Medical debt banned from appearing on credit reports in new Biden administration rule

WASHINGTON – Unpaid medical bills will no longer appear on consumer credit reports, which can result in people being blocked from getting mortgages, car loans or small business loans, according to a final rule announced by President Joe Biden’s outgoing administration. 

The Consumer Financial Protection Bureau rule, announced by the White House on Tuesday, will remove $49 billion in medical debt from the credit reports of more than 15 million Americans.

This means lenders will no longer be able to take that into consideration when deciding to issue a loan.

Here’s what to know:

Biden rule bans medical debt from credit reports

More than 100 million Americans have medical debt, according to the White House – which added that it’s the largest source of debt in collections and makes up a larger proportion of debt tradelines than credit cards, utilities, and auto loans. 

“However, medical debt is not like other forms of debt because it is often the result of unavoidable medical complications and medical bills often contain significant errors, such as inflated or duplicative charges and fees for services never received or already paid,” the White House said in its announcement of the new rule. 

The change is estimated to raise the credit scores by an average of 20 points and could lead to 22,000 additional mortgages being approved every year, according to officials.

Vice President Kamala Harris said in a statement that it would be “lifechanging” for millions of families.

“No one should be denied economic opportunity because they got sick or experienced a medical emergency,” Harris said.

Harris also announced that states and local governments have used a sweeping 2021 pandemic-era aid package, called the American Rescue Plan, to eliminate more than $1 billion in medical debt for more than 700,000 Americans.

The administration first announced plans for the rule in fall 2023.

The CFPB said that medical debt is a poor predictor of an individual’s ability to repay a loan. Experian, Equifax and TransUnion, the three national credit reporting agencies, said last year that they were removing medical collections debt under $500 from U.S. consumer credit reports.

The new rule from the Biden administration is set to take on the outstanding bills appearing on credit reports.

The new rule comes after Republican congressional leaders called on Biden’s financial regulators, including the CFPB, to stop “finalizing partisan rulemaking” in the days leading up to President-elect Donald Trump’s inauguration on Jan. 20.

“The financial system, its institutions, consumers, and the CFPB itself do not benefit from last-minute partisan rulemaking attempts,” current Chairman Rep. Patrick McHenry, R-N.C.; and Rep. French Hill, R-Ark, the likely incoming chairman, wrote in a Dec. 16 letter to CFPB Director Rohit Chopra.

Similar letters were also sent to the Treasury Department, the Department of Housing and Urban Development, the Securities and Exchange Commission, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency.

The new rule was endorsed by the American Medical Association, according to Reuters. But trade groups representing banks and credit bureaus said the evidence did not support the CFPB’s decision, and that the ban could leave them blind to important information about the risk financial institutions face from borrowers, the news outlet reported.