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The Key Takeaways
- Consumer Financial Protection Bureau has issued a regulation that prevents the credit bureaus including consumer medical debt when calculating credit scores.
- The rule won't go into effect for another two months, at which point the new Trump administration will be in power.
- The rule is part of a flurry of activity by the government's consumer protection watchdog in the final days of the Biden administration.
The government's consumer watchdog agency has finalized a rule banning medical debt from credit reports in a move that could raise the credit scores of about 15 million people.
Consumer Financial Protection Bureau finalized a rule announced previously on Tuesday, which pushed an initiative of the Biden administration to reduce the financial impact of medical bills. Medical debt is banned from credit report and lenders are prohibited from factoring medical debt into lending decisions.
“People who get sick shouldn’t have their financial future upended,” In a recent press release, CFPB director Rohit Chopra stated.”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 its current format, major credit reporting agencies (Experian TransUnion Equifax will no longer be allowed to report information regarding medical debts on consumer credit reports. This could increase FICO scores, which are calculated based on these credit reports. It would also make it easier to obtain mortgages, other loans or jobs for those with medical debt, if employers consider credit scores in their hiring decisions.
According to the CFPB, borrowers who have medical debt will see an increase of up to 20 points in their credit score. This scale ranges typically from 300-850. The bureau estimated that these increases would result in an additional 22,000 people being approved each year for mortgages.
The bureau has argued that medical debt does not truly reflect borrowers' ability or willingness to repay since consumers often get into medical debt unintentionally and that debt records are often added to credit reports erroneously due to the complexities of medical billing and insurance.
Can The Rule Be Implemented?
This rule is not going to be effective for another 60 days. That’s when Donald Trump will take over the White House. Financial companies are also expected to challenge the bill in court.
“The CFPB lacks the legal authority to prohibit creditors from considering medical debt, as long as the record of the debt does not disclose the existence of the provider or the nature of the services provided,” In a press release, Dan Smith, the CEO of Consumer Data Industry Association (a trade association that represents the three major credit bureaus), said. “The CFPB also lacks the authority to dictate what can and cannot be included on credit reports.”
Under the Biden Administration, the Bureau has made significant changes in the American credit report. The bureau’s actions in the Biden administration have already changed the credit report of Americans.
Here is The Latest Rule in A Flurry Of Actions
Finalizing the rule on medical debt is just one of many new rules and lawsuits that the bureau has brought out in the days leading up to the new administration taking over. Since the election alone, the bureau has restricted bank overdraft fees, required payment app companies to submit to bank-like inspections of their activities, and launched consumer protection lawsuits against major companies, including payment Zelle, Walmart, and Experian.
In the courtroom, financial companies fought back against the latest CFPB regulations and temporarily stopped the rule that would have capped late credit card fees at $8.
The bureau faces an uncertain future under the Trump administration and Republican-controlled government. Many Republicans have been historically hostile to the agency created in 2010 by Democratic Senator Elizabeth Warren of Massachusetts in the wake of the Great Financial Crisis. Elon Musk, a close Trump adviser and billionaire, recently proposed that the agency be renamed. “deleted.”
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