The CFPB's Medical Debt Credit Reporting Rule (Part 3)

Deep diving into the proposed rule released earlier this month.

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In this week's (late) edition of our newsletter, we'll deep dive into the fully-formed medical debt-related credit reporting proposed rule the CFPB issued earlier this month, several months after initially releasing an outline of their vision around reforming the Fair Credit Reporting Act/Regulation V. The gist of it is that they propose removing these medical debt tradelines from consumers' credit reports, and they believe this would have a net benefit to consumers while not having a major impact on creditors and healthcare providers. A lot of that is discussed throughout the proposal, and we chime in with our thoughts throughout as well and at the end. Let's dig in:

PART 1: Background

·  The proposal starts off referencing an exception to FCRA where normally, creditors would not be able to obtain or use medical debt for credit eligibility determinations but for the creation of this exception. The rule is trying to get rid of it.

·  We are also reminded that a CRA has the responsibility to not furnish to a creditor a consumer report containing information on medical debt that the creditor isn’t allowed to use.

·  A quote is shared to set the stage: “Information about a person’s medical history and health is sacrosanct and among the most intimate and sensitive categories of data.”

·  Coming back to the aforementioned exception - there's a reference to signing the FACT Act in 2003 – which specifically limited the use and sharing of medical information in the financial system. (My thoughts here: Some would argue that this limitation was on the consumer's actual medical issue/problem itself and specifically aimed at folks like insurers, employers, bankers, etc - not necessarily on the financial debt itself which can mask the issue (and arguably the most sensitive/private thing, rather than the ability to pay which could arguably be relevant to a lender who is considering whether or not to loan to someone). By contrast, SCRA prevents creditors from doing ability to pay (among other things) on military folks for existing loans they have before they go active duty, so perhaps one solution is for Reg V to instead provide an SCRA like provision that allows existing loans to be frozen the minute medical debt over a certain amount is incurred and can last as long as the person is dealing with the medical issue for a minimum of 6 months.)

· As we set the stage, the proposal then proceeds to call out the existing issues that exist in the medical payments space today:

o   Third party reimbursement processes

o   Debt collector practices for furnishing information to CRAs (nice shot at another favorite target of the Bureau here)

·  There is a claim about medical debt having limited predictive value – the CFPB cites the lack of control over incurring it. (My thoughts - I would go a step further here and add that rather than look at the medical debt itself, the rest of the consumer’s debts should be reviewed and if they are paying everything else off, then what’s the issue?)

·  The CFPB then notes that changes are already happening, from CRA side, creditor/lender side, and more.

·  They call out the NCUA for making an exception back in 2005 without providing evidence to support their conclusion that an exception from a congressionally created legal requirement was needed.

Then we get into some not-so-fun statistics:

·  41% of adults have some medical debt – unable to pay, on credit cards, being paid back, direct to a provider, owed to family members, owed to bank, owed to collection agency, and more.

· There is an acknowledgment that typically there's no advance notice of the cost - there's a focus on treatment to save the person first, without talking about their wallet because that would seem inhumane, but after they’re healed (or temporarily at least), then the wallet comes into play.

·  43% of all adults, 53% of adults with medical debt – believe their medical or dental bills contain an error.

·  51% did not dispute the bill or were unable to resolve the dispute. This speaks to the confusion about things like copays, insurance, reduction, Medicare, etc.

·  Historically, medical debt has been the most common type of debt on consumer reports at both the consumer report and individual collections tradeline level. This comprised 57% of all collection tradelines in Q1 2022, 58% in Q2 2018 (no real change over 4 years)

·  6% of medical collections are flagged as being disputed at some point, almost 3x as higher than rate of dispute flags for credit cards, 7x higher than dispute flags for student loans.

Then the CFPB cites some unsavory behavior from debt collectors:

·  Some debt collectors take advantage of the fact that most consumers find out about medical debt for the first time when they pull their credit report. The collectors wait for it to show up, and then the consumer gets so frustrated they reach out to the debt collector and pay it off no matter how inaccurate it is. This is known as “debt parking”.

Some good news?

·   CRA changes went into effect starting in July 2022, with unpaid medical debts not showing up for up to one year in reports, and another set in April 2023, with medical debts below 500 not showing up in reports.

·  However, the CFPB shares that even after the changes, there are still 15 million Americans with $49 billion in medical bills on consumer reports. The total dollar balances of medical collections on consumer reports fell only by 38% nationwide.

· Some other efforts are cited, namely those in Colorado, NY, CT, VA, IL, MN, ME, and VA. Also, FICO and VantageScore Credit Scores no longer put that much of an emphasis on medical collections, with VantageScore being updated in Jan 2023 to ignore medical collections altogether. But older FICO Scores are still being used and considered by GSEs, Fannie Mae, Freddie Mac, FHA. A transition to new scores is not expected until Q4 2025.

PART 2: The Rule Itself

·         The CFPB spends some time digging into the rule itself and starts off with trying to recap some history of the aforementioned exception, known as the “financial information exception” that was passed with the FACT Act in 2005. The conditions for the exception to apply are 1) the information sought is the same type used to make typical credit eligibility decisions 2) the way the information used is the same as non-medical debt information would be used 3) The creditor does not take any acutal medical information into consideration for credit eligibility including history, health, treatment, etc.

