Writer: Eric Bank
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
- A federal court overturned the CFPB rule that removed medical debt from credit reports, and lenders can again use such information when assessing creditworthiness.
- The decision could hurt millions of borrowers with unpaid medical bills, lowering their credit scores and making loans harder to access.
- Subprime lenders would be aided by increased risk transparency but are subject to reputational harm for penalizing people for insurable healthcare costs.
The Consumer Financial Protection Bureau (CFPB) rule that medical debt not be included in consumer credit reports was struck down by a federal court in Texas. The ruling is a quick reversal for the Biden administration’s largest credit reform effort to date and can be far-reaching in its effects on both lenders and consumers.
U.S. District Court Judge Sean Jordan ruled that the policy exceeded the CFPB’s authority under the Fair Credit Reporting Act (FCRA) when it made the rule in January 2025.
The judge’s decision was in response to court challenges initiated by business groups and Republican state attorneys general, and it restores the ability for credit bureaus to include unpaid medical debts in consumer credit reports.
That move could have lasting impacts. The CFPB estimated previously that the rule would wipe out $49 billion worth of medical debt for an estimated 15 million Americans.
With that protection gone, millions of consumers could once again see their credit scores drop as a result of unpaid hospital bills and other medical charges. Lenders may respond by tightening access to credit, particularly for less wealthy consumers.
What the Ruling Means for Subprime Lenders
The about-face becomes effective immediately for the subprime lending market. With the rule eliminated, a data source lenders consider critical for assessing repayment risk is once again available to lenders.
While critics say medical debt reporting is unfair due to its unpredictable and involuntary nature, some lenders argue that removing it forces them to rely on less predictive factors when underwriting.
“Information about unpaid medical debts is an important element in assessing a consumer’s ability to pay,” said Dan Smith, president and CEO of the Consumer Data Industry Association.
Risk and Reputation Concerns
That said, using medical debt in credit decisions isn’t without drawbacks. Consumers may not be completely aware of their credit standing, especially in instances when medical debt is accrued because of insurance benefits or unforeseen medical care.
Lenders using that information may face public criticism for penalizing people over circumstances beyond their control.
Consumer organizations indicate that such underwriting could attract regulatory scrutiny and damage their brand name.
“Everyone deserves to live without the fear of medical debt ruining their financial future,” said Arika Sanchez, Healthcare Director of the New Mexico Center on Law and Poverty.
“People don’t plan to get sick and end up with unmanageable medical bills that damage their credit scores, making it harder to access credit, safe housing, or even jobs,” she said
Part of a Broader Regulatory Rollback
It is the latest in a string of reversals of Biden administration CFPB regulations. The last few months have seen federal courts or the new leadership at the bureau suspend or terminate various signature initiatives, including enforcement against overdraft fees and limits on credit card late fees.
The medical debt rule reversal is just the latest in a broader regulatory rollback of the Biden administration’s agenda.
Critics in both cases have complained that the CFPB is practicing regulatory overreach, while supporters argue the reversals leave consumers less protected.
Subprime lenders will have to decide how to adjust. Some may already have credit models on their books that factor in medical debt, but others will be forced to shift pricing strategies and risk scoring.
Companies that operate in several states will also need to pay attention to new local legislation — such as California’s new prohibition on reporting certain kinds of medical debt in credit reports, or Colorado’s reporting thresholds for lower-value debts.
Such laws could narrow the impact of the federal ruling depending on where a borrower resides.
What Comes Next
Consumer groups will likely appeal the ruling, and members of Congress indicated they may pass legislation that would directly prohibit the use of medical debt in credit reports. The CFPB, meanwhile, hasn’t publicly indicated whether it will appeal the ruling.
For now, the bureau appears to be weighing its legal options during a leadership transition. Lenders, in the meantime, are walking a fine line in deciding how far to go using the newly reclaimed data.
The war on medical debt spotlights an old dilemma in subprime finance: weighing access against risk. The lenders are less bound by regulatory constraints but are under more scrutiny than ever regarding how they use that freedom.
