Anthony Jost and Lindsay Llewellyn: New rule would remove medical debt from credit reports

Under a new rule finalized by the Consumer Financial Protection Bureau on Jan.7, the consideration and reporting of medical information and debt will no longer be included in credit reports governed by the Fair Credit Reporting Act.

As the CFPB notes, financial regulators initially sought an exception to Congress’s decision to restrict lenders from obtaining or using medical information, which includes medical debts. The CFPB’s final rule — which goes into effect March 17, 2025 — ends this exception.

Of particular importance to legal practitioners, the final rule effectively does three noteworthy things: it 1) bans the inclusion of medical bills on credit reports used by lenders; 2) prohibits lenders from using medical information in their lending decisions; and 3) prohibits lenders from taking medical devices as collateral for a loan and from repossessing medical devices if people are unable to repay the loan.

This final rule has been in the making at least since 2023. A study completed by the CFPB in 2022 perhaps sheds some insight into the CFPB’s motivation for promulgating this final rule.

For example, the CFPB found roughly 43 million Americans had medical bills on their credit reports, totaling nearly $88 billion dollars. That same study showed medical bills comprised 58 percent of the bills in collections on people’s credit reports.

The CFPB’s research also revealed people of color may have a disproportionate amount of medical debt: 28 percent of Black and 22 percent of Hispanic people carry past-due medical debt, compared with 17 percent of white and 10 percent of Asian people.

The CFPB also found medical billing data on a credit report is less predictive of future repayment than reporting on traditional credit obligations (such as length of credit history and debt to income ratio), largely because mistakes and inaccuracies frequently occur and can be compounded by commonly experienced problems such as disputes over insurance payments or complex billing practices.

This may be why, according to a 2024 survey from the Pew Research Center, 57 percent of Americans said the affordability of health care was a “very big problem.”

After the CFPB released its research findings, the three largest credit reporting agencies — Equifax, Experian, and TransUnion — announced they would remove certain types of medical debt, such as collections less than $500, from U.S. consumer credit reports. That action reduced the outstanding reported medical debt from 43 million people with a total of $88 billion dollars to 15 million people with a total of $49 billion dollars.

A little more than a year later, however, the CFPB proposed this rule, in part, to combat the effects of a worldwide pandemic, inflation, and rising interest rates. The CFPB expects the final rule will lead to the approval of approximately 22,000 additional, affordable mortgages every year and that those Americans with reported medical debt could see their credit scores rise by an average of 20 points.

If the final rule produces the effects the CFPB anticipates, this could have a significant impact on the economy and Americans’ ability to purchase a home in a time when the number of first-time home buyers has been declining; the percentage of first-time home buyers dropped to 24 percent last year compared to the historical average of approximately 40 percent.

However, the final rule has already been subject to legal challenge. On the same day the CFPB issued its final rule, industry trade groups Consumer Data Industry Association and Cornerstone Credit Union League filed a lawsuit in the U.S. District Court for the Eastern District of Texas on behalf of credit reporting and credit union industries, asserting the CFPB exceeded its authority.

The lawsuits claim that only Congress has the power to determine whether information can or cannot be included on credit reports. Although the final rule is not effective until March 17, its application could be revised further or reversed prior to its effective date.•

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Anthony R. Jost is a partner, and Lindsay A. Llewellyn is an associate attorney with Riley Bennett Egloff LLP in Indianapolis. Opinions expressed are those of the authors.