·         The CFPB clarifies that outside of debts owed directly to a healthcare provider (i.e. hospital/doctor) or a debt buyer (who bought the debt of the consumer), it would not include for example personal loans taken out to pay medical expenses or bills. While seeking comment as to whether it’s realistic to be able to distinguish between the two types. (My comment – if the actual healthcare provider is listed as medical debt information, then it could arguably give prospective lenders/creditors a clue as to the private medical dealings of that customer, which gives further juice as to why this exception should be dropped.)

·         They then go into their new definition of medical debt – for them this means information pertaining to a debt owed by a consumer to a person whose primary business is providing services/products/devices to patients, and would also clarify that medical bills that are not past due/already paid can also be considered “medical debt information”. They state further that they are aligning this definition with that of FCRA stating “medical information furnisher,” with an eye on assisting the CRAs. The definition also includes debt owed to the agents/assignees i.e. debt buyers/collections agencies.

·         The CFPB then states (or more accurately summarizes, with some of the points aforementioned) why medical debt doesn’t need to be included in credit reporting 1) Consumers can’t control it 2) There are tons of errors in information relating to medical debt (and are frequently disputed by consumers) 3) There is limited predictive value about how likely a medical debt consumer is to pay vs a “normal” consumer. 4) There was a lawsuit in 2015 with 30 state attorney generals and the CRAs where it turned out that debt less than 180 days past due was not being shared with creditors while that greater than 180 days past due was; preventing the creditors from getting the full picture 5) Some credit score providers have adjusted their models to reduce/eliminate medical debt collections 6) There are inconsistent collection practices compared to that performed by card/other financial debt. 7) Numerous industry participants have stopped relying on this data including CRAs for less than 500 8) The states that have limited or removed medical debt info for creditors

·         There is a particularly heinous part of this exception that would allow medical devices/equipment as collateral to secure a loan. Regardless, the CFPB signals their openness to hearing what creditors/collectors might have to say about scenarios where they think it might be legit.

·         The CFPB does propose keeping part of the exception that talks about being allowed to consider the income/benefits/purpose of the loan (although to be frank, this has very little to do with medical debt so I feel like them saying this seems like them just trying to cosmetically be able to say “See? We aren’t completely getting rid of this exception.”

·         The CRAs are specifically called out, and specifically are put on the hook to ensure they don’t release information about medical debts to creditors (if somehow they get furnished it).

·         Creditors and card issuers in particular get a bit of a break, where the CFPB notes that if consumers provide medical information unsolicited for example in their credit application, then it is what it is although they would still be prevented from finding out more by trying to pull that data in a credit report.

PART 3: Winners, Losers:

·         As the CFPB prepares to assess the impact on various parties, it talks about the need for this regulation (which can be a bit repetitive from points previously raised, so I’ll touch on the ones that weren’t covered) – 1) Most consumers don’t choose their healthcare providers based on how they report debt. 2) The medical debt tradelines tend to be full of errors, so it presents no benefit to the creditor to rely on that information and essentially deny someone who could have been a good payer/customer

·         They cite the sources they pulled the information from as well – noting that it pulled together a Small Business Review Advisory Panel, and also a Consumer Credit Informational Panel which is essentially a sample of anonymized consumer reports, and lastly data from the Hospital Cost Reporting Information System, which is limiting because it doesn’t include non-hospital medical debt.

·         CRAS:

Cons – revenues might take a hit if debt collectors decide credit reports don’t give them a picture of what they need. The biggest creditors in particular that appear to rely on medical information are credit card issuers. There might also be one time costs to comply with the rule, namely updating reporting systems/databases although the CFPB thinks many CRAs may have already set this up due to some states coming up with rules like this. The bureau also notes that while Metro 2 (the credit reporting format) actually designates a section to point out whether a debt is medical or not, if furnishers choose to just not indicate this the compliance burden could be on them.

Pros – Less accuracy checking/followup since there would be less overall information to screen/validate, along with less consumer disputes.

·         Health Care Providers:

Cons – Debt buyers may not pick up these medical debts from hospitals if furnishing isn’t helping ultimately get that debt collected (the threat of reporting seems to have appeared to have been effective in the past). The CFPB also acknowledges what we talked about last time in terms of the state of revenue/profit at hospitals already declining, without an answer as to how they are going to replace this lost revenue (seeking comment/seeking data is all they can muster). They talk about litigation as an option to try and recover debt instead (because that’s all we need, more lawsuits clogging the court systems) – but again, a lot of “the CFPB does not have data” in there.

Pros – I guess they rightfully point out that there aren’t many positives to the Health Care providers on this one!

