On June 11, 2024, the Consumer Financial Protection Bureau (CFPB) proposed a rule that would introduce sweeping changes to the process of medical debt credit reporting and the use of information related to the nonpayment of medical debt for underwriting purposes. The rulemaking reflects CFPB Director Rohit Chopra’s longstanding view that medical debt has “relatively limited predictive value” in credit reporting, which has been disputed by financial services stakeholders. The proposal joins a litany of CFPB actions following the Supreme Court’s recent ruling to uphold the CFPB’s funding structure.
At a high level, the CFPB is proposing targeted amendments to Regulation V as follows:
- Remove the financial information exception, which broadly permits creditors to obtain and use medical financial information (including information about medical debt) in connection with credit eligibility determinations, while retaining select elements of the exception related to income, benefits and loan purpose; and
- Limit the circumstances under which consumer reporting agencies are permitted to provide medical debt information to creditors in connection with credit eligibility determinations.
SBREFA Process
The proposal stems from the CFPB’s Sept. 21, 2023, announcement that it would consider a rulemaking to address several consumer reporting topics, including medical debt reporting, data brokers and credit header regulation under the Fair Credit Reporting Act (FCRA). The CFPB convened a Small Business Review Panel (SBREFA) to collect advice and recommendations from small entities or their representatives as a first step in the formal rulemaking process.
Within the medical debt reporting section of its outline, the CFPB considered proposals to:
1. Revise Regulation V Section 1022.30(d) to modify the exemption such that creditors are prohibited from obtaining or using medical debt collection information to make determinations about consumers’ credit eligibility;
2. Prohibit consumer reporting agencies from including medical debt collection tradelines on consumer reports provided to creditors for purposes of making credit eligibility determinations.
For a recap of the rulemaking’s SBREFA process, click here.
Overview of the Proposal
The CFPB’s proposal is in line with the September 2023 SBREFA, although it makes some important clarifications sought by participants in the panel. For example, it provides a definition of medical debt and clarifies that medical credit cards are not included within that definition. It also clarifies that ancillary medical purchases not directly sent to a medical provider on credit cards are excluded from the definition of medical debt.
The CFPB states that medical debt information means medical information that pertains to a debt owed by a consumer to a person whose primary business is providing medical services, products or devices, or to such person’s agent or assignee for the provision of such medical services, products or devices. Medical debt information includes, but is not limited to, medical bills that are not past due or that have been paid.
The CFPB does not exclude elective medical debt (which they acknowledge could include cosmetic surgeries) from the definition of medical debt. However, it makes the distinction that veterinarian debt is not included. Thus, arguably, if a consumer opts to get a facelift, that debt cannot be included by consumer reporting agencies (CRAs), but veterinarian debt can.
Since the proposal outlines several reasons why CRAs may still use medical debt information, it does not limit providing information about medical debt from debt collectors or medical providers but instead targets how this information is used by the CRAs.
The CFPB proposes modifying a regulatory exemption originally promulgated by a group of federal banking agencies and the National Credit Union Administration (NCUA) that allows creditors to consider a consumer’s medical debt information as financial information when underwriting credit. The CFPB proposes that a creditor’s consideration of financial information concerning a consumer’s medical debt under the financial information exception in existing law be “necessary and appropriate” to protect “legitimate operational, transactional, risk, or consumer needs.”
The proposal would permit a consumer reporting agency to include medical debt information in a consumer report provided to a creditor for credit eligibility purposes only if the following criteria are met:
(1) The consumer reporting agency has reason to believe the creditor is not prohibited from obtaining or using the medical debt information under Section 1022.30.
(2) The consumer reporting agency is not otherwise prohibited from providing to the creditor a consumer report containing the medical debt information, including by a state law that prohibits providing to the creditor a consumer report containing medical debt information.
However, it creates a complex framework in which medical debt information can still be used “to an extent that is no less favorable than it would use comparable non-medical information.” It provides the example, “A consumer indicates on an application for a $200,000 mortgage loan that she receives $15,000 in long-term disability income each year from her former employer and has no other income. An annual income of $15,000, regardless of source, would not be sufficient to support the requested amount of credit. The creditor denies the application on the basis that the projected debt-to-income ratio of the consumer does not meet the creditor’s underwriting criteria.”
The proposal outlines scenarios where creditors can obtain information about medical debt and use it, but it generally discourages seeking this information other than for the exceptions outlined. The CFPB also proposes to treat medical expenses and medical debts the same, citing their similarities. Additionally, the CFPB states that it is not “necessary and appropriate” to apply the financial information exception to information about medical assets and collateral.
However, the CFPB proposes to retain the exception relating to income, benefits and the purpose of the loan, stating that it is necessary and appropriate to permit actions necessary for administrative verification purposes. The CFPB provides an example of consumers whose primary source of income is disability benefits. It states that if income and benefits were exempted, affected consumers might not be able to obtain credit if creditors cannot consider their income.
Despite concerns raised during SBREFA about the conflicts with complying with the Truth In Lending Act (TILA) and Regulation Z ability to repay (ATR) requirements, the CFPB states that it has determined not to repeal other exceptions, including one for medical information that is necessary to comply with applicable local, state or federal laws. Thus, creditors must use information about medical debt if it is included in an application for credit but cannot use information about medical debt from a credit report. However, the proposal states that consumer reports can be used for other aspects of ATR requirements.
The CFPB provides an example to help direct creditors and card issuers that are creditors, regarding how to obtain and use medical information provided by the consumer in compliance with TILA and Regulation Z, for purposes of compliance with the ability-to-repay rule under Section 1026.43(c) for closed-end mortgages, the repayment ability rule under Section 1026.34(a)(4) for open-end, high-cost mortgages, and the ability-to-pay rule under Section 1026.51(a) for open-end (not home-secured) credit card accounts. However, it is likely that many questions remain about how creditors can comply with TILA, Regulation Z and the CFPB’s proposal, beyond a limited example.
The CFPB acknowledges that its proposal will lead to more litigation, since that will be one of the only options remaining for medical providers to be paid on contractual obligations.
Next Steps
The CFPB did not address data brokers or include limitations on credit header data with respect to the FCRA in this proposal, though it may issue a separate proposal later in the year. Industry stakeholders who participated in the SBREFA process were able to garner some clarifications regarding the definition of medical debt. However, the proposal outlines an extremely complex and onerous path forward for creditors to consider medical debt in underwriting. It also brushes off many of the concerns raised by industry about the impact of this proposal on medical providers and medical costs. As such, stakeholders should consider providing detailed feedback about the impact of these changes.
The CFPB will accept comments on the medical debt proposal until Aug. 12; the proposal states the final rule, once issued, would be effective 60 days after publication in the Federal Register. The future of the rulemaking likely depends on the results of the 2024 general election. Industry is likely to push for an extension of time for comments.
The rule, if finalized, will qualify for the time frame in which the Congressional Review Act (CRA) will give the 119th Congress an opportunity to roll it back. The CRA enables Congress to issue a joint resolution of disapproval to invalidate a final rule in its entirety.
