NEWS: Yesterday, The League submitted a comment letter to the CFPB, urging them to take “a more balanced approach” to a proposed rule that would generally bar creditors from considering consumers’ medical debts when making credit decisions.
Background
The CFPB’s proposal would amend Reg. V, which implements the federal Fair Credit Reporting Act (FCRA).
The FCRA bars creditors from obtaining or using information on medical debts to help determine a consumer’s eligibility for credit. In 2005, the federal financial regulators issued a regulatory exception to the FCRA’s prohibition, allowing creditors that meet certain conditions to obtain and use consumers’ medical financial information for credit underwriting.
The CFPB is proposing to amend Reg. V by:
- Removing that 2005 exception (with limited exceptions related to income, benefits, and loan purpose); and
- Limiting the circumstances under which consumer reporting agencies (CRAs) could furnish medical debt information to creditors in connection with credit eligibility determinations.
This League Comment Call from July 8 has more details about the contents of the proposal.
Our comments
Our comment letter stressed that credit unions, as not-for-profit financial cooperatives, work tirelessly to help their member-owners achieve financial well-being, and that includes working with them when medical bills mount.
We acknowledged the CFPB’s concerns that consumer medical debit “is often plagued with inaccuracies and errors” and that it causes “consumer confusion.” In fact, we pointed out, some credit unions have voluntarily stopped considering medical debt when underwriting consumer credit applications, or at least discounting the weight they might otherwise assign to such debts. And though the CFPB’s proposal may be well-intentioned, “the solution is not to bar all creditors from” considering medical debt when underwriting consumer loan applications, we wrote.
Based on credit union feedback, we told the CFPB that their proposal would:
- Undermine the integrity of the credit reporting system;
- Lead to unintended consequences, such as higher interest rates on consumer loans;
- Push default rates up, because credit may be unknowingly extended to higher-risk borrowers; and
- Simply mask consumer financial problems that credit unions and their members could work together to resolve.
We urged the CFPB to address the root causes of high medical debt, instead, such as drafting rules to 1) require that health care providers and insurers adopt more transparent pricing and billing practices; and 2) improve the accuracy and fairness of medical debt reporting by allowing only legitimate and verified debts to be reported.
“The CFPB proposal addresses symptoms instead of causes,” we wrote. “It would force all creditors to simply pretend that medical debt does not exist.”
We also stressed that the proposal would hamper credit unions’ compliance with Reg. Z rules that require creditors to assess a consumer’s ability to repay credit before making a dwelling-secured mortgage loan or opening a consumer credit card account. Both of those Reg. Z rules require creditors to consider an applicant’s current debts, and they do not exclude medical debts from the calculation. How can a credit union make a “reasonable and good faith” determination about a consumer’s ability-to-repay, as Reg. Z requires, if significant medical debt is hidden from the consumer’s credit report? Creditors may violate Reg. Z by complying with Reg. V’s proposed ban on considering medical debts, we warned.
Comments on the CFPB proposal closed yesterday. The League will let credit unions know when the CFPB announces further action on this proposal.