By, Sheela Ranganathan and Maanasa Kona
Amidst the growing interest among policymakers to protect patients from medical debt and its negative downstream effects, in April 2023, the three credit reporting agencies (CRAs)—Equifax, Experian, and TransUnion—voluntarily agreed to stop reporting any medical debt under $500. This April, the Consumer Financial Protection Bureau (CFPB) found that, despite these changes, 15 million Americans still have $49 billion worth of medical bills on their credit reports. In particular, CFPB found that medical debt disproportionately burdens older Americans as well as low-income and rural communities.
In an effort to protect these patients, CFPB issued a proposed rule in June 2024 seeking to ban medical debt from certain credit reports. If finalized, the rule would also stop creditors from relying on medical bills for underwriting decisions and stop debt collectors from engaging in certain coercive collection practices.
In a press release accompanying the proposed rule, Vice President Kamala Harris and CFPB Director Rohit Chopra highlighted the importance of ensuring that getting sick or taking care of loved ones does not result in financial hardship. The proposed rule is aimed at protecting consumers from repercussions of medical debt like restricted access to loans and increased risk of bankruptcy, many of which disproportionately burden Black, Hispanic, and low-income communities.
The Impact Of Medical Debt On Credit Reports And Policy Responses To Date
Medical debt is a leading cause of bankruptcy in the United States and affects about 100 million Americans. Medical debt can impact patients’ well-being, making them less likely to seek future medical care and negatively affecting their financial stability. One of ways in which medical debt can negatively affect a patient’s financial health is through its impact on their credit report. Hospitals and debt collectors often provide information about medical debt to credit reporting agencies, which then include this information in the credit reports they provide to prospective lenders, employers, and landlords. This practice can make it much harder for patients to obtain loans, employment, and housing.
At the federal level, the tax code defines the practice of non-profit hospitals reporting medical debt to credit reporting agencies as an “extraordinary collections action.” Before taking this action, federal law requires non-profit hospitals to wait at least 120 days from the day of providing the first post-discharge bill, and to notify patients at least 30 days before reporting that debt to credit reporting agencies. This requirement only applies to non-profit hospitals and falls far short of actually prohibiting the practice entirely.
Further, at the federal level, the CFPB has additional oversight authority over credit reporting through the Fair Credit Reporting Act (FCRA). Under FCRA, CFPB oversees credit reporting agencies, entities that provide information to them (debt collectors and hospitals), and entities that use credit reports in their decision making (creditors, employers, landlords). In 2003, FCRA was amended to prohibit creditors from using medical information in their decision making, but subsequent regulations created an exemption that allows the consideration of financial medical information or information related to medical debt, a subcategory of medical information.
States have been active in this space as well. In the past year alone, a number of states have enacted legislation that will prevent medical debt from harming patient credit reports. For example, Rhode Island implemented a “belt-and-suspenders” approach, which (1) prohibits providers from reporting medical debt to credit reporting agencies, and (2) prohibits credit reporting agencies from retaining or reporting on any medical debt information.
New CFPB Rule Seeks To Remove Medical Debt Data From Certain Credit Reports
In the preamble to the proposed rule, CFPB notes that medical debt has limited predictive value for credit underwriting purposes given the unique circumstances that cause an individual to go into medical debt. Further, CFPB finds that medical debt information can be riddled with inaccuracies. According to the agency, many industry participants have stopped or reduced their reliance on medical debt information, “casting doubt on its value.”
Given the limited utility of using medical debt to make credit decisions, CFPB’s proposed rule would amend Regulation V, which implements FCRA, to incorporate three main changes. First, it would remove the financial information exception that currently allows creditors to use medical information related to medical debt when making credit eligibility determinations. The preamble explains:
Medical information related to medical debt includes, for example, “[t]he dollar amount, repayment terms, repayment history, and similar information regarding medical debts to calculate, measure, or verify the repayment ability of the consumer, the use of proceeds, or the terms for granting credit” and “[t]he identity of creditors to whom outstanding medical debts are owed in connection with an application for credit, including but not limited to, a transaction involving the consolidation of medical debts.”
CFPB would apply this requirement to any medical debt owed directly to a health care provider, sold to a debt buyer, assigned to a third-party debt collector who has been assigned the debt by a health care provider, or that is the subject of a civil judgment related to a debt collection action.
