Biden Proposes Banning Medical Debt from Credit Reports, Loan Decisions

The Biden administration Tuesday will announce rules to block medical debt from being used to evaluate borrowers’ fitness for mortgages and other types of loans, people familiar with the matter told The Washington Post.

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.

“This is going to be an enormous relief for so many people battling bills when it comes to medical visits,” CPFB director Rohit Chopra said Tuesday on ABC’s “Good Morning America,” teasing the forthcoming rules.

The rules set to be announced Tuesday would ban credit reporting agencies from incorporating medical debt when calculating credit scores, said the people with knowledge of the matter, who spoke on the condition of anonymity to describe private discussions. The rules would also bar lenders from using medical debt to determine loan eligibility, they said.

The proposal will undergo weeks of public comment – meaning this November’s election will probably determine whether the measures are finalized. GOP presidential candidate Donald Trump did not seek to remove medical debt from consumers’ credit reports during his four years in the White House.

Roughly 15 million Americans have medical bills on their credit reports, according to a study released in April by the Consumer Financial Protection Bureau. 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. 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, especially at a time when they may be sick and less able to work.”

In a September briefing about the administration’s intent to focus on the issue, Vice President Harris and 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.

A bad credit score can weigh on the ability to afford a home, car and other essentials, Harris said.

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 they must pay monthly to service the loan.

The proposed rules “can have a meaningful effect,” said Neale Mahoney, a Stanford University economist who has studied medical debt and served on the White House National Economic Council before leaving a year ago. He pointed to recent findings by the Urban Institute that medical debt affects the credit scores of at least 5 percent of Americans.

But Mahoney, citing his own research, noted that many people who carry medical debt also “have other flags on their credit report” that can make it hard for them to get loans even when medical debt is addressed.

“Once you already have a bunch of derogatories – a technical term – on your credit report, having one removed, or even a handful removed, is not going to make a big difference in your credit score,” Mahoney said.

Harris has spoken about the need for the new rules in recent speeches focused on the administration’s economic policies.

“Medical debt cannot be the reason someone is denied a car loan, a home loan or a small-business loan,” Harris said in remarks in Detroit in May.

“It’s just what’s morally right,” she told a crowd in Milwaukee days later.

Other Democrats are pursuing efforts to address medical debt. Sen. Bernie Sanders (I-Vt.) and lawmakers in May proposed legislation that would eliminate all existing medical debt and impose restrictions to limit future medical debt.

Democratic mayors in 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 it.

(c) Washington Post