Biden administration moves to ban medical debt from credit reports

The Biden administration announced Tuesday it will be following through on plans to bar medical debt from being included on credit scores.

“One of the most significant consequences of carrying medical debt is the harm it does to a person’s credit score,” Vice President Harris said in a press briefing.

“Medical debt makes it more difficult for millions of Americans to be approved for a car loan, a home loan or a small business loans. All of which in turn makes it more difficult to just get by much less get ahead. And that is simply not fair.”

The administration said back in September it had begun looking into the potential of banning medical debt from credit scores. At the time, the Consumer Financial Protection Bureau (CFPB) said it was seeking to keep creditors from “relying on data that is often plagued with inaccuracies and mistakes.”

The CFPB has previously reported that medical debt is one of the most common forms of debt represented on credit reports. CFPB Director Rohit Chopra said on Tuesday that medical debt is unique and shouldn’t be taken into consideration when assessing someone’s credit worthiness.

“Medical debt on a consumer credit report is just so different than a mortgage, auto loan or credit card. Sometimes, like a visit to the emergency room, the debt is taken on unexpectedly and in a time of crisis. Medical bills are also frequently subject to insurance coding errors, charity care mistakes or complexities with insurance,” he said.

Chopra said that the medical debt has become a “major money-making enterprise” for agencies that buy debt from hospitals for pennies on the dollar.

“The credit reporting system is more closely resembling a weapon for debt collectors rather than a tool for lenders to assess someone’s likelihood to repay a loan,” he added.

The proposed rule will be open for comment from the public through August 12.

According to senior administration officials, this rule is “simply closing a regulatory loophole” that was left open after Congress passed the Fair and Accurate Credit Transactions Act of 2003. The bill restricts the sharing of medical information in credit reporting, but regulatory exemptions remained.

Officials said on Tuesday that the new rule, which will go into effect retroactively on past medical bills, will allow for stronger assessments of credit worthiness going forward.

Medical debt experts previously called for the rule to recognize how healthcare costs are often shifted by patients paying them off through personal loans or credit cards. Administration officials said the rule will not extend to third-party lenders as debt incurred through paying off hospital bills would be considered new debt obligations.

Advocacy groups welcomed the proposal.

“Medical debt is an unfair burden on millions of people and I am thrilled to see the CFPB taking
action” Allison Sesso, CEO of the nonprofit Undue Medical Debt, said in a statement.

“Access to necessary healthcare should have zero impact on creditworthiness and while many providers like hospitals have stopped reporting to the credit bureaus, this is still a huge achievement for the millions struggling with a depressed credit score simply because they got sick or were in an accident,” added Sesso.

“We have known for years that medical debt doesn’t predict credit defaults, nor does it accurately predict a person’s desire and willingness to pay off loans. The CFPB agrees,” said Patricia Kelmar, health care campaigns director for the consumer protections nonprofit Public Interest Research Group.

“These newly proposed rules are an important step toward implementing a fair credit system that doesn’t penalize people for life events they can’t control, such as getting sick or injured.”