A trade group representing consumer credit reporting companies and a Texas-based credit union association have filed a lawsuit to block the Consumer Financial Protection Bureau's (CFPB) new rule that removes most medical debt from credit reports.
The lawsuit, filed in the US District Court for the Eastern District of Texas, argues that the CFPB overstepped its authority by eliminating medical debt from credit reports and preventing creditors from considering medical debt in lending decisions. The plaintiffs claim that only Congress has the authority to decide what information can appear on credit reports.
“The CFPB lacks the legal authority to prohibit creditors from considering medical debt, as long as information about the provider of medical services or the nature of services provide is not disclosed,” Consumer Data Industry Association President and CEO Dan Smith said in a statement. “Nor does the CFPB have the authority to dictate what can or cannot be included on consumer credit reports.” Smith is a former top CFPB official.
The rule will wipe out around $49 billion in medical bills from the credit reports of around 15 million Americans, the financial regulator said.
Additionally, the CFPB said the rule will boost the credit scores of Americans with medical debt by an average of 20 points and spur around 22,000 more mortgages a year.
The CFPB said that medical bills on credit reports contribute to thousands of denied mortgage applications a year, but poorly predict if someone will repay a loan.
“People who get sick shouldn’t have their financial future upended,” CFPB Director Rohit Chopra said.
Around 20 million Americans owed medical debt in 2021, representing 1 in 12 people, according to the Peterson-KFF Health System Tracker.
Makes it hard to assess creditworthiness
The lawsuit argues that removing medical debt from credit reports could make it harder for lenders, employers, and landlords to assess borrowers' creditworthiness. The trade groups believe that knowing whether a consumer has medical debt is an important part of underwriting and that the rule could erode the accuracy of credit reports.
The CFPB's action is part of a broader effort to address the negative impact of medical debt on consumers, with research showing that millions of Americans have medical debt on their credit reports.
However, the plaintiffs argue that the CFPB's rule is based on outdated data and contradicts previous legislation that allowed medical debt to be included on credit reports, as long as it was coded to protect patient privacy. The lawsuit also challenges provisions that extend the ban on medical debt reporting to include state laws, which the plaintiffs believe violates federal law.