CFPB Rule to Ban the Use of Medical Debt in Credit Reports

The Consumer Financial Protection Bureau (CFPB) has recently introduced a rule that will significantly impact how medical debt is treated in consumer credit reports. This regulation aims to eliminate the inclusion of medical debt from credit reports, which previously affected millions of Americans struggling with unpaid medical bills. With over $49 billion in unpaid medical debt removed from these reports, this change represents a significant shift in how the credit industry views medical expenses and their influence on credit scores. The rule seeks to offer better consumer protections and ensures that consumers are not unfairly penalized for debt resulting from unexpected medical costs. 

‍

Let’s take a closer look at the key aspects of this rule and its potential impact on individuals and the credit industry.

‍

Overview of the CFPB Rule on Medical Debt

‍

The CFPB medical debt rule significantly transforms the credit reporting process, specifically how unpaid medical bills are treated. Under this rule, consumer reporting agencies will no longer include medical debt on credit reports, providing substantial relief for those struggling with medical-related financial burdens. 

‍

This change follows significant amendments to the Fair Credit Reporting Act (FCRA), marking a step toward fairer consumer reporting practices. Below, we break down the key components of this important rule.

‍

1. Removal of $49 Billion in Unpaid Medical Bills
   As part of the CFPB medical debt rule, $49 billion in unpaid medical bills will be removed from consumer credit reports. This step directly addresses the burden that medical debt has placed on millions of consumers whose credit scores previously suffered due to unavoidable medical expenses.
   ‍
2. Amendments to Regulation V of the FCRA
   The CFPB medical debt rule amends Regulation V, which governs the reporting of consumer information. These amendments specifically prohibit the inclusion of medical debt on credit reports, ensuring that unpaid medical bills do not unfairly affect consumers' creditworthiness.
   ‍
3. Prohibition Against Reporting Medical Debt
   This new regulation prohibits consumer reporting agencies from including medical debt in consumer credit reports. This policy change is designed to create a more equitable financial system where medical expenses do not impact a person’s ability to access credit.
   ‍

Rationale Behind the Rule

‍

The CFPB medical debt rule is rooted in the bureau's mission to protect consumers from financial hardships often out of their control. Medical debt is unique because it usually arises due to unforeseen health conditions or emergencies, making it an unfair factor in credit reporting. 

‍

The CFPB’s emphasis on state laws highlights the growing concern over the treatment of medical debt and reflects the broader movement toward consumer protection. The CFPB seeks to create more fairness in reporting debt by aligning federal policy with state laws.

‍

1. State Laws and Consumer Protection
   The CFPB medical debt rule is not an isolated measure—it complements existing state laws to protect consumers from the negative impacts of medical debt. Many states, such as Colorado and New York, have already implemented policies that limit how medical debt can affect credit scores, further strengthening consumer rights at both the state and federal levels.
   ‍
2. Ensuring Fairness in Credit Reporting
   The rule emphasizes the need for a credit reporting system that focuses on a consumer’s ability to manage debt rather than penalizing them for medical expenses beyond their control. Medical debt, often an emergency expense, should not be treated like other types of debt, such as credit card balances or personal loans.
   ‍

Impact on Credit Reports
‍

The introduction of the CFPB medical debt rule is expected to drastically change how national consumer reporting companies handle medical debt in credit reports. For years, unpaid medical bills negatively impacted credit scores, even though these debts were often out of the consumer’s control. With the implementation of this rule, medical debt will no longer play a role in determining a person's creditworthiness. Here are the key changes that will be seen in credit reports going forward:
‍

1. Changes in Reporting by National Consumer Reporting Companies
   Under the CFPB medical debt rule, the major consumer reporting agencies will no longer include medical debt in their reports. This shift means that consumers with medical debt will no longer see a significant drop in their credit scores due to unpaid medical bills.
   ‍
2. VantageScore’s Shift in Scoring Models
   In line with the CFPB medical debt rule, VantageScore, one of the leading credit scoring models, has eliminated medical collection data from its scoring models. This change reflects the growing consensus that medical debt should not affect a consumer’s credit score and financial standing.
   ‍
   
   
3. Focus on Credit Risk Instead of Medical Debt
   The CFPB medical debt rule emphasizes credit reporting that accurately assesses a consumer’s ability to manage credit risk rather than penalizing individuals for medical debt. This shift is designed to help individuals secure credit more efficiently, even if they have medical bills in the past.
   ‍

