The Club PUBlication 06/24/2024

Debt plan could help credit fitness
By DAN DIAMOND and AARON GREGG
​Washington Post

The Biden administration Tuesday announced rules to block medical debt from being used to evaluate borrowers' fitness for mortgages and other types of loans.

The proposed rules from the Consumer Financial Protection Bureau arrive less than five months before Election Day and are poised to be part of President Biden's closing argument that he is addressing pocketbook issues as voters rank the economy as their top concern. The White House has repeatedly focused on the issue of medical debt, saying it disproportionately harms low-income Americans and communities of color.

"Medical debt makes it more difficult for millions of Americans to apply for a car loan, a home loan or a smallbusiness loan, all of which makes it more difficult to just get by, much less get ahead," Vice President Kamala Harris said . "No one should be denied access to opportunity simply because they have experienced a medical emergency."

The rules would ban credit reporting agencies from incorporating medical debt when calculating credit scores. They would also bar lenders from using medical debt to determine loan eligibility.

The proposal will undergo public comment until Aug. 12 before officials begin drawing up a final version, meaning November's election will probably determine the rules' fate. Administration officials have said the rules would probably be finalized next year. Republican presidential candidate Donald Trump did not seek to remove medical debt from consumers' credit reports during his four years in the White House.

Adam Rust, an expert with the Consumer Federation of America, said the new rules would have significant impact because they would directly affect millions of people, many of whom took on involuntary or errant debts.

"When medical debt can affect credit scores, it leads to downstream harms in very important parts of our lives, like the ability to get housing or find a job," Rust said.

About 15 million Americans have medical bills on their credit reports, according to a study released in April by the CFPB. The figure used to be significantly higher — the agency in March 2022 found that medical bills appeared on about 43 million credit reports — but major credit bureaus voluntarily adopted limits on which medical bills were included in reports.

Those limitations removed medical collections under $500 and those that were less than a year past due; the proposed rules from the CFPB would cover all medical debts.

People affected by medical debt disproportionately live in the South or in low-income communities, according to the CFPB.

Experts have warned that medical debt is linked to numerous health and financial harms, such as worse mental health or delays in obtaining additional medical care.

Medical debt "can lead to other kinds of financial vulnerability," Cynthia Cox, vice president at KFF, a nonpartisan health care research organization that has analyzed medical debt, wrote in a text message. "It's a difficult cycle for people to pull themselves out of ."

In a September briefing about the administration's intent to focus on the issue, Harris and CFPB Director Rohit Chopra argued that unpaid medical bills and the related debts have little predictive power in determining whether a consumer will pay down an unrelated loan.

Harris and Chopra have chastised debt collectors, who they say are known to use credit reports as a cudgel to manipulate debtors into paying bills they know are incorrect.

The amount of debt consumers have, and their history of making timely payments, can significantly affect the interest rate offered by lenders, which in turn influences how much consumers must pay monthly to service the loan.

Democratic mayors in Washington, D.C., New York and other major cities in recent years have worked to relieve residents' medical debt by purchasing existing balances for pennies on the dollar and immediately canceling them.