Second, the proposed rule would prohibit consumer reporting agencies from including medical debt information in credit reports provided to creditors, when it believes that creditors are prohibited from considering it. CFPB states that it intends for this requirement “to operate alongside Federal and State-level efforts to increase consumer protections around medical debt consumer reporting.” While the proposed rule falls short of a full prohibition, it would significantly limit the appearance of medical debt on credit reports.
Lastly, the proposal would ban repossession of medical devices. For example, CFPB provides that lenders would be prohibited from “taking medical devices as collateral for a loan” and “repossessing medical devices, like wheelchairs or prosthetic limbs, if people are unable to repay the loan.” If finalized, the rule would be effective 60 days after publication in the Federal Register.
While this proposed regulation represents a significant step forward in protecting patients from the negative downstream effects of medical debt, there are some gaps in the proposed rule that are worth noting. First, the proposed rule only prohibits the inclusion of medical debt information in credit reports generated for creditors making lending decisions. It does not prohibit credit reporting agencies from including information about medical debt in credit reports issued to others who use credit report information, such as prospective employers or landlords. Second, the proposed rule’s protections would not extend to patients who pay for their medical bills through either general purpose or medical credit cards.
Recent Litigation Allays Concerns About CFPB’s Constitutionality
CFPB’s ability to issue rules like the proposed rule on medical debt hinges on its authority and funding to do so. In 2020 and again this term, the Supreme Court considered broad constitutional attacks seeking to stop CFPB from conducting its work, ultimately rejecting such claims and permitting the agency to continue to issue regulations and bring enforcement actions.
The first existential lawsuit threatening CFPB was decided in 2020. That case was brought by a law firm in California that was being investigated by CFPB for alleged violations of telemarketing laws. The law firm asserted that CFPB’s demand for certain documents in its investigation process was invalid because CFPB’s leadership structure was unconstitutional under separation of powers principles. In a 5-4 opinion, the Court held that the agency’s single-Director configuration was incompatible with the Constitution, especially because the Director was not removable at will by the President. However, finding that CFPB’s leadership structure provisions were severable from the rest of the statute granting CFPB its authority, the Court found that the agency could continue to exercise its authority under a Director that was removable at the President’s discretion.
Again in its most recent term, the Court considered whether the structure of CFPB was constitutional—this time, evaluating whether the agency’s funding mechanism—separate from the annual appropriations process by Congress, though consistent with the model used for the Federal Reserve and other financial regulators—violated the Appropriations Clause. In May 2024, in a 7-2 decision written by Justice Clarence Thomas, the Court held that CFPB’s funding structure did not violate the Appropriations Clause because a valid appropriation only needed to identify a source of public funds and authorize the expenditure of those funds for designated purposes. In a press release following the decision, Director Rohit Chopra stated that the ruling “makes clear that the CFPB is here to stay,” noting that the agency would resume its enforcement actions and rulemakings that were on pause while the case was heard.
Takeaways
Whether the CFPB issues a final rule on medical debt may depend on the upcoming presidential election and potential shifts in policy that could result from a change in administration. Under the Trump administration, CFPB was less engaged in both rulemaking and enforcement, consistent with the administration’s overall deregulatory efforts. In referring to the CFPB’s strategic plan for 2018 to 2022, the agency’s acting director at the time stated that the administration was “committed to fulfill the Bureau’s statutory responsibilities, but go no further.” Further, even if the rule is finalized, it might have to face and survive legal challenges.
Given the repeated challenges to CFPB’s authority, the uncertainty around the upcoming election, and the high probability of litigation if the rule is finalized, further state action could ensure that at least some patients are protected from the impact of medical debt on their credit reports. Even if the rule is finalized as proposed and survives legal challenges, state action can address some key gaps in the rule. Notably, the rule does not limit the use of medical debt information in employment and tenant screening or protect patients who pay for medical care using general purpose or medical credit cards. State action prohibiting providers from supplying information about medical debt to credit reporting agencies in the first place, or prohibiting credit reporting agencies from including medical debt information on any credit report they generate, could significantly expand protections for patients.
Sheela Ranganathan, Maanasa Kona, “Biden Administration Proposes Rule to Ban Medical Debt from Credit Reporting,” Health Affairs Forefront, August 9th, 2024, https://www.healthaffairs.org/content/forefront/biden-administration-proposes-rule-ban-medical-debt-credit-reporting. Copyright © 2024 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.