CFPB Asked to Look into Medical Debt Collection and Reporting

U.S. Senators Jeff Merkley (D-Ore.), Chuck Schumer (D-N.Y.), Robert Menendez (D-N.J.) and Sherrod Brown (D-Ohio), late last week asked Consumer Financial Protection Bureau (CFPB) Director Richard Cordray to begin addressing the harmful impact of medical debt collection and reporting on consumer credit.

In a letter sent to Director Cordray Thursday, the four Senators detailed the costs imposed on consumers and the economy by unfair medical debt collections and reporting and requested that the CFPB consider regulatory action to address these problems.

According to the Senators, the medical debt collection process is riddled with informational and administrative problems, inflicting serious damage on the credit reports of millions of creditworthy consumers. Unlike most other debt, medical debt is often incurred unexpectedly, and given the complexity of the insurance process, health providers frequently send bills to collections before patients even know that they are personally responsible for paying. Because of these factors, the Senators say medical debts are less accurate predictors of a consumer’s creditworthiness than other debts, making their presence on the credit report unfair to consumers and unhelpful to lenders.

Even if a patient pays off a debt immediately after being notified, once it has gone to collections, that black mark remains on his or her credit score, which can result in a deduction of up to 100 points for as long as seven years, the four noted in their letter.

“The issue of consumer debt is usually discussed in relation to a consumer’s ability to pay,” wrote the Senators. “But for medical debt, the problem is one of information. Consumers frequently do not even know there is a debt that they are personally responsible for paying before it goes to collections. Often, by the time they find out, the medical office has already reported the bill to collections. In this case, even if the consumer is still in discussions with the insurance company, the damage to the consumer’s credit score has already been done.”

“We therefore ask you to begin the process of addressing, through your authorities and in cooperation with us, the problems related to medical debt collections and scoring.”

The Senators are also co-sponsors of the Medical Debt Responsibility Act, which would require credit ratings agencies to remove medical debts from consumers’ credit reports no later than 45 days after they have been settled or paid in full.

The full text of the letter follows.

Dear Director Cordray:

We write to express concern about the impact of medical debt on the consumer credit market. In recent months, national press coverage has helped highlight the unfortunate fact that fully paid-off medical debts are needlessly constraining the ability of millions of consumers to responsibly acquire credit. This state of affairs is bad for consumers, bad for lenders, and bad for our economy.

The issue of consumer debt is usually discussed in relation to a consumer’s ability to pay. But for medical debt, the problem is one of information. Consumers frequently do not even know there is a debt that they are personally responsible for paying before it goes to collections. Often, by the time they find out, the medical office has already reported the bill to collections. In this case, even if the consumer is still in discussions with the insurance company, the damage to the consumer’s credit score has already been done. In fact, the Fair Isaac Corporation estimates that any unpaid debt sent to collections, whether for $100 or $10,000, can shave up to 100 points off of a credit score.

These black marks, which remain on credit reports for seven years, can translate into large and unforeseen costs for consumers. Creditworthy consumers look artificially risky and their ability to contribute fully to our economy is constrained. As we all know, markets do not work well when the information they rely on is not correct.

The uniqueness of medical debt–the unplanned nature of the purchases, the opaqueness of the costs, the complex billing procedures, the exceptionally high error rate in reporting, and the lack of predictive value for lenders–and the implications of the informational inaccuracies it creates require all involved to craft careful and thoughtful solutions.

One potential approach put forward by us is the Medical Debt Responsibility Act (S.2149). This bill would amend the Fair Credit Reporting Act to require consumer reporting agencies to remove medical debts from a consumer’s credit report within 45 days once they have been fully paid or settled. This approach has already won the backing of a number of key industry participants, including the American Medical Association, the Mortgage Bankers Association, and the National Credit Reporting Association. It also passed the House of Representatives last Congress with a bipartisan majority of 336-82.

But there may be other approaches that could also address the challenge of medical debt, both legislatively and through the regulatory process. We therefore ask you to begin the process of addressing, through your authorities and in cooperation with us, the problems related to medical debt collections and scoring.

Addressing the unique challenges of medical debt would be helpful to all involved. Consumers would get access to credit at the prices they truly deserve, while lenders would get better and more accurate information about consumer creditworthiness. But the real winner would be our economy, as millions of creditworthy consumers would be released from artificially-low credit scores that misrepresent their ability and likelihood to pay.

We look forward to working with you and with colleagues on both sides of the aisle on this issue.