CFPB Medical Debt Rule Draws Legal Scrutiny as States Take Action

A federal court in Texas will issue a decision that may alter the visibility or absence of medical debt on consumer credit reports. The court’s final decision about medical debt reporting will determine how credit information is collected and used by lenders and credit bureaus, and how it affects the consumers who hold medical debt.

A proposed rule from the Consumer Financial Protection Bureau (CFPB) seeks to stop credit reporting agencies from including medical debt in credit reports.

The rule would eliminate $49 billion worth of unpaid medical debt from credit reports, according to the proposal, which creditors argue may reduce their ability to assess default risks.

The CFPB first came out with its proposal in September 2023, and it was to have become effective in mid-2024 before it was placed on hold following a court challenge.

U.S. District Judge Sean Jordan is expected to issue a ruling in August. If the case is overturned, the CFPB has given no indication whether it will release an alternative version or be finished with it.

The litigation involves broader credit reporting practice and enforcement regulation effects. Management issues await financial institutions amid uncertainty as the CFPB attempts to derail its rule while states continue to pass their own medical debt reporting prohibitions.

The CFPB surprised observers by asking the court to strike down its own regulation. But the bureau also asked to have its authority kept by the court such that it would be capable of issuing new rules at a later time.

The CFPB also declined to defend the rule, and its intervention was overruled when Jordan permitted the National Consumer Law Center to enter and defend it. The bizarre move created an odd courtroom split, where a consumer group defended a rule its issuing agency no longer defended.

The ramifications are broader than healthcare debt. It would be unusual for such an appeal not to have ramifications for how much power can be exercised by federal agencies to change rules over information under the Administrative Procedure Act.

Other regulations, like on open banking and buy now, pay later, will also be put to tough tests at law.

Industry giants have yet to comment, creating doubt about how they will respond. Many face conflicting state rules.

Since 2022, the CFPB has argued that medical debt records are frequently incorrect, hard to verify and do not effectively predict consumer debt repayment performance.

Several states, including Oregon, Maine, Colorado and California, have enacted laws that limit medical debt reporting and create different reporting requirements.

The U.S. Chamber of Commerce together with its trade associations filed the lawsuit to challenge the CFPB’s proposed rule. The agency supposedly exceeded its authority by redefining credit reporting standards that did not have sufficient backing from Congress, according to their argument.

In an unusual move, the CFPB requested the court to invalidate the rule even though the agency would continue defending its authority to make future regulations.

It may seem like a tactical retreat at the CFPB — the agency wants to leave itself open to taking action down the line while delaying some potentially adverse effects for its authority.

Consumer organizations are pushing to have medical debt removed from credit reports because they believe it is a sign of problems with the medical system and not payment history. They refer to data which shows medical debts are frequently caused by delays or bills being sent to collections erroneously, not payment lapses.

While many support the cause to clean up credit reports, others believe medical debt, with all of its flaws, still provides a glimpse of financial strain that would otherwise go unseen.

The biggest danger here is to low-income community lenders, and removing medical bills from credit reports may decrease model accuracy. It will diminish lenders’ access to relevant data necessary for assessing risks leading to undesirable underwriting results.

Removing medical debt from credit reports could eliminate relevant data lenders need to assess risk.

According to CFPB data, an estimated 15 million consumers have medical debt, which works out to billions of dollars of potential blind spots for credit determination. Some studies show medical debt removal raised scores by about 20 points, but approval rates barely changed.

States have proceeded to adopt their own remedies because the national implementation did not take place. Several states have adopted statutes that limit or outright bar medical debt from appearing on credit reports.

National creditors as well as reporting agencies are confronted with issues of compliance as a result of this initiative on the part of states.

Equifax, Experian, and TransUnion have started to voluntarily reduce medical debt reporting by removing all paid medical debts and debts under $500 from consumer credit reports.

A government-mandated rule would demand drastic shifts within the entire credit reporting industry that would cause universal pressure.

Fintech lenders are paying attention. Some companies are already refining their models to account for the possible loss of medical debt data.

The court decision will not affect the willingness of some lenders to update their models, but other lenders have started testing new data to replace medical debt in their risk assessment.

The ruling will set a precedent for future litigation involving the treatment of other alternative data types like rents, utilities and buy now pay later accounts. The outcome may spark new legal challenges to the CFPB’s authority over credit reporting rules.

Credit bureaus and fintechs as well as lenders will have to modify their practices due to the continued evolution of the regulations.