In another blow to Biden-era financial regulations, a federal judge has blocked a rule that would have removed medical debts from millions of Americans’ credit reports.
The Consumer Financial Protection Bureau finalized the rule in early January, shortly before President Trump took office. The bureau estimated that the rule, which prohibited credit bureaus from including medical debt in the reports and scores sent to lenders, would have removed $49 billion in medical bills from the credit reports of 15 million Americans. Credit reports are used by lenders to make decisions about whether to approve loans for homes, cars and small businesses.
Before the rule took effect, two trade groups credit bureaus and credit reporting agencies sued to block it, arguing that the bureau had exceeded its authority. They filed the lawsuit in the U.S. District Court for the Eastern District of Texas, a popular venue for litigation challenging the federal government’s reach.
Under the Biden administration, the agency fought the lawsuit, but once Mr. Trump returned to the White House, the new leaders he installed to oversee the consumer bureau reversed course. In April, the bureau joined the trade groups in asking the federal court to strike down the agency’s regulation.
Last Friday, the court granted their request. Judge Sean D. Jordan wrote that he agreed with the trade groups’ argument that the consumer bureau’s rule conflicted with Fair Credit Reporting Act, which governs consumer credit reports. That federal law allows lenders and credit reporting agencies to use financial information related to medical debts, and the bureau exceeded its authority by “fashioning a new regulatory scheme that conflicts with the plain text” of the existing law, the judge wrote.
The Consumer Data Industry Association, a plaintiff in the lawsuit to block the rule, praised the judge’s decision. “Information about unpaid medical debts is an important element in assessing a consumer’s ability to pay. This is the right outcome for protecting the integrity of the system,” said Dan Smith, the group’s chief executive.
Consumer advocates said the ruling would add to the burdens confronting people facing health challenges. In drafting the rule, the consumer bureau drew on its own research and other studies showing that unlike most other consumer debt, medical bills have little predictive value in determining a consumer’s likelihood to repay loans.
In a macabre nod to how deeply debt enforcement efforts can cut, the bureau said when it issued the rule that it would have prevented creditors from using information about medical devices — like wheelchairs or prosthetic limbs — to demand that the devices “serve as collateral for a loan for the purposes of repossession.”
Judge Jordan’s ruling went a step further than simply striking down the consumer bureau’s rule. More than 10 states — including California, New Jersey and New York — have imposed their own bans on which medical debts can be reported to credit agencies. Those laws are inconsistent with the Fair Credit Reporting Act, Judge Jordan ruled, and are therefore pre-empted by the federal law.
But some recent limits to medical debt reporting will remain in place. In April 2023, the three national credit bureaus — Equifax, Experian and TransUnion — stopped including on their reports medical debts with initial balances below $500. They also extended the time period before unpaid debt could be reported, to one year from six months. That removed almost 70 percent of overdue medical debt from consumers’ reports, the credit agencies said.
Those changes will remain, according to the Consumer Data Industry Association. Representatives from each of the three bureaus referred questions about their medical debt reporting plans to the trade group.
A recent analysis from the Urban Institute found that around 4 percent of American consumers — an estimated 10 million people — had medical debt that was past due on their credit report last year. That’s around a third of those who had such entries on their reports before the credit bureaus’ changes in 2023, the research group said.
Stacy Cowley is a business reporter who writes about a broad array of topics related to consumer finance, including student debt, the banking industry and small business.
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