CFPB finalizes a rule to remove $49 billion in medical bills from credit reports

On Tuesday, the Consumer Financial Protection Bureau (CFPB) finalized a rule that will remove an estimated $49 billion in medical bills from the credit reports of roughly 15 million Americans. The final rule bans the inclusion of medical bills on credit reports utilized by lenders and prohibits lenders from factoring medical information into their lending decisions.

The rule, effective 60 days following its publication in the Federal Register, intends to enhance consumer privacy protections and curb coercive practices by debt collectors. According to the CFPB, the change addresses longstanding concerns that medical debts are unreliable indicators of a borrower’s financial reliability and disproportionately affect individuals who receive inaccurate or improperly billed medical charges.

“People who get sick shouldn’t have their financial future upended,” Rohit Chopra, director, CFPB, said in a news release. “The CFPB’s final rule will close a special carveout that has allowed debt collectors to abuse the credit reporting system to coerce people into paying medical bills they may not even owe.”

In an announcement of the decision, Vice President Kamala Harris called it “lifechanging for millions of families, making it easier for them to be approved for a car loan, a home loan or a small-business loan.”

Harris also explained that states and localities have leveraged American Rescue Plan (ARP) funds to support the elimination of more than $1 billion in medical debt for more than 700,000 Americans, saying: “No one should be denied economic opportunity because they got sick or experienced a medical emergency. That is why President Biden and I cancelled over $1 billion in medical debt—part of our overall plan to forgive $7 billion by 2026—with support from our American Rescue Plan, legislation that I advanced with my tie-breaking vote in the Senate. We also reduced the burden of medical debt by increasing pathways to forgiveness and cracking down on predatory debt collection tactics.”

Impact on borrowers

CFPB research highlights that medical debt has little predictive value for lenders assessing a borrower’s ability to repay other debts. The inclusion of medical bills on credit reports has led to thousands of denied mortgage applications, many of which involved borrowers who were otherwise financially capable. The CFPB estimates the new rule will facilitate the approval of approximately 22,000 additional affordable mortgages annually, while Americans with medical debt on their credit reports could experience an average credit score boost of 20 points.

This rule builds upon prior reforms by major credit reporting agencies—Equifax, Experian and TransUnion—who, in 2022, announced plans to remove certain types of medical debt, including collections under $500, from credit reports. Credit scoring companies FICO and VantageScore also adjusted their methodologies to minimize the weight of medical debts in determining credit scores.

Closing a controversial carveout

The CFPB’s new rule eliminates an exception to the Fair Credit Reporting Act (FCRA) that previously allowed creditors to consider medical debts in lending decisions. This exception, initially created by federal financial regulators, had enabled debt collectors to leverage the credit reporting system to pressure patients into paying disputed or erroneous bills.

The final rule amends Regulation V of the FCRA to:

• Prohibit lenders from considering medical information: Creditors can no longer use medical information, including details about medical devices or treatments, as collateral for loans.
• Ban medical bills on credit reports: Reporting agencies are barred from including medical debt in credit scores or reports shared with lenders. However, lenders can still verify medical expenses for legitimate purposes, including loan underwriting or medical-based forbearances.

The CFPB’s action aligns with Congress’s broader mandate to safeguard consumer privacy. By addressing the systemic issues surrounding medical debt reporting, the rule is expected to alleviate financial stress for millions of Americans while allowing lenders to focus on more accurate indicators of borrowers’ financial standing.

This development marks a significant shift in how the financial system interacts with the health care industry and reinforces the importance of protecting consumers from predatory debt collection practices.