Medical Debt on Credit Reports: CFPB Targets 15 State Laws

Fifteen states that restrict the reporting of medical debt on credit reports now find themselves at odds with a rule from the Consumer Financial Protection Bureau aiming to stop these limitations.

Delaware, Maine, Maryland and Oregon have all passed laws this year excluding medical debt from residents' credit reports, joining others with existing legislation that bars unpaid medical bills from appearing on the key financial record. There's a reason for this burst of activity: In July, a judge scrapped a Biden-era federal rule that would have removed about $49 billion of medical debt from U.S. credit reports.

That development, which followed the CFPB's U-turn on the issue of medical debt in credit reporting when President Donald Trump took office, gave fuel to legislative efforts at the state level to carry on the spirit of the Biden administration's efforts.

If these state laws are voided, millions of consumers with unpaid medical debt could see negative marks appear — or reappear — on their credit reports. Even though newer scoring models have de-emphasized medical debt as a factor, that would bring down credit scores, making this legal fight one with particularly high stakes for Americans' wallets.

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A 'dramatic' tale of two CFPBs

A brief history: On Jan. 7, in the lame-duck period of Joe Biden's presidency, the CFPB announced a final rule to remove all medical debt from credit reports. Then-CFPB Director Rohit Chopra said in the announcement that "people who get sick shouldn’t have their financial future upended."

The rule was scheduled to take effect in March but never did. Once Trump's second term began, he started to both dismantle the CFPB and walk back the medical debt ban. The policy was struck down over the summer, and states took up the cause.

In late October, however, the CFPB issued an interpretive rule that said the Fair Credit Reporting Act preempts state laws that "touch on broad areas of credit reporting."

While the rule is not legally binding, it set the stage for the state laws in question to be challenged in court — which is already happening.

Proponents of allowing medical debt in credit reporting argue that it's actually consumer friendly because it means lenders can ensure they're not loaning too much to people who are already struggling with a lot of debt. They also say that the possibility of medical debt appearing on credit reports motivates patients to pay bills they rightfully owe, which supports hospitals and health care providers' financial stability.

"The story of medical debt over the last five years is one of this data being step-by-step constrained in reporting — all the way until Jan. 20 of this year, at which point there was a dramatic U-turn," says Kevin King, vice president of credit risk at LexisNexis Risk Solutions, a financial data company.

This tension between states and the administration over medical debt is just one of the clashes over regulation unfolding under new CFPB leadership. (Other examples include the tug-of-war over state lending laws and enforcement of consumer protection rules.) The CFPB is now "trying to knock down many of the rules that have been put in place by them over the last four years or so," King says.

In fact, in issuing its new interpretive rule, the CFPB withdrew an earlier 2022 interpretive rule that said states had more agency to regulate credit reports.

Medical debt under $500 unaffected — for now

During the Biden presidency, the CFPB took aim at the use of medical debt in credit reporting and credit decisions, with officials contending that it's fundamentally unfair to consider this type of debt in credit and lending matters because it involves people's health: a factor they can't always control.

The Biden administration secured some wins. In April 2023, the major credit bureaus confirmed that they had finished removing medical debt under $500 from credit reports after agreeing to the move in light of increased government scrutiny.

That protection remains in place to this day, and there's a chance it sticks.

North Carolina Gov. Josh Stein sent a letter to Experian, Equifax and TransUnion earlier this month urging them to confirm that they are still committed to keeping "medical debt that has been forgiven, paid or settled" off of credit reports. He also asked they continue to exclude debts under $500 and debt that is less than a year past due.

Those guardrails "have unburdened millions of American consumers who now have expanded options for employment, insurance, housing and consumer finance," Stein wrote in the letter.

In a response letter that Stein's office shared with Money, Equifax acknowledged the involuntary nature of medical debt and reiterated some of its commitments to consumers, including the removal of medical debt under $500 from credit reports.

"We remain committed to the changes we have already implemented and do not have any plans to change our current practices related to medical debt reporting at this time," the letter said.

North Carolina is not one of the 15 states that have laws restricting medical debt on credit reports. Nevertheless, "Gov. Stein is disappointed that the CFPB has sought to roll back the progress made on protecting consumers from the burden of medical debt," his spokesperson tells Money in an email.

What's next for medical debt on credit reports

The Biden-era CFPB rule was never likely to result in the removal of all medical debt from credit reports, but it did force the Trump administration to take on the political consequences of reversing a popular policy.

Groups including the Consumer Data Industry Association, which represents the credit bureaus, have contended that the CFPB never had the power to wipe all medical debt from credit reports. Those are questions that will now be examined by the courts.

On Nov. 5, ACA International — a debt-collection trade group — filed a suit challenging a Colorado law excluding medical debt from credit reporting. The group's CEO, Scott Purcell, argues that national credit reporting standards were established by the Fair Credit Reporting Act back in 1970.

States, he says, weren't meant to have the authority to restrict medical debt in credit reporting.

"The allowance of reporting in the FCRA, combined with Congress’s stated intent in the statute to ensure accurate credit reporting, makes a blanket ban on reporting inconsistent with federal objectives," he writes in an emailed statement to Money. "States cannot selectively ban accurate debt information."

Purcell says he hopes all of these laws will be struck down.

"Colorado’s law is the top of a slippery slope of states banning reporting of certain categories of debt to score political points," he adds. "How is banning reporting a person’s mortgage payment or rent history any different than their medical payment information?"

Consumer protection groups push back, suggesting it's wrong to punish an individual simply for having a medical tradeline on their credit report, as that debt so often arises due to an unforeseen health crisis or an egregious medical bill.

The Biden administration argued that patients are regularly taken advantage of in medical billing, facing surprise bills for services that they're often not fully aware of until after the fact. In addition to its involuntary nature, advocates and Democratic officials point to studies that have shown medical debt is not a reliable predictor of an individual's ability to repay loans or pay back credit cards.

Now, as the political battle plays out in the courts, Americans are left waiting to see what rules will govern medical debt on credit reports going forward.

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