Biden Administration to ban medical debt from credit reports

(ABC News) – In a sweeping change that could improve millions of Americans’ ability to own a home or buy a car, the Biden administration on Tuesday proposed a rule to ban medical debt from credit reports.

The rule, announced by Vice President Kamala Harris and Consumer Financial Protection Bureau Director Rohit Chopra, comes as President Joe Biden beefs up his efforts to persuade Americans his administration is lowering costs, a chief concern for voters in the upcoming election.

“This is going to be an enormous relief to so many people battling bills when it comes to hospital visits,” Chopra told ABC News in an exclusive interview ahead of the policy announcement.

The rule, which has been in the works since September, could go into effect early next year.

“Our research shows that medical bills on your credit report aren’t even predictive of whether you’ll repay another type of loan. That means people’s credit scores are being unjustly and inappropriately harmed by this practice,” Chopra said.

CFPB’s research estimates that the new rule would allow 22,000 more people to get approved for safe mortgages each year — meaning lenders could also benefit from the positive impact on peoples’ credit scores, by being able to approve more borrowers.

Some major credit report companies have already taken steps to stop using certain medical debt to calculate peoples’ credit worthiness, including Equifax, TransUnion and Experian. FICO also recently started factoring medical debt less heavily into its scores and VantageScore doesn’t use it in its newer models.

But 15 million Americans still have $49 billion of medical debt that is hampering their scores, the CFPB found. This rule would extend the practice to all credit reporting in the U.S.

Medical debt is extensive in the U.S. It affects two in every five Americans, according to the health policy research organization KFF, and a vast majority have debt in the thousands.

Once those debts go to collections, credit scores take a hit, which means car and home loans are harder to come by or are only offered with high interest rates — leading to a slippery slope for people who are already struggling with their bills.

“Medical debt makes it more difficult for millions of Americans to be approved for a car loan, a home loan or small business loan, all of which in turn makes it more difficult to just get by, much less get ahead. And that is simply not fair,” Harris said on a call with reporters Tuesday.