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Financial regulators propose barring medical debt from credit reports

Officials estimated that 15 million Americans would immediately see their credit scores increase an average of 20 points.

WASHINGTON (CN) — Federal regulators on Tuesday unveiled a proposal to eliminate medical debt from the calculation of credit reports, an effort they say would immediately boost scores for millions of Americans.

Officials said the Consumer Financial Protection Bureau rule would help people secure more loans for cars, houses and businesses that they might be denied because of medical debt.

“No one should be denied access to economic opportunity simply because they experienced a medical emergency,” Vice President Kamala Harris told reporters.

The White House estimated that 15 million Americans would immediately see their credit scores increase an average of 20 points.

Medical debt is routinely included in credit reports through a loophole in the Fair and Accurate Credit Transactions Act. The 2003 law restricted lenders from obtaining or using medical information, including information about debt. However, federal agencies later allowed an exception for creditors to use medical debts in their credit decisions.

Debt collectors will also furnish the information or threaten to provide it to credit reporting agencies in an effort to coerce consumers into payment. 

The proposal revealed Tuesday would prohibit creditors from factoring medical debt into credit decisions.

Bureau director Rohit Chopra said that medical debts “have little to no predictive value when it comes to repaying other loans."

“Most information on a credit report represents debt a consumer voluntarily signed up for,” Chopra said.

A 2022 report by the bureau estimated that medical bills accounted for $88 billion in debt included on credit reports.

Including medical debts on credit reports leads to thousands of denied mortgage applications, the bureau said, and officials estimated the proposal would lead to an additional 22,000 mortgages issued each year. 

“For consumers, today’s proposed rule would have practical and positive real world consequences,” Chopra said.

Pennsylvania Senator John Fetterman said the proposal is part of the bureau's “vital work” to protect working families.

“Actions like this change lives,” he wrote online.

Vermont Senator Bernie Sanders called it “an important step in the right direction."

“It is immoral that families are being evicted, having their heat disconnected, or having their wages garnished because of crippling medical debt while the health care industry made more than [$100 billion]  in profits last year,” he wrote online.

Massachusetts Senator Elizabeth Warren lauded the proposal as a “critical action.”

“No one should be crushed by medical debt after a health emergency,” she wrote online. “Removing this debt — which is often inaccurate & disproportionately harms Black Americans — from credit reports will help folks afford a home & lower costs.”

The proposal didn’t receive universal praise as Republicans lumped it in with their opposition to the Biden administration’s efforts to cancel or forgive other types of debt, including student loans.

“The Biden Admin strikes again, weaponizing the CFPB to push their belief that debts don't need to be repaid and buy votes in the upcoming election,” Kentucky Representative Andy Barr wrote online. “Today's proposal to ban medical debt info from credit reports is reckless, putting businesses on the hook and increasing risks in our financial system.”

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Categories / Consumers, Financial, Government

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