On August 25, the Office of Management and Budget (OMB) directed federal agencies involved in originating consumer and small business loans — including the Small Business Administration, Department of Veterans Affairs, Department of Agriculture, and the Federal Housing Finance Agency — to reduce the impact of medical debt when making underwriting decisions. This instruction aligns with Executive Order 14070 issued in April, which in part directed federal agencies to examine pathways to reduce the burden of medical debt on consumers.

The OMB noted it is estimated that one in three adults in the United States has outstanding medical debt. “The Administration is committed to taking actions to mitigate the burden of medical debt on American families and in particular preventing medical debt from unfairly limiting Americans’ access to Federal loans and loan guarantee programs.”

The OMB outlined the following next steps for federal agencies to take to implement this directive:

• Identifying any statutory, regulatory, or administrative changes required to modify criteria to exclude medical debt or otherwise lessen its impact on underwriting decisions;
• Conducting cost-benefit analysis of any such changes to determine whether they would be considered “economically significant;”
• Assessing the administrative changes, staffing requirements, and any technological infrastructure upgrades required to implement the proposed changes;
• Assessing whether model updates are needed for cost estimation, especially if the exclusion of medical debt would explicitly or implicitly affect particular underwriting requirements, such as debt-to-income ratios.

As we discussed previously, the effect of medical debt on consumer finance has become a top priority for the Biden administration. In March 2022, the Consumer Financial Protection Bureau (CFPB) released a report, highlighting the effect of medical collections on consumer credit reports. Just last month, the CFPB issued its analysis of the plans announced by the three nationwide consumer reporting agencies to reduce medical debt reporting, concluding that “more work must be done.”