New Law Removes Medical Debt From Credit Reports, Could Lead To 20K More Home Loan Approvals A Year
The Consumer Financial Protection Bureau (CFPB) has finalized a rule that will remove medical debts from consumer credit reports.
By doing so, Americans’ credit scores should increase by an average of 20 points, increasing the number of mortgage applicants who are approved for a home loan.
The agency noted that “medical debt provides little predictive value to lenders about the borrower’s ability to pay other debts.”
And it is often reported by consumers as unfair or controversial, resulting in more harm than good.
Going forward, the inclusion of medical debts on credit reports will be prohibited and lenders will be prohibited from using medical information in their credit decisions.
No more Medical Debt on Credit Reports
Specifically, the new change from the CFPB would amend Regulation V by removing an exception that allows creditors to obtain and consider medical debt in determining creditworthiness.
As such, the Fair Credit Reporting Act (FCRA) is about to prohibit creditors from considering medical information when writing a new loan.
And credit reporting agencies (Equifax, Experian, TransUnion) will not be able to provide consumer credit reports to lenders that contain information related to medical debt.
Previously, the trio had announced the removal of medical kits if prices were below $500.
And the two main credit scoring companies, FICO and VantageScore, had adjusted their algorithms to reduce the degree to which medical debt affected a consumer’s credit score.
But now all medical debts will be banned from credit reports, except for medical forbearance programs and related medical expenses.
Lenders will also be prohibited from considering medical information, such as requiring medical equipment to serve as collateral for a loan if they are rejected again.
Long story short, you shouldn’t see much if any medical information on your credit report going forward.
But Are Medical Collections and Cost Reduction Already Overlooked?
Before this new law changed, the likes of Fannie Mae, Freddie Mac, the FHA, and the VA were already using revisions to underwriting guidelines to ignore medical collections and billing.
This means that even if they were listed on the credit report, they will not count towards the borrower’s DTI score or have to be paid off before getting a loan.
While that provided much-needed relief, the presence of medical debt on credit reports still means that a borrower’s credit score may be adversely affected.
As such, a prospective borrower could see their FICO score drop by 20 points or more, pushing them into the more expensive price bucket.
For example, a borrower with a FICO score of 695 is subject to a 1.75% interest rate on credit scores alone.
Meanwhile, a borrower with a 700-719 FICO is subject to a 1.375% discount rate.
This difference in loan costs is then passed on to the borrower through higher closing costs or a higher loan rate.
For some prospective borrowers, a low credit score may be enough to rule them out of loan approval altogether.
22,000 Additional Home Loan Approvals Proposed Annually
As a result of this new law, the CFPB projects that 22,000 additional Americans will be approved for “affordable credit” each year.
This means that having a questionable medical bill will no longer act as a barrier to home ownership.
A large part is due to borrowers with medical debts on their credit reports who see a 20 point credit score increase once such information is removed.
For example, if a borrower had a midscore of 680 before this change, they may have a 700+ FICO going forward.
Remember, until now FICO and VantageScore have still given weight to medical debt in their scoring models, despite reducing the impact of such events.
Now they will be prevented from doing so, which all things being equal will lead to higher credit scores across the board.
Additionally, borrowers may have been required to provide a medical collection letter in the past, which resulted in additional delays and the possibility of jeopardizing their approval.
This will no longer be the case, which should result in more loans being approved with lower mortgage rates reflecting higher credit scores.
The CFPB also expects the closure of this special “carveout” that allowed lenders to consider medical debt to increase privacy protections and reduce enforcement debt collection procedures.
So apart from perhaps finding it easier to qualify for a loan, consumers won’t be burdened by debt collectors.
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.
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