The Consumer Financial Protection Bureau (CFPB) has taken a significant step to protect consumers by finalizing a new rule that will remove billions of dollars of medical debt from credit reports. This change is expected to positively impact millions of Americans by improving their credit scores and making it easier to qualify for a mortgage. Here’s what you need to know about the new rule, how it affects your credit score, and what it means for potential homebuyers.

What Does the CFPB Rule Change?

The CFPB’s final rule bans credit reporting agencies from including medical bills on credit reports and prohibits lenders from using medical information when making lending decisions. An estimated $49 billion in medical bills will be removed from the credit reports of about 15 million Americans. This rule aims to prevent debt collectors from using the credit reporting system to coerce consumers into paying medical bills they may not owe.

Key Provisions of the Rule:

• Prohibits lenders from considering medical information: Lenders can no longer use medical information, including medical debts, when making credit decisions.
• Bans medical bills on credit reports: Consumer reporting agencies are no longer allowed to include medical debt information on reports sent to lenders.

This change is expected to help consumers who have been unfairly penalized by medical debt reporting, especially those who have received inaccurate medical bills or bills that should have been covered by insurance.

How Medical Debt Has Impacted Credit Scores

Historically, medical debt has negatively affected millions of Americans’ credit scores, even though it’s often an unreliable indicator of a borrower’s ability to repay other debts. Medical bills can end up on a credit report due to billing errors, disputes with insurance companies, or delays in processing claims. Unfortunately, these issues have led to denied mortgage applications and higher borrowing costs for consumers.

The CFPB found that medical debt is a poor predictor of creditworthiness. For instance, many consumers with medical debt on their credit reports have otherwise good credit habits, but their scores were dragged down due to unpaid medical bills. This rule change will help address that imbalance.

Positive Impact on Credit Scores

The removal of medical debt from credit reports is expected to boost credit scores for millions of Americans. The CFPB estimates that consumers with medical debt on their reports could see their scores increase by an average of 20 points. This increase could make a significant difference for individuals on the cusp of qualifying for a mortgage or securing better loan terms.

Additionally, credit scoring companies FICO and VantageScore have already made changes to reduce the impact of medical debt on credit scores. These updates, combined with the CFPB’s rule, mean that medical bills will no longer be a major factor in determining a person’s creditworthiness.

What This Means for Homebuyers

For those looking to buy a home, the CFPB’s rule is a game-changer. Medical debt has been a common barrier for potential homebuyers, causing unnecessary denials or less favorable loan terms. With medical debt no longer impacting credit reports, more people will qualify for affordable mortgages.

The CFPB expects that approximately 22,000 additional mortgages will be approved each year due to this rule change. For many borrowers, this could mean the difference between renting and owning a home.

How Mortgage Lenders Will Be Affected:

• Lenders will no longer see medical debt on credit reports.
• Loan approvals will be based on more accurate indicators of creditworthiness, such as payment history on loans and credit cards.

This change will help ensure that consumers are judged fairly on their ability to repay a mortgage rather than being penalized for medical expenses that are often beyond their control.

Protecting Consumers from Coercive Debt Collection Practices

One of the primary goals of the CFPB’s rule is to protect consumers from aggressive debt collection practices. In the past, debt collectors have used the threat of damaging a consumer’s credit report to coerce payment of medical bills, even if those bills were inaccurate or shouldn’t have been owed.

By banning medical bills from credit reports, the CFPB is closing a loophole that allowed these practices to continue. The rule brings credit reporting regulations in line with Congress’s privacy protections, which restrict lenders from obtaining or using medical information.

What You Can Do to Improve Your Credit Score

While the removal of medical debt from credit reports will give many consumers a credit score boost, there are other ways to improve your score and strengthen your chances of qualifying for a mortgage:

1. Pay all your bills on time. Your payment history is one of the most important factors in your credit score.
2. Keep your credit utilization low. Try to use less than 30% of your available credit.
3. Check your credit report for errors. Regularly review your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) to ensure accuracy.
4. Avoid applying for too much credit at once. Too many credit inquiries can temporarily lower your score.

The Future of Credit Reporting and Lending

The CFPB’s new rule reflects a broader trend in the credit industry toward more accurate and fair credit reporting practices. By removing medical debt from credit reports, lenders can better assess a borrower’s true creditworthiness, leading to more approvals and better loan terms for consumers.

For potential homebuyers, this change provides new opportunities to achieve their dream of homeownership. It’s an important step toward a more equitable financial system that doesn’t punish consumers for medical issues beyond their control.

Final Thoughts

The CFPB’s decision to remove medical bills from credit reports is a significant win for consumers. It addresses long-standing issues with inaccurate medical billing and unfair credit reporting practices that have hurt millions of Americans.

If you’re considering buying a home or refinancing your mortgage, this rule change could improve your chances of qualifying for a loan. At United Mortgage Advisors, Inc., we stay up-to-date on these industry changes to help you navigate the mortgage process with confidence.

Contact us today to see how we can help you achieve your homeownership goals!