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Jimmy Williams
In a significant move to help Americans own homes or buy cars, the Biden administration will propose a rule on Tuesday to ban medical debt from credit reports.
Vice President Kamala Harris and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra will announce the new rule, which aims to show that the Biden administration is working to lower costs—a key concern for voters in the upcoming election.
Chopra explained the motivation behind the rule in an exclusive interview with ABC News. “Our research shows that medical bills on your credit report aren’t even predictive of whether you’ll repay another type of loan. That means people’s credit scores are being unjustly and inappropriately harmed by this practice,” he said.
CFPB’s research estimates the new rule could help 22,000 more people get approved for safe mortgages each year. This positive impact on credit scores will benefit lenders, enabling them to approve more borrowers.
Major credit report companies like Equifax, TransUnion, and Experian have already stopped using medical debt to calculate creditworthiness. FICO and VantageScore also recently began factoring medical debt less heavily into their scores. Despite this, 15 million Americans still have $49 billion of medical debt impacting their scores, according to CFPB findings.
Medical debt is widespread in the U.S., affecting two in every five Americans, with most having debt in the thousands. Once debts go to collections, credit scores suffer, making car and home loans harder to obtain or available only at high interest rates.
The CFPB rule, which has been in the works since last year, also targets incorrect and complicated medical bills, which often lead to prolonged disputes between patients and billing departments. “Too often, we see that people are receiving bills that are inaccurate. Many patients are fighting over these bills for months, only to find that it then appears on their credit report,” Chopra said.
Experts like Matt Notowidigdo, a health economics professor at the University of Chicago, support the rule. He stated, “We know empirically that the repayment rates are incredibly low for medical debt, so I don’t think this policy change is going to change behavior that dramatically.”
However, some experts warn of potential downsides. Ge Bai, a professor at Johns Hopkins University, predicted that hospitals might adopt stricter payment efforts, potentially requiring payment before patients receive medical care, which could hurt low-income patients.
Chopra dismissed concerns that the rule would lead to more people defaulting on their health care debts. “Those individuals will still be subject to collection actions, lawsuits and more. There are plenty of ways that people get penalized for not paying their bills. I just don’t want to see the credit reporting system be weaponized against people who already paid them,” he said.
This new CFPB rule represents a significant step towards alleviating the burden of medical debt on Americans’ credit scores, aiming to improve their financial stability and access to necessary loans.
