The Consumer Financial Protection Bureau’s announcement that it has expanded access to credit scores and reduced the impact of medical debt on credit has even some critics of the consumer protection agency impressed by its work.
Upwards of 50 million consumers now have access to free credit scores through more than a dozen major issuers following a year-long campaign by the agency to get credit-reporting agencies to provide the scores for free, Director Richard Cordray announced this week in Washington.
Credit scores, issued by credit-reporting agencies Experian, Equifax and TransUnion as well as FICO, are important in all types of consumer credit, including mortgages, and can even be looked up by landlords or potential employers to gauge people’s reliability.
Although Congress had previously mandated that the three major credit reporting companies make credit reports accessible for free to people who asked for theirs, consumers generally had to pay to see their scores. Now, more credit card issuers are showing customers their scores on their statements, and Cordray said he expects more companies to do the same.
Furthermore, credit reporting agencies have changed the way they treat medical debt — to stop over-penalized people who were late in repaying hospital or other medical bills, which can be complicated and confusing, a development Cordray attributed to agency research.
“From one medical incident – a single trip to the hospital or a period of treatment for an illness – there can be multiple bills from multiple providers, which may or may not be covered by insurance,” Cordray said. “As a result, consumers might not know which medical debts they are responsible for paying or in what amounts.”
The consumer protection agency has been studying the effects of medical debt on consumer credit for more than a year and has generally found that medical debt is different from mortgage debt or debt owed on a car. In May 2014, the agency found that credit scores may overly penalize medical debt.
Another report, released in December, found that 43 million Americans have overdue medical debt on their reports, accounting for more than half of total overdue debt.
The average unpaid medical debt noted by agencies is $579, well below the roughly $1,000 for other debts.
Medical debt is especially tricky for people because they may be billed by a number of parties for one incident, and they may not know whether they or their insurance is responsible for a bill. Furthermore, unlike a house or a car, an illness or injury is often unpredictable and hard to factor into financial plans.
“It’s not always clear to the consumer whose that payment was,”said Ruth Susswein, deputy director for the consumer advocacy group Consumer Action. “Was it the individual? Or was it the insurance company? Whose responsibility was it to pay that bill?”
A representative for TransUnion said that its latest proprietary credit score model does not include medical debt collections.
Last year, FICO — which provides scores for the vast majority of home and other lenders — said its latest credit score model would differentiate medical debt from other kinds of debt.
Susswein noted that it could take several years for lenders to use the updated FICO model. But she said that “the practical impact will be helpful to people who, through no fault of their own, have ended up with a financial problem because of a medical problem,” noting that it will help some otherwise creditworthy borrowers get loans, and help some job applicants qualify for jobs they might have otherwise been turned down for.
Todd Zywicki, a law professor at George Mason University and the author of a book on U.S. consumer credit, expressed some skepticism of the agency’s role in the change. “To put it bluntly, that a government agency would be able to figure this out and a private business wouldn’t is hard to believe,” he said.
Zywicki suggested that the CFPB might be “strong-arming the credit reporting agencies on a highly political topic,” noting that bankruptcies due to medical charges were a crucial justification for Obamacare. Furthermore, Sen. Elizabeth Warren, D-Mass., who as a financial regulator had the idea to create the bureau, made medical bankruptcies a focus in her work as a law professor.
Zywicki has been a critic of the consumer agency, which was created by the 2010 Dodd-Frank law in the wake of the mortgage crisis.
But he acknowledged that the bureau’s efforts to get free credit scores to millions of consumers was “a big deal.”
“That seems like a boon for consumers,” he said.
