CFPB issues medical debt rule; regulation immediately challenged in federal court

The CFPB has issued its  final rule that will prohibit the inclusion of medical debts in credit reports lenders use to make credit decisions and that will also generally prohibit lenders from using medical debt information in making credit decisions.

But the rule faces challenges on several fronts.

“People who get sick shouldn’t have their financial future upended,” said CFPB Director Rohit Chopra, in issuing the rule.

The bureau said that the rule will remove an estimated $49 billion from the credit reports of about 15 million people. In addition, bureau officials said that the rule will lead to the approval of an estimated 22,000 additional mortgages. Consumers with medical debts may see their credit scores increase an average of 20 points, according to the CFPB.

CFPB officials said that the bureau has found that medical debts do not provide predictive value to lenders making credit decisions. In addition, consumers often report being asked to pay bills that should have been covered by insurance or financial assistance programs, according to the CFPB.

Bureau officials said that the final rule brings regulations in line with the decision by Congress to restrict lenders from obtaining or using medical information.

The CFPB said that the three nationwide credit reporting conglomerates already have announced they would take certain types of medical reports off credit reports.

In addition, two major credit scoring companies, FICO and VantageScore, have announced that they have decreased the degree to which medical bills have an impact on a consumer’s score.

The rule goes into effect 60 days after its publication in the Federal Register.

The law faces opposition in the courts and on Capitol Hill.

Almost immediately, two lawsuits asking for the rule to be set aside were filed in federal court in Texas.

In the first suit, filed in the U.S. District for the Eastern District of Texas, the Consumer Data Industry Association (CDIA) and the Cornerstone Credit Union League, said the CFPB exceeded its authority in issuing the rule. The CDIA, headquartered in Washington, D.C.,   represents national and regional credit bureaus. The Cornerstone League, headquartered in Plano, Texas, represents almost 600 credit unions, including those in Texas.

In their suit, the groups contended that “In the waning days of the Biden Administration, the CFPB upends the carefully balanced framework established by Congress with a Final Rule that plainly exceeds its statutory authority.”

The groups added that the Fair and Accurate Credit Transactions Act permits credit reporting agencies to report medical debt that has been coded to protect the medical privacy of consumers by concealing the name of the provider and the nature of services provided.

“Because the portion of the Final Rule barring [credit reporting agencies] from reporting coded information about medical debt is contrary to law, the Court has an obligation to declare it unlawful and set it aside,” the groups said, in the suit.

They said that Congress determined that coded medical debt struck a balance “between protecting a consumer’s private medical information and ensuring creditors have access to information relevant to the assessment of a consumer’s creditworthiness when determining whether to extend credit to the consumer.”

In the second suit, filed in the U.S. District Court for the Southern District of Texas, ACA International, an association representing third-party collection agencies, law firms, asset buying companies, creditors, and vendor affiliates, headquartered in Minneapolis, Minnesota, and Specialized Collection Services Inc., a woman-owned small collection agency specializing in the collection of medical debt, with a principal place of business in Harris County, Texas, also contend that the CFPB has exceeded its authority in issuing the rule.

The CFPB is taking advantage of peoples’ frustration with medical bills, according to the groups.  “A federal agency with no healthcare experience is exploiting this frustration by making a politically motivated regulation that prevents credit reporting agencies from showing accurate medical debts on credit reports,” they asserted in the suit. “No agency has the power to do that.”

The groups give several reasons for asking that the rule be blocked, including that, “The Final Rule is not based on reasoned decision-making, but rather political ideology.”

On Capitol Hill, the Republican leaders of two committees with jurisdiction over the CFPB made it clear that they oppose the medical debt rule.

House Financial Services Committee Chairman Rep. French Hill, R-Ark, said, following the release of the rule that he looks forward to “working with the incoming Trump Administration to rectify this misguided action.” He called the rule an “11^th-hour effort to appease the White House.”

And on the other side of Capitol Hill, Senate Banking, Housing and Urban Affairs Chairman Tim Scott, R-S.C., said that “the rule will reduce access to credit and important health care services while putting lenders and medical providers at risk.”