Biden administration unveils rule to remove medical debt from credit reports

In a major move that could improve the financial prospects of millions of Americans, the Biden administration announced a new rule Tuesday, Jan. 7, that will remove medical debt from credit reports and limit how lenders can use medical information in loan decisions. The rule, finalized by the Consumer Financial Protection Bureau (CFPB), is expected to take effect 60 days after publication in the Federal Register.

The measure is poised to eliminate an estimated $49 billion in medical debt from the credit reports of approximately 15 million Americans, boosting their credit scores by an average of 20 points, according to the CFPB. Advocates say the rule will provide significant relief for individuals struggling with the financial burden of medical expenses and improve their access to credit.

“Medical debt is not a reliable predictor of creditworthiness, and its inclusion in credit reports unfairly penalizes millions of Americans,” said a CFPB spokesperson.

Key Provisions of the Rule

The finalized rule introduces sweeping changes aimed at reducing the financial hardship associated with medical debt:

Medical Debt Exclusion: Medical debt will no longer appear on credit reports, removing a common barrier to securing loans and favorable credit terms.

Restrictions on Medical Information Use: Lenders are prohibited from using certain medical details, such as whether a borrower requires expensive medical devices, in loan decisions.

Protections for Medical Equipment: The rule bars lenders from using medical devices, such as wheelchairs or prosthetic limbs, as collateral for loans and prevents repossession of such items in cases of loan nonpayment.

However, there are exceptions. Lenders may still consider medical information in specific situations, such as when loans are requested to cover healthcare expenses or when borrowers request temporary payment postponements for medical reasons.

Economic Impact

The CFPB estimates that the rule will lead to the approval of an additional 22,000 mortgages annually, signaling broader access to homeownership for Americans who previously faced barriers due to medical debt.

Despite the potential benefits, the move has faced opposition from the banking and consumer data industries, which argue the changes could increase risks for lenders.

A Race Against Time

The timing of the rule’s release has raised questions about its longevity. With President-elect Donald Trump set to be inaugurated on Jan. 20, the incoming administration and Congress could overturn the rule before it takes effect. Under the Congressional Review Act, lawmakers can review and rescind final rules issued late in an outgoing administration.

Consumer advocates, however, remain hopeful that the rule will survive potential challenges. “This is a long-overdue step toward fairness in lending,” said a representative from a leading consumer rights group.