Two trade associations have filed a lawsuit against the Consumer Financial Protection Bureau (CFPB) over a new rule banning medical debt from credit reports, igniting a debate on consumer protection and credit scoring practices.
At a Glance
- CFPB’s rule aims to remove $49 billion in medical debt from credit reports of 15 million Americans
- Consumer Data Industry Association and Cornerstone Credit Union League filed a lawsuit challenging the rule
- The rule is expected to increase credit scores by an average of 20 points for those with medical debts
- Trade groups argue the rule could lead to worse credit decisions and increased credit costs
- CFPB claims medical debts have limited predictive value in credit scoring
CFPB’s New Rule on Medical Debt
The Consumer Financial Protection Bureau (CFPB) has finalized a rule that would remove $49 billion in medical bills from the consumer reports of approximately 15 million Americans. This amendment to Regulation V, which implements the Fair Credit Reporting Act (FCRA), aims to prevent lenders from using medical information in lending decisions. Under the new rule, Consumer Reporting Agencies (CRAs) are prohibited from including medical debt information on consumer reports and credit scores sent to lenders.
The CFPB, under the leadership of Director Rohit Chopra, argues that medical debts have limited predictive value in assessing a consumer’s creditworthiness. The bureau claims that these debts contribute to mortgage application denials for consumers who could otherwise repay loans. According to the CFPB, the rule is expected to increase credit scores by an average of 20 points for Americans with medical debts and approve an additional 22,000 mortgages annually.
Legal Challenge to the Rule
In response to the CFPB’s rule, two trade associations – the Consumer Data Industry Association and Cornerstone Credit Union League – have filed a lawsuit in the U.S. District Court for the Eastern District of Texas. The plaintiffs argue that the rule exceeds the CFPB’s statutory authority and is arbitrary and capricious.
“It is black letter law that an agency cannot prohibit through regulations what Congress has expressly permitted by statute,” the plaintiffs stated.
The lawsuit represents a significant challenge to the CFPB’s efforts to remove medical debt from consumer reports. The trade associations claim that removing medical debts from credit reports could lead to worse credit decisions, higher delinquency and default rates, and increased credit costs for consumers.
Implications for Consumers and Lenders
The CFPB maintains that the rule aligns with Congress’s intent to protect consumer privacy and restrict inappropriate use of medical information. Vice President Kamala Harris has expressed support for the rule, stating that it will be life-changing for families by facilitating approvals for loans.
“By relying on this study, the Bureau failed to account for both the reporting changes implemented by the CRAs in the years since and the numerous more recent studies showing that unpaid medical debt does have important predictive value,” the plaintiffs countered.
The lawsuit argues that the rule would significantly impact lenders by eroding the predictive value of credit reports. This ongoing legal battle highlights the tension between consumer protection efforts and the credit industry’s need for comprehensive financial information to make informed lending decisions.
