Biden's Proposal: Ban Medical Debt on Credit Reports, Boosting Homeownership & Car Loans

Photo courtesy of AARP/Medical DebtPhoto byAARP

There is a change that could improve millions of Americans' ability to own a home or buy a car, the Biden administration last Tuesday proposed a rule to ban medical debt from credit reports.

It was announced by Vice President Kamala Harris and Consumer Financial Protection Bureau Director Rohit Chopra and comes as President Joe Biden increases his efforts to show Americans his administration is lowering costs. This is going to be a huge relief to so many people unable to their medical bills when it comes to hospital visits.

The rule, which has been in the works since September, could go into effect early next year. According to Rohit Chopra Financial Protection Bureau Director said, “Our research shows that medical bills on your credit report aren't even predictive of whether you'll repay another type of loan. That means people's credit scores are being unjustly and inappropriately harmed by this practice.”

CFPB estimates that the new rule would allow 22,000 more people to get approved for safe mortgages each year. This means lenders could also benefit from the positive impact on people's credit scores, by being able to approve more borrowers. The major credit report companies have already taken steps to stop using certain medical debt to calculate peoples' creditworthiness, including Equifax, TransUnion and Experian. Have you noticed the infamous FICO Score started factoring medical debt less heavily into its scores, and VantageScore doesn't use it in its newer models?

There are 15 million Americans who still have $49 billion of medical debt that is hampering their scores, the CFPB found. This rule would extend the practice to all credit reporting in the U.S. This raises the question of why medical debt is reported to credit reporting companies in the first place. This type of debt no one intentionally went out to get and signed an agreement.

Medical debt is a major issue in the U.S. It affects two in every five Americans, according to the health policy research organization KFF, and a vast majority have debt in the thousands. Once those debts go to collections, credit scores take a big hit. This means car and home loans are harder to obtain or are only offered with high interest rates.

Vice President Harris told reporters. “Medical debt has made it more difficult for millions of Americans to get approved for a car loan, a home loan or small business loan, all of which in turn makes it more difficult to just get by, much less get ahead.“

Vice President Harris used Lexi Coburn, 33 years as an example. Lexi first ran into that issue nearly a decade ago. She took on medical debt in 2013 when she was 23 years old and uninsured. Her feet were too swollen to walk, so she went to the emergency room for medical treatment. At the time Lexi did not have any medical Insurance. She was told she had early-onset arthritis. The $425 bill from that visit was not in Coburn's budget, so she left it unpaid. Even though she was able to enroll in health insurance through the Affordable Care Act, Coburn's medical debt still grew to over $2,300. Including another $1,532 from dental work and a separate ER visit, both in 2019. She started to realize she was going to have difficulty trying to obtain a car loan. Lexi Coburn said, “Immediately my medical debt was in the way of qualifying for a good loan that didn't have an outrageous payment per month.”

The new CFPB rule also seeks to address the issue of incorrect, confusing, and complicated medical bills, which often lead to long, drawn-out disputes between patients and billing departments. A complaint that the CFPB, as the agency tasked with consumer empowerment.

Share your thoughts:

Do you think eliminating Medical debt from all credit reports will help more Americans obtain home and car loans?