning that she was deep into collections. Repeated tests and procedures over the years brought a steady stream of bills, leading to financial anxiety that felt like “a general sense of doom,” she said.

“It feels like the minute I pay off one bill another comes along, because that is the nature of having a chronic illness,” she said.

Her credit score held her back in other ways, she said, such as tighter spending limits on credit cards. When she moved to Chicago to be closer to family, there were buildings where she couldn’t apply for a lease because she was below the building’s minimum credit limit, Reid recalled.

Reid said the CFPB rules would “level the playing field for people with difficult medical conditions.” She added, however, that the broader problem of medical debt has more to do with health-care costs, calling the CFPB rules “a Band-Aid on the problem, but a damn-good band-aid.”

The proposed rules “can have a meaningful effect,” said Neale Mahoney, a Stanford University economist who has studied medical debt and served on the White House National Economic Council before leaving a year ago. He pointed to recent findings by the Urban Institute that medical debt affects the credit scores of at least 5 percent of Americans.

But Mahoney, citing his own research, noted that many people who carry medical debt also “have other flags on their credit report” that can make it hard for them to get loans even when medical debt is addressed.

“Once you already have a bunch of derogatories—a technical term—on your credit report, having one removed, or even a handful removed, is not going to make a big difference in your credit score,” Mahoney said.

Other Democrats are pursuing efforts to address medical debt. Sen. Bernie Sanders (I-Vt.) and other lawmakers in May proposed legislation that would eliminate all existing medical debt and impose restrictions to limit future medical debt. In a statement, Sanders called Biden’s plan “an enormous step in the right direction.”

“In the United States of America, the wealthiest country in the history of the world, one illness or disease should not ruin a family’s financial life and future,” he said in the statement.

Democratic mayors in D.C., New York and other major cities in recent years have worked to relieve residents’ medical debt by purchasing existing balances for pennies on the dollar and immediately canceling them.