Biden’s rule banning medical debt from credit reports raises alarms

The Biden administration moved Tuesday to ban medical debt from appearing on credit reports, erasing $49 billion in unpaid bills from the records of 15 million Americans.

The rule, which was finalized by the Consumer Financial Protection Bureau, prevents credit cards, banks, car dealerships and other lenders from using medical information when making lending decisions. It also prohibits lenders from using medical devices such as wheelchairs and prosthetic limbs as collateral for loans and prohibits them from repossessing the devices if patients cannot repay a loan.

White House officials say the change could improve borrowers’ credit scores by an average of 20 points, helping them qualify for mortgages and other loans that otherwise might have been denied.

Banking groups have strongly criticized this rule. They argue that by limiting creditors’ access to consumers’ medical debts, borrowers could be granted more credit than they can afford, which could lead to default and harm their ability to pay. qualify for future loans. The groups said it would hurt consumers because it would increase the cost of credit while reducing its availability.

“Credit scores would increase as a result of the proposal (but) those scores would be artificially inflated; they would only increase because some relevant data would be removed. As a result, credit scores would be less reliable, compromising the ability of lenders to engage in risk-based underwriting, and credit markets would become less efficient as a result,” the Bank Policy Institute and Consumer Affairs wrote. Bankers Association in a letter to the Consumer Financial Protection Bureau.

Debt collection groups also opposed the change. The Association of Credit and Collection Professionals said in a statement that the rule would result in “reduced consequences for not paying your bills, which in turn would reduce access to credit and health care for those who need it most.”

The White House argues that medical debt should be treated differently from other types of debt resulting from excessive spending, such as taking out a loan to buy a house or car that a borrower may not be able to afford. afford. Officials say medical debt is not optional and often necessary and therefore should be treated differently.

This makes medical debt less predictive of whether a borrower will repay a loan, administration officials say. They cite a study by the Consumer Financial Protection Bureau that found removing medical debt from credit reports would lead to the approval of about 22,000 more mortgages that could be paid off each year.

“People who become ill should not have their financial future disrupted,” said Rohit Chopra, director of the office. “The CFPB’s final rule will end a special exclusion that has allowed debt collectors to abuse the credit reporting system to coerce people into paying medical bills they may not even owe.”

An April study by the National Bureau of Economic Research, co-authored by Stanford economics professor Neale Mahoney, found that borrowers were less likely to pay existing medical bills after debt forgiveness. The study also concluded that there is no evidence that forgiving medical debts in collections improves borrowers’ finances, their access to credit, or their physical or mental health.

In a statement accompanying the study, Mr. Mahoney called the results “largely disappointing.”

He said debt cancellation “may be coming too late to make a difference, or there are problems in the way it’s being done that currently need to be addressed.”

It is unclear whether the rule, which will take effect within 60 days of publication in the Federal Register, will survive the new Trump administration.

President-elect Donald Trump did not discuss medical debt on the campaign trail, and a transition spokesperson did not respond to a request for comment.

Mr. Trump has pledged to dismantle much of the Biden administration’s policies and significantly reduce government regulations.

Republican lawmakers have already said they will attempt to repeal some Biden-era regulations through the Congressional Review Act, which allows Congress to repeal agency rules with a majority vote in both chambers.

Some Republicans on the House Financial Services Committee have already signaled that the rule canceling medical debt could be at the top of their list. They sent a letter to Mr. Chopra in August saying they had “serious concerns” about the rule, which they said would “weaken the accuracy and completeness of consumer credit reports.”

They added: “This effort will have significant negative effects on access and affordability of credit for all consumers and particularly for low-income borrowers. »