On January 7, 2025, the Consumer Financial Protection Bureau (CFPB) finalized a groundbreaking rule prohibiting lenders from using medical information in their lending decisions.
The rule does not get rid of the debt itself, but stops it from having an impact on a consumer’s credit worthiness and aims to protect consumers from unfair practices. The move reflects a broader commitment to eliminating discriminatory practices and mitigating the impact of medical debt on financial opportunities.
What Prompted the New CFPB Rule?
Medical bills on credit reports have long been a contentious issue. Unlike car loans or mortgages, medical debt is often incurred suddenly and without prior planning. Medical debt often penalized consumers for situations beyond their control. such as unexpected illnesses or emergencies. Penalties in the form of lower credit scores, and difficulty securing loans or favorable interest rates.
“People who get sick shouldn’t have their financial future upended,” said CFPB Director Rohit Chopra. “The CFPB’s final rule will close a special carveout that has allowed debt collectors to abuse the credit reporting system to coerce people into paying medical bills they may not even owe.”
A significant factor prompting the new rule was the growing recognition that medical debt is not a reliable indicator of creditworthiness. Advocacy groups and policymakers highlighted how medical debt disproportionately affects vulnerable populations, such as those with low income or without health insurance, leading to calls for regulatory reform.
CFPB Research Reinforced the Need for Change
The Consumer Financial Protection Bureau found that medical debt is a leading cause of credit report inaccuracies and disputes. Their studies showed that medical collections often stemmed from billing errors or insurance disputes, rather than a consumer’s unwillingness to pay. Additionally, they identified how medical debt disproportionately impacts communities of color and older Americans, exacerbating existing inequities in the financial system.
In response to growing concerns, credit reporting agencies Equifax, Experian, and TransUnion had already taken steps to address medical debt issues. They removed certain types of medical debt from credit reports, such as debts under $500 and those fully paid or settled. These changes, implemented in 2022 and 2023, marked significant progress in reducing the negative impact of medical debt on consumers. The CFPB’s new rule builds on these changes, offering a more comprehensive solution to the problem.
The CFPB’s rule amends Regulation V, which implements the Fair Credit Reporting Act (FCRA). This amendment explicitly prohibits the use of medical information for credit decisions, ensuring lenders cannot discriminate against individuals based on their medical history. By strengthening consumer protections, the rule aligns with the broader goals of the FCRA to promote accuracy, fairness, and privacy in credit reporting.
The CFPB Predicts Significant Impact on Prospective Homebuyers
The Consumer Financial Protection Bureau expects the rule will lead to the approval of approximately 22,000 additional mortgages with better terms each year and that Americans with medical debt on their credit reports could see their credit scores rise by an average of 20 points.
Medical debt has historically been a barrier to obtaining mortgages, with many applicants being denied loans or receiving unfavorable terms due to medical collections on their credit reports. By removing medical information from the equation, the rule levels the playing field, enabling more consumers to qualify for home loans. This change is expected to particularly aid first-time homebuyers, who often face challenges in navigating the financial system. With this reform, the CFPB has taken a critical step toward ensuring a fairer and more equitable credit system for all.
About Michigan Mortgage Lender, Julie Krumholz from Superior National Bank
With over 35 years of experience in the mortgage industry, Julie Krumholz from Superior National Bank is a trusted resource and friend to homebuyers. Julie has worked in processing, closing, loan origination, underwriting, and QC auditing and has even co-owned a mortgage brokerage firm. Julie applies her knowledge to help first-time and seasoned homebuyers with a seamless homebuying experience.
