Something is ailing Americans, and it just may be an emerging issue in the 2024 election.
According to a study by the Kaiser Family Foundation, 15 percent of Americans hold medical debt, including about 20 percent of Americans who say they have debt despite the fact that their health is in pretty good shape. In all, these individuals owe about $220 billion. Fourteen million people across the country owe more than $1,000 to hospitals or some other medical provider. Three million owe more than $10,000.
President Joe Biden highlighted this growing burden at the National Institutes of Health in December, noting, “If I added up the costs of when I was in the hospital, it’s literally several hundred thousand dollars. Imagine … I didn’t have insurance and I ended up in debt because of that.”
Six months later, on June 11, the Consumer Financial Protection Bureau (CFPB) proposed a draft rule that, if implemented, would ban credit reporting agencies (CRAs) from including medical debt on credit reports. What is the scope of this proposal, what could be the long-term effects, and why is it sparking political outrage? Let’s take a look.
The CFPB On Medical Debt
This spring, in a precursor to the draft regulation issued last week, the CFPB released a report that found 15 million Americans collectively carry about $88 billion in medical bills on their credit reports. The CFPB also determined these Americans:
- Disproportionately live in the South and in low-income communities;
- Have more than $49 billion in outstanding medical bills in collections; and
- Have an average medical debt balance of $3,100.
Consumer advocates have argued this debt has kept people from being eligible for mortgages or other affordable loans, and, since debt is often accrued because of one-time or unanticipated event, is not an accurate indicator of whether someone is likely to repay a loan or not.
“The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe,” said CFPB Director Rohit Chopra. “Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans.”
The CFPB’s draft rule would erase most of medical debt information from credit reports, and more. Specifically, as the CFPB itself explained, if finalized, the proposed rule would:
- Remove the exception that broadly permits lenders to obtain and use information about medical debt to make credit eligibility determinations. Lenders could still consider medical information related to disability income and similar benefits, as well as medical information relevant to the purpose of the loan, however.
- Ban credit reporting companies from including medical debt on credit reports sent to creditors when creditors are prohibited from considering it.
- Prohibit lenders from taking medical devices as collateral for a loan, and ban lenders from repossessing medical devices, like wheelchairs, if people cannot repay a loan.
As the law firm Brownstein has explained, the proposed rule does offer scenarios where creditors can obtain information about medical debt and use it, but the rule “generally discourages seeking this information other than for the exceptions outlined.”
Opponents were quick to criticize the proposed regulation, and the manner in which the CFPB introduced it.
Medical Debt Rule May Have Unintended Consequences
Financial institutions and other entities use credit reports to determine whether an applicant can afford a product — a car, a home, a lease for an apartment, or the limit for a shiny new credit card — given all of the other debt burdens that person or family has to shoulder.
According to NBC News, the Biden administration calculates that, if implemented, the CFPB’s proposed rule would raise affected Americans’ credit scores by an average of 20 points and could lead to the approval of about 22,000 additional mortgages each year.
But opponents of the proposal point out those statistics beg a question: since medical debt itself is not being forgiven (even state-based policy efforts to forgive medical debt only erase hospital debt and do not erase debt that consumers finance through credit cards or other means), is the CFPB sure these individuals can afford mortgages or other loans? CRAs already have removed medical debt totaling less than $500 from credit reports. Couldn’t adding a mortgage on a larger sum of medical debt force consumers further underwater?
While medical debt does not indicate to lenders a person’s general spending habits, it does tell lenders something about a family’s monthly budget and how much of their income already is obligated. Without this insight, it’s possible a lender could unwittingly be helping a person take on more debt than is actually wise. (If this scenario sounds familiar, it should. It’s basically what happened during the housing crisis of 2007 to 2009 with subprime loans.)
It is perhaps for this very reason that House Financial Service Committee Chairman Patrick McHenry (R-N.C.) argued the rule “will harm the very consumers the agency was created to protect.” “
Financial services firms are not the only ones worried about unintended consequences. The healthcare industry is as well. As NPR reported, hospital leaders have said the proposed rule may require them to ask for upfront payment before providing care since there would be little incentive for medical debt holders to pay their bills — a scenario that could leave consumers turning to high-interest credit cards. The law firm Cooley said the rule also could lead to more people leaving healthcare bills unpaid, an outcome that could “result in increased costs across the healthcare system.”
The CFPB is receiving public comment on the rule until August 12. It is very likely the Bureau will hear more about these concerns during that process. In the meantime, we are also likely to hear more concerns about the manner through which the CFPB announced the proposed rule.
CFPB And White House Jointly Announced Medical Debt Rule
While the White House often coordinates major regulatory announcements with executive branch agencies like the Departments of Energy, Transportation, or Treasury, the CFPB is an independent agency. The Bureau is part of the executive branch, but is not subject to presidential control like those other agencies. Just like with the Federal Reserve — no one would condone the president whispering into the Fed chair’s ear about interest rate policy, for example — politics is not supposed to come into play.
That’s why CFPB opponents erupted when Director Chopra announced the medical debt rule alongside Vice President Kamala Harris during a White House press event. “No one should be denied access to economic opportunity simply because they experienced a medical emergency,” Harris said. “I am proud to announce we … are making it so that medical debt cannot be used against you when you apply for a car loan, a home loan, or a small-business loan or something of that nature.”
That’s not all: the same day the proposed rule was announced, the Democratic National Committee, the Democrats’ primary election committee, which is under President Biden’s direct control, issued a statement supporting the proposed regulation. That statement also noted, “President Biden is fighting for the American people by cracking down on junk fees and taking on the big banks.”
Republicans certainly took notice. “Director Chopra is once again acting as a political arm of the White House, rather than as an independent regulator,” said HFSC Chairman McHenry.
GOP lawmakers will do everything they can to fight the rule, including trying to win the White House, an outcome that, of course, would change what policies the CFPB would issue.
What Are The Next Steps For The Medical Debt Rule?
As noted above, the CFPB is taking public comments on the rule until August 12. Given that timeline, there is no way the Bureau will have enough time to issue a final regulation on this matter before inauguration day 2025, much less Election Day 2024. Additionally, as Roll Call noted yesterday, even rules finalized this summer will likely be subject to a Congressional Review Act challenge, which would allow “Donald Trump to quickly overturn [regulations] if he’s elected president again, as his administration did numerous times in 2017.”
Make no mistake: if President Biden and Vice President Harris lose their bid for a second term, the Trump administration will halt the progress of the proposed medical debt rule. And the CFPB medical debt rule would not be the only one in trouble. The CFPB is considering a handful of rulemakings under the Fair Credit Reporting Act (FCRA) that are unlikely to be finalized before the end of President Biden’s first term. (FCRA is a federal law that promotes accuracy, fairness, and the privacy of personal information collected and held by consumer reporting agencies. The medical debt rule falls under FCRA.) Under Director Chopra, the Bureau also has issued several advisory opinions as “part of the CFPB’s ongoing efforts to clean up what the CFPB describes … as allegedly ‘sloppy’ credit reporting practices and ensure credit report accuracy and transparency to consumers.”
A second Trump administration will have a very different take on these actions, and with the veneer of independence all but eliminated by last week’s announcement, it will be easier for a Republican administration to impose its will on the Bureau.