Title: The Biden Administration's Regulation: Ditching Medical Debts from Lenders' Credit Reports

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Title: The Biden Administration's Regulation: Ditching Medical Debts from Lenders' Credit Reports

New CFPB Rule Eliminates Medical Debt Impact on Loan Applications and Boosts Credit Scores for Millions of Americans

Introduction

Gone are the days when medical debt affected loan approvals. The Consumer Financial Protection Bureau (CFPB) has finalized a new rule that prohibits lenders from considering medical debt in loan applications, removing around $49 billion worth of medical bills from the credit reports of about 15 million individuals. This long-awaited rule, proposed by Vice President Kamala Harris in June 2024, will bring a significant improvement to the financial lives of many Americans.

Key Details

  1. Rule Impact: The CFPB estimates the rule will remove over $49 billion in medical bills from about 15 million Americans' credit reports, significantly impacting their financial future.
  2. Medical Debt Exemptions: Lenders can still consider medical information for specific purposes, such as verifying medical-based forebearances or considering medical expenses to be covered by a loan.
  3. Effective Date: The rule will take effect 60 days after its publication in the Federal Register, but the exact date for submission to the register is yet to be determined.
  4. Credit Score Improvement: Americans with medical debt on their credit reports may witness an average credit score increase of up to 20 points.

Context and Background

  1. CFPB Research: Internal research conducted by the CFPB revealed that medical bills negatively impact credit scores, despite showing no correlation with loan repayment. This research also highlighted the role of medical debt in denying mortgage applications for eligible borrowers.
  2. Credit Reporting Companies' Previous Move: Before the CFPB's rule, credit reporting companies like Equifax, Experian, and TransUnion removed medical bills under $500 from Americans' credit reports in 2023, significantly reducing medical debt collections.

Additional Information

The CFPB's new rule emphasizes financial fairness, privacy, and protecting consumers from the burden of medical debt, ensuring that creditworthiness is not determined by unforeseen medical expenses. Industry groups, however, have posed legal challenges to this rule, citing concerns over CFPB's authority and potential unwanted consequences. Despite these challenges, the rule's positive impact on millions of Americans remains significant.

  1. Under President Biden's administration, Vice President Kamala Harris proposed a rule in June 2024 that aims to eliminate the impact of medical debt on loan applications.
  2. The new rule by the Consumer Financial Protection Bureau (CFPB) will exempt lenders from considering medical debt when making loan decisions, potentially reducing consumer debt by approximately $49 billion.
  3. For individuals with medical bills on their credit reports, the new rule might lead to an improvement in their credit scores, with an average increase of up to 20 points.
  4. In case of any disputes, medical debt can still be considered by lenders for specific purposes, such as verifying medical-based forebearances or considering covered medical expenses in loan agreements.

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