Medical debt soon will be banned on credit reports
CNN
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Americans won't have to worry about unpaid medical bills damaging their credit reports and scores much longer.
The Biden administration is finalizing a rule Tuesday that will end the inclusion of medical debt on credit reports and ban lenders from using certain medical information in loan decisions.
The rule will also remove an estimated $49 billion in medical bills from the credit reports of about 15 million people, the Consumer Financial Protection Bureau (CFPB) said in a press release.
"People who get sick shouldn't have their financial future upended," Rohit Chopra, the bureau's director, said in the 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."
The measure, which was proposed last June, takes effect 60 days after it is published in the Federal Register. (Congress has a limited period of time when it can review and rescind final rules, which has typically happened when a new president takes office.)
The rule also bans lenders from using medical devices, such as wheelchairs or prosthetic limbs, as collateral for loans and bars them from repossessing the devices if patients are unable to repay the loans. However, lenders can continue to consider medical information in certain situations, including when a consumer requests a loan to pay health expenses or asks for a temporary postponement of loan payments for medical reasons.
Those with medical debt on their credit reports could receive a 20-point boost, on average, in their credit score, the bureau said. Also, the rule is expected to lead to the approval of about 22,000 additional mortgages every year.
"This will be 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," Vice President Kamala Harris said in a fact sheet.
Medical debt on credit reports is not a good predictor of a person's ability to pay other loans, the bureau's research has found. Plus, health care bills often contain mistakes, which can lead to extended battles among patients, health insurers and medical providers.
Weighty burden
High health care costs are among Americans' biggest headaches. The murder of UnitedHealthcare CEO Brian Thompson in December unleashed a flurry of rage and frustration from social media users over denials of their medical claims.
There are varying estimates on just how many people have medical debt, but it's a sizable share of the population.
In recent years, medical bills have become the most common collection item on credit reports, Chopra told reporters when the proposed rule was unveiled.
Helping minimize the impact of unpaid medical bills on consumers has been a priority for the Biden administration as it sought to assist Americans contending with higher costs of living. Trouble getting loans "makes it more difficult to just get by, much less get ahead," Harris told reporters in June.
In 2022, the administration laid out a four-point plan to help protect consumers, including having the bureau investigate credit reporting companies and debt collectors that violate patients' and families' rights.
Also that year, the three largest credit reporting agencies, Equifax, Experian and TransUnion, announced they would remove nearly 70% of medical debt from consumer credit reports.
The agencies no longer include medical debt that went to collections on consumer credit reports once it has been paid off. That eliminated billions of dollars of debt on consumer records.
In addition, unpaid medical debt no longer appears on credit reports for the first year, whereas the previous grace period was six months. That gives people more time to work with their health insurers or providers to address the bills. And medical collection debt of less than $500 is no longer included on credit reports.
Plus, FICO and VantageScore reduced the degree to which unpaid medical bills impact credit scores.
Paying off medical debt
In a related effort, Harris announced Tuesday that states, counties and cities have eliminated more than $1 billion in medical debt for more than 750,000 Americans, using funding from the 2021 American Rescue Plan Act. States and municipalities are on track to wipe out an estimated $7 billion in medical debt for nearly 3 million Americans by the end of next year.
In addition, she noted, North Carolina has set up a medical debt relief program in which the state's 99 eligible hospitals have promised to eliminate up to $4 billion in unpaid bills for nearly 2 million low- and middle-income residents, as well as have policies in place that reduce the chance that future patients will incur debts. In exchange, the participating hospitals become eligible for enhanced Medicaid reimbursements.
