The Consumer Financial Protection Bureau (CFPB) has finalized a rule that removes medical debt from consumer credit reports.
In doing so, Americans’ credit scores should increase by an average of about 20 points, increasing the number of mortgage applicants who are approved for a home loan.
The agency noted that “medical debt provides little predictive value to lenders about borrowers’ ability to repay other debt.”
And are often reported by consumers to be inaccurate or inconsistent, leading to more harm than good.
Going forward, the inclusion of medical bills on credit reports will be prohibited, and lenders will be prohibited from using medical information in their credit decision.
No more medical debt on credit reports
Specifically, the new amendment from the CFPB would amend Regulation V by removing an exception that allowed creditors to obtain and consider medical debt in credit eligibility determinations.
As such, the Fair Credit Reporting Act (FCRA) will now prohibit creditors from considering medical information when underwriting new loans.
And the credit reporting agencies (Equifax, Experian, TransUnion) will not be able to provide consumer credit reports to lenders that contain information related to medical debt.
Previously, the trio had announced the removal of medical collections if amounts were below $500.
And the two main credit-scoring firms, FICO and VantageScore, had adjusted their algorithms to reduce the degree to which medical bills affected a consumer’s credit score.
But now all medical bills will be banned from credit reports, except for medical-based forbearance plans and medical expenses with an associated loan.
Lenders will also be prohibited from considering medical information, such as requiring medical equipment to serve as collateral for a loan in the event of a repossession.
The CFPB found that collection trade lines were present on nearly a third (31.6 percent) of credit reports, with medical debt making up about half (52 percent) of those.
As such, nearly one in five consumers (19.5 percent) have one or more collection accounts on their credit report originating from a physician.
Long story short, you shouldn’t see much, if any medical information on your credit report going forward.
But haven’t medical charges and fees already been ignored?
Before this new rule change, the likes of Fannie Mae, Freddie Mac, FHA and VA were already implementing underwriting policy updates to ignore medical collections and fees.
This meant that even if they were listed on a credit report, they would not count towards the borrower’s DTI ratio or have to be paid off before loan financing.
While that provided some much-needed relief, the presence of medical debt on credit reports still meant that a borrower’s credit score may have been adversely affected.
As such, a hypothetical borrower could have seen their FICO score drop by 20 points or more, pushing them into a more expensive price bracket.
For example, a borrower with a 695 FICO score is subject to a 1.75% pricing hit for credit score alone.
Meanwhile, a borrower with a 700-719 FICO is only subject to a 1.375% price hit.
This difference in loan costs is then either passed on to the borrower in the form of higher closing costs or a higher mortgage rate.
For some potential borrowers, the lower credit score may have been enough to completely disqualify them from loan approval.
22,000 more home loan approvals are expected annually
Thanks to this new rule, the CFPB expects an additional 22,000 Americans to be approved for “affordable mortgages” each year.
This means that the presence of a questionable medical bill will no longer serve as a barrier to home ownership.
That’s largely because borrowers with medical debt on their credit reports see an average credit score increase of 20 points when such information is removed.
For example, if a borrower had a midscore of 680 before this change, they may have a 700+ FICO going forward.
Remember, up until this point, FICO and VantageScore still assigned weight to medical debt in their scoring models, despite discounting the impact of such events.
They will now be banned from doing so, which, other things being equal, will result in higher credit scores across the board.
In addition, borrowers may previously have had to provide an explanatory letter for the medical collection, which resulted in more legwork and had the potential to jeopardize their approval.
This will no longer be the case, which should result in more approved loans at lower mortgage rates reflecting the higher credit score.
The CFPB also anticipates the closure of this particular “carveout” that allowed creditors to consider medical debt to increase privacy protections and reduce debt foreclosures.
So, aside from perhaps making it easier to qualify for a mortgage, consumers will be less likely to be burdened by pesky debt collectors.
Before creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and existing) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
