CFPB Seeks to Erase Medical Debt Rule, Sparks Controversy

The Consumer Financial Protection Bureau (CFPB) is facing scrutiny after seeking to eliminate a Biden-era rule that would have prohibited the inclusion of medical debt on consumer credit reports. This decision has ignited a debate over consumer protection, data accuracy, and the future of financial regulations.

The CFPB, in a surprising move, sided with two trade groups – the Consumer Data Industry Association (CDIA) and the Cornerstone Credit Union League – in an April 30 motion filed with a federal judge in Texas. The motion requests the court to vacate the medical debt rule, a decision that has sparked outrage from consumer advocacy groups who view it as a betrayal of the agency’s mission.

The now-contested medical debt rule, finalized in the last days of the Biden administration, aimed to prevent medical debt from appearing on credit reports. This rule would have further restricted lenders from considering an individual’s medical debt history when making lending decisions. The intention was to alleviate the burden on individuals struggling with medical expenses and prevent them from being penalized with lower credit scores and limited access to financial products.

The rule was initially scheduled to take effect in March. However, the CDIA and the Cornerstone Credit Union League filed a lawsuit challenging the CFPB’s authority and seeking to halt the rule’s implementation. A U.S. District Court judge in the Eastern District of Texas granted a 90-day stay, pushing the effective date to June 15.

Instead of defending its own rule, the CFPB joined the trade groups in a joint motion asking U.S. District Court Judge Sean Jordan to vacate the medical debt rule. The CFPB argues that the rule exceeds the bureau’s statutory authority. This rationale has drawn criticism from those who believe the agency is abandoning its responsibility to protect consumers from unfair and predatory practices.

Consumer groups, recognizing the potential harm to individuals with medical debt, have sought to intervene in the case to defend the rule. They argue that the medical debt rule is a crucial measure to safeguard consumers from the adverse consequences of medical debt on their credit scores and financial well-being.

Judge Jordan, in an order issued on April 30, has given consumer groups, the trade groups, and the CFPB an additional week to file legal paperwork before making a decision on the next steps. The court’s decision will have significant implications for the future of medical debt reporting and the CFPB’s role in consumer protection.

Adding to the complexity, the CFPB is also embroiled in another court challenge initiated by its own employees. The employees are fighting efforts that stem from the Trump administration that aim to effectively close the consumer protection agency. This legal battle over the CFPB’s very existence casts doubt on its ability to effectively rein in bank overdraft fees and oversee digital payments apps, both of which are critical areas of consumer finance.

Consumer advocates express deep concern that the CFPB’s decision to abandon the medical debt rule could strip away a vital layer of protection for consumers. Patricia Kelmar, senior director of health care campaigns at the U.S. PIRG Education Fund, expressed her disappointment, emphasizing the detrimental impact on the millions of Americans who have medical bills on their credit reports and suffer the consequences of poor credit scores as a result.

Conversely, the Consumer Data Industry Association (CDIA), which represents credit bureaus, has applauded the CFPB’s decision not to defend the medical debt rule. Dan Smith, president and CEO of the association, argued that the rule would have prohibited lenders from considering complete and accurate information when making lending decisions. Smith asserted that CDIA member companies remain committed to providing complete and accurate information to support lenders and help consumers access financial products.

The debate highlights the fundamental differences in perspectives on the role of credit reporting and the impact of medical debt on creditworthiness. Consumer advocates argue that medical debt is often involuntary and unpredictable, making it an unreliable indicator of credit risk. The CDIA, on the other hand, maintains that all relevant financial information, including medical debt, should be considered to provide a comprehensive assessment of a borrower’s creditworthiness.

Data from the CFPB reveals that medical bills accounted for more than half of debt collection entries on consumers’ credit records in 2022. This statistic underscores the widespread impact of medical debt on consumers’ financial lives and the potential benefits of the medical debt rule.

It is worth noting that the three largest credit reporting companies have already taken steps to remove certain types of medical debt from credit reports, including paid medical debts, unpaid medical debts less than a year old, and medical debt less than $500. While these measures are a step in the right direction, consumer advocates argue that they do not go far enough to protect consumers from the harmful effects of medical debt.

Despite the current legal challenge and the CFPB’s decision not to defend the rule, Kelmar believes that there is bipartisan support for the concept of sparing consumers from credit demerits due to old medical bills. She emphasizes that medical debt is a nonpartisan issue that disproportionately affects middle-income Americans who face higher out-of-pocket healthcare costs. This bipartisan support suggests that there may be future opportunities to address the issue of medical debt reporting through legislation or other regulatory means.

The CFPB’s decision to abandon the medical debt rule marks a significant shift in the agency’s approach to consumer protection and raises questions about its future direction. The outcome of the legal challenge and the ongoing battle over the CFPB’s future will have profound consequences for consumers, lenders, and the overall financial system. The debate surrounding medical debt reporting highlights the need for a balanced approach that protects consumers from unfair practices while ensuring that lenders have access to accurate and reliable information for making informed lending decisions. The coming weeks will be critical in determining the fate of the medical debt rule and the future of consumer financial protection.