Two trade associations have filed a lawsuit against the Consumer Financial Protection Bureau (CFPB) over a recent rule that prohibits medical debt reporting in credit reports.
On Jan. 7, the federal agency finalized a rule seeking to “ban the inclusion of medical bills on credit reports used by lenders and prohibit lenders from using medical information in their lending decisions.” Agency Director Rohit Chopra said, “people who get sick shouldn’t have their financial future upended.”
The same day, trade groups Consumer Data Industry Association and Cornerstone Credit Union League filed a lawsuit in the U.S. District Court, Eastern District of Texas, to prevent the rule from coming into effect.
“If not overturned, the Final Rule’s impact will be significant and immediate,” the lawsuit said, arguing that having information about consumer debts is critical for lenders. Eliminating medical debts from credit reports “erodes the predictive nature and therefore the value” of these reports.
“This leads to worse credit decisions, which in turn will harm consumers in the form of higher delinquency and default rates and increased costs of credit,” the complaint said.
On the other hand, the CFBB said that medical debts provide “limited predictive value” to lenders about the ability of borrowers to repay their loans. Putting medical bills on credit reports contributes to thousands of mortgage applications being denied for consumers who “would be able to repay” the loans, the agency said.
Once the final rule comes into effect, Americans with medical debts on their credit reports “could see their credit scores rise by an average of 20 points.” In addition, around 22,000 additional mortgages are expected to be approved annually.
On the contrary, the lawsuit says, in 2003, Congress amended the Fair Credit Reporting Act by passing the Fair and Accurate Credit Transactions Act. The amendment allowed consumer reporting agencies to include “coded” medical debt in credit reports and allowed lenders to use this information to make credit decisions.
Coded medical debt refers to credit that has been “coded” to protect consumers’ privacy by concealing providers’ names and the nature of medical services provided.
However, in 2005, financial regulatory agencies and the National Credit Union Administration made a regulatory exception, allowing non-coded medical information to be used by creditors in their decision-making, if certain conditions were met.
The CFPB’s final rule “plainly exceeds its statutory authority,” said the complaint. The agency only has authority to block the use of non-coded medical debt and “has no authority” to prevent coded medical debt from being used by creditors which has been approved by Congress, it argued.
The CFPB said the final rule is estimated to remove roughly $49 billion worth of medical bills from the credit reports of around 15 million Americans.
The Epoch Times reached out to the CFPB for comment.
