(Source – Tampa Bay Times)
In a significant move aimed at alleviating financial burdens on Americans, the Biden administration announced on Tuesday a proposed rule to prevent medical debt from affecting people’s credit scores. This initiative, spearheaded by the Consumer Financial Protection Bureau (CFPB), could potentially lead to the removal of $49 billion in liabilities from the credit reports of 15 million Americans.
Addressing Economic Concerns and Home Ownership
The proposed rule is a response to broader economic concerns, particularly related to home ownership, and seeks to ensure that lending decisions are not unfairly influenced by individuals’ medical circumstances. Under the new rule, reporting companies would be prohibited from considering medical debts when determining creditworthiness and sharing information about such debts with lenders.
According to officials, banning medical debt from credit reports could significantly boost credit scores by an average of 20 points, resulting in approximately 22,000 more mortgages being approved annually. The proposed rule is open for public comments over the next few months, with plans to issue a final rule early next year.
CFPB Director Rohit Chopra emphasized the inadequacy of medical bills on credit reports, citing their inaccuracy and limited predictive value in assessing loan repayment behavior.
Impact on Borrowing and Racial Disparities
The announcement comes in the context of a significant prevalence of unpaid medical bills among Americans, with about 1 in 12 U.S. adults having medical debts of at least $250. Racial and ethnic disparities are also evident, with Black middle-class individuals experiencing a higher proportion of unpaid medical debt compared to the overall middle-class population.
The aggressive collection practices of hospitals have drawn criticism, and the financial burden of injuries and illnesses can be substantial, even for individuals with private insurance who face high out-of-pocket costs.
This latest move builds upon previous efforts by major credit bureaus to delay the reporting of debt until it is at least a year old. Additionally, credit-scoring companies have reduced the impact of medical debts on consumers’ credit scores.
Overall, the proposed rule represents a significant step towards addressing financial inequities and promoting access to credit for millions of Americans burdened by medical debt.
On Tuesday, the Biden administration unveiled regulations aimed at preventing medical debt from influencing assessments of borrowers’ eligibility for mortgages and various loan types. Proposed by the Consumer Financial Protection Bureau, these rules come just under five months before Election Day and are expected to feature prominently in President Biden’s campaign messaging, highlighting his efforts to address economic concerns. The White House has consistently emphasized the impact of medical debt, emphasizing its disproportionate effects on low-income individuals and communities of color.
