A new rule removes medical bills from credit reports and could lead to 20,000 more mortgage approvals per year
The Consumer Financial Protection Bureau (CFPB) has finalized a rule that would remove medical debt from consumer credit reports.
By doing this, Americans’ credit scores should rise by about 20 points on average, which would increase the number of mortgage applicants who get approved for a home loan.
“Medical debt provides little predictive value to lenders about borrowers’ ability to repay other debts,” the agency noted.
They are often reported by consumers as inaccurate or disputed, causing more harm than good.
From now on, medical bills will be prohibited from being included in credit reports, and lenders will be prohibited from using medical information in their credit decisions.
No more medical debt on credit reports
especially, The new change from the CFPB will amend Regulation V By removing the exception that allowed creditors to take medical debts and take them into account when determining creditworthiness.
As such, the Fair Credit Reporting Act (FCRA) will now prohibit creditors from considering medical information when underwriting new loans.
Credit reporting bureaus (Equifax, Experian, and TransUnion) will not be able to provide consumer credit reports to lenders that contain information related to medical debt.
The trio previously announced that medical collections would be withdrawn if the amounts were less than $500.
The two major credit scoring companies, FICO and VantageScore, have modified their algorithms to reduce the degree to which medical bills affect a consumer’s credit score.
But now all medical bills will be blocked on credit reports, other than medical forbearance plans and medical expenses associated with the loan.
Lenders will also be prohibited from considering medical information, such as requiring medical devices to serve as collateral for a loan in the event of a repossession.
In short, you shouldn’t see much, if any, medical information on your credit report from now on.
But haven’t medical collections and recovery fees already been ignored?
Before this new rule change, companies like Fannie Mae, Freddie Mac, the FHA, and the VA had already implemented underwriting guidance updates Ignore medical kits and additional costs.
This means that even if it is listed on a credit report, it will not be factored into the borrower’s DTI ratio or required to be paid before the loan is funded.
While this provided some much-needed relief, the presence of medical debt on credit reports still meant that the borrower’s credit score may have been negatively impacted.
As such, the hypothetical borrower could have seen their FICO score drop by 20 points or more, pushing them into a more expensive pricing group.
For example, a borrower with a FICO score of 695 is subject to a rate of up to 1.75% for credit score alone.
Meanwhile, a borrower with a FICO score of 700-719 is only subject to a rate of up to 1.375%.
This difference in the cost of the loan is then passed on to the borrower in the form of higher closing costs or a higher mortgage rate.
For some potential borrowers, a low credit score may be enough to completely disqualify them from loan approval.
An additional 22,000 mortgage approvals are expected annually
Thanks to this new rule, the CFPB expects an additional 22,000 Americans will be approved for “affordable mortgages” each year.
This means that a questionable medical bill will no longer be a barrier to home ownership.
This is largely because borrowers with medical debt on their credit reports see their average credit score jump by 20 points once that information is removed.
For example, if a borrower had an average score of 680 before this change, they may have a 700+ FICO going forward.
Remember, at this point, FICO and VantageScore still give weight to medical debt in their scoring models, though they reduce the impact of such events.
They will now be prohibited from doing so, which will result in higher credit scores across the board.
Additionally, borrowers may have had to provide a letter of explanation to the medical group in the past, which resulted in further legal action and could have jeopardized their approval.
This would no longer be the case, which would lead to more loans being approved with lower mortgage rates that reflect higher credit scores.
The CFPB also expects to close this special “deduction” that allowed creditors to consider medical debt to increase privacy protections and reduce coercive debt collection practices.
So, even though it may become easier to qualify for a mortgage, consumers will be less likely to be burdened by pesky debt collectors.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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