·         Medical Debt Collectors and Debt Buyers:

Cons – Once again we are reminded of the credit report “damage” as being a tactic that many collectors use to get a consumer’s attention. The CFPB predicts the agencies will go back to mail and phone calls. They also mull over whether these parties will also pursue more litigation (like Health Care providers might) but don’t have a clear prediction. Back to the topic of “old school collecting,” there’s an assessment that believes staffing will have to go up, which means more focus on training/procedures/systems/contracts. One possibility on litigation is that attorneys may already be on payroll and so for them this could be just another type of case, meaning little increase in cost if more of this is pursued. Of course, the big elephant in the room is that recoveries will likely go down, which means less revenue, which means less demand for medical debt (as they pay providers to buy it).

Pros – See above. No positives here either.

·         Costs and Benefits to Creditors:

Cons – The CFPB starts off by referencing that loan portfolios might struggle without medical debt being part of underwriting/delinquency risk assessment. However then they turn this into a “but actually” type of deal, mostly focusing on the benefits, so let’s shift:

Pros - Tact that they could start asking consumers point blank if they have medical debt in applications, as well as the fact that not all medical debt is in reports is a win for creditors. While the CFPB cites some of the research done leading up to CRAs’ decision in 2022 to stop reporting medical tradelines under 500, they reference their Technical Appendix and point out that while more loans would be originated overall, it isn’t by much (at least in the short term). The CFPB also uses it to assert that they believe people who are approved for credit accounts and  have  medical debts excluded on their credit reports are no more likely to be seriously delinquent than those who are approved and actually have medical debts included on their reports. The CFPB actually goes on to state that based on what they’ve seen, medical debt deters consumers from applying for credit (whether they’d be eligible or not).

·         Costs and Benefits to Consumers

One would think this would be a net win for consumers. And it is. However the CFPB really wants you to know it is a win. They start off by making it clear that this is not a proposal/rule to eliminate debt. But not having to deal with incorrect debt is a big positive and incentive to pay off the actual debt (so hey, a win for everyone!). And it sounds like more consumers will be able to have access to more credit.

There are some possible cons 1) The CFPB has spoken with some healthcare providers who state that if this rule goes into effect, they will have to start turning away folks who cannot pay upfront or have outstanding balances. But they conclude that they don’t believe this will actually happen especially since in emergency cases, turning away folks would result in a loss of Medicare funding for the hospital. 2) Some healthcare providers also told the CFPB that insurers may drop consumers and/or the overall cost of insurance may go up further, but they again don’t believe this and state that access is the real challenge. 3) As far as timely payments declining, we’ve heard about this in the assessment of other parties but there is certainly a risk of more litigation that arises, the threat of which the CFPB believes would be enough to continue to have consumers pay on time. If there is more litigation, consumers will have to pay out of pocket costs for attorneys and court fees even if the debt is not legitimate. 4) There is also the potential con that because many consumers’ only recent tradeline is medical debt, removing this from reports could also remove credit scores altogether, but the CFPB cites a CRA (a representative of Experian specifically) that says “no credit is better than bad credit.” The CFPB goes on to cite their prediction that this rule will in fact end up increasing consumer’s credit scores. 5) Credit Scoring companies might end up weighing other factors heavier in the absence of medical debt; however the CFPB points to its Technical Appendix suggesting that in the current model, they aren’t getting any benefit anyway (of having less delinquent loans).

The CFPB closes with some benefits, stating that they can clearly see that there won’t be too many scenarios where you see folks having to pay to remove stuff from their credit reports, or having to deal with incorrect billing in general.

·         The CFPB does cite some consumers and entities that might not benefit at all. They cite rural consumers as being more likely to experience rejection from providers, while noting that they don’t see any special impact on smaller institutions.

PART 4: Flexibility Analysis

·         A couple things to point out in this section – we get a huge table of entity types by NAICS code that might be subject to the rule. The goal here is to figure out more about what “small entities” are. We also get a sense of the fact that bureaus may need to up their game (mentioned previously) and creditors may need to update procedures and add a different type of expertise professionally (resulting in cost). The final bit of this talks about some duplication between this rule and the following regs: TILA/Reg Z, ECOA/Reg B, FDCPA, GLBA, HIPAA, ADA, FHA and possible more (the CFPB seeks comment to determine if there’s any they missed).

And more or less, that’s it. My concluding thought?

CONCLUSION:

Don’t get me wrong, this is a good proposal. But the biggest issue is that you keep hearing the classic two (at this point) lines that seem to be common in CFPB proposed rules these days – “The CFPB has no data” and “The CFPB seeks comment”, and in particular on two areas that are of the most concern if this rule passes – one, towards litigation that creditors and collectors may decide to file against medical debtors and two, towards healthcare providers deciding to deny care to more folks in non-emergency situations without upfront payment. The CFPB attempts to downplay the likelihood of that happening, but they don’t do it in any substantive way. Unfortunately, that is the larger more meta issue about the Bureau – its power extends to interpretation of the law, but when the “offending parties” decide and still the ability to work around the law (right or wrong), it puts the effectiveness of the Bureau and its rules into question.

Overall, I’d say this rule doesn’t bring a whole lot that’s new to the table, with many states and the bureaus already doing a lot of work on removing medical debt from tradelines in recent years. Unfortunately, it does shine a light on the very real problem we talked about last time, which is specifically about what to do with the medical debt. It can’t just disappear; there is a food chain issue. And that also needs to be solved, regardless of what happens with credit reporting.