Legal Challenges to the Rule
‍

The CFPB medical debt rule has faced legal scrutiny despite the clear consumer benefits. Various lawsuits have challenged the CFPB’s authority to enforce such a sweeping regulation. Some of these legal challenges argue that the rule is arbitrary and violates the Administrative Procedure Act (APA), which governs how federal agencies create regulations. Below are some of the key legal concerns surrounding the rule:
‍

1. Lawsuits Questioning the CFPB’s Authority
   Some parties have filed lawsuits questioning the CFPB’s authority to make this rule, arguing that it oversteps the bureau’s regulatory powers. These legal challenges aim to block or delay the rule's implementation.
   ‍
2. Claims of Arbitrariness
   The plaintiffs claim that the CFPB medical debt rule is arbitrary, pointing out that it was implemented without fully considering the impact on all stakeholders.
   ‍

State and Federal Collaboration
‍

The CFPB medical debt rule aligns with the growing trend of state-level consumer protections aimed at reducing the negative impacts of medical debt. States have long been at the forefront of addressing issues with medical debt, and their efforts have contributed to developing this new federal regulation. 
‍

This collaboration between state and federal governments ensures that consumers are better protected against the harmful effects of medical debt reporting.
‍

1. State Legislation
   States like Colorado and New York have already passed laws designed to shield consumers from the consequences of medical debt. These state-level actions complement the CFPB medical debt rule, reinforcing the need for stronger consumer protection.
   ‍
2. Federal and State Collaboration
   The rule represents a successful collaboration between federal policies and state protections. It highlights the importance of joint efforts to address medical debt's challenges to consumers and ensures that protections are in place at multiple levels.
   ‍

Concerns About Medical Debt Reporting
‍

The CFPB medical debt rule addresses a long-standing issue with the reliability and accuracy of medical debt reporting. Many consumers have faced financial difficulties due to incorrectly reported medical debts, often due to clerical errors or billing discrepancies. The rule aims to reduce these issues and give consumers greater confidence in their credit reports' accuracy.
‍

1. Incorrect Medical Debt Reporting
   One of the most significant concerns voiced by consumers is the frequent reporting of incorrect medical debts. Many individuals have had medical bills reported on their credit without their knowledge or when they were already paid off. This kind of error can severely damage a person’s credit score.
   ‍
   
   
2. Opaque Medical Billing Practices
   Another factor contributing to medical debt accumulation is the lack of medical billing and pricing transparency. Consumers are often unaware of what they owe until the debt is reported to credit bureaus, leading to confusion and unexpected financial strain.
   ‍

Industry Perspectives and Shifts
‍

The CFPB medical debt rule has sparked significant discussions in the credit industry, especially concerning how medical debt should be handled under the Fair Credit Reporting Act (FCRA). Some industry stakeholders argue that the rule interferes with the FCRA preemption clause, which could lead to future legal battles over the scope of federal regulations.
‍

1. Counterarguments from the Industry
   There are concerns from the industry regarding how the rule conflicts with existing credit reporting frameworks. Critics argue that the rule might undermine the FCRA preemption, which dictates how federal regulations override state laws in certain circumstances.
   ‍
   
   
2. Shifts in Reporting Practices
   Despite these challenges, the industry is shifting its reporting practices in line with the CFPB medical debt rule. Major credit bureaus are revising their approaches to ensure that medical debt no longer negatively impacts consumers’ credit scores, which aligns with broader efforts to promote fairer credit reporting.
   ‍

Conclusion
‍

The CFPB medical debt rule is a significant step forward in protecting consumers from the negative impacts of medical debt on their credit reports. While legal challenges may arise as the rule is fully implemented, it represents a shift toward a more consumer-friendly credit reporting system. By removing medical debt from credit reports, this rule ensures that consumers are no longer penalized for medical expenses that are often out of their control.
‍

As legal proceedings unfold, the rule may be updated. Still, one thing is clear: the CFPB medical debt rule marks a significant victory for consumer protection, offering millions of individuals a fairer chance at managing their financial futures.
‍

If you're a creditor or debt buyer looking to ensure compliance and manage medical debt efficiently, South East Client Services (SECS) has over a decade of experience converting distressed receivables into cash while maintaining high legal and ethical standards. 
‍

Contact SECS today to discuss how we can help you resolve medical debt collections effectively while preserving the value of your receivables.