Lenders will no longer be able to consider medical bills in making loan decisions and the bills will be excluded from credit reports, in an effort to relieve Americans burdened with medical debt and encourage affordable mortgages, the Consumer Financial Protection Bureau said in a final rule on Tuesday.
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.
Around 20 million Americans owed medical debt in 2021, representing 1 in 12 people, according to the Peterson-KFF Health System Tracker.
Americans most frequently owed medical debt between $2,001 and $5,000, but nearly three million Americans had debts exceeding $10,000.
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.
The rule also ends a carveout that previously allowed creditors to consider certain medical information in decisions, including about medical devices such as prosthetic limbs that could be reposessed as collateral for a loan, the CFPB said.
Still, the CFPB said lenders can keep using medical details to verify medical-based forbearances, medical expenses that a consumer needs to pay a loan and lenders can consider certain benefits as income when underwriting or for "other legitimate uses."
The rule goes into effect 60 days after its publication in the Federal Register, the official publication of the U.S. government.
What else has been done to tackle medical debt?
The CFPB's new rule follows recent developments on how medical debt is weighed against credit.
In 2023, the three major credit bureaus—Equifax, Experian and Transunion—said they would take certain kinds of medical debt off of credit reports, including paid debts, debts less than a year old and collections under $500.
The changes by the credit bureaus have already wiped out medical debts from credit reports for around half of Americans, the CFPB said.
And the two big credit scoring companies—FICO and VantageScore—have said they have decreased how much medical bills affect a score.
Congress has also passed a law that restricted lenders from obtaining or using medical information, including medical debt.