A federal judge in Texas has struck down a rule issued by the Consumer Financial Protection Bureau that would have prohibited medical debt from appearing on consumer credit reports. The decision, issued Friday by U.S. District Judge Sean Jordan, halts a key component of the Biden administration’s efforts to reduce the impact of healthcare debt on creditworthiness.
Judge Jordan, serving in the Eastern District of Texas, ruled that the CFPB overstepped its legal authority under the Fair Credit Reporting Act. The law governs how consumer reporting agencies collect and share financial data, but the judge concluded it does not authorize the bureau to eliminate categories of information, including medical debt.
The rule, finalized earlier this year, was projected to remove approximately $49 billion in medical debt from the credit records of about 15 million Americans. The CFPB argued the change would have improved access to mortgages and other loans by eliminating what it described as a poor indicator of credit risk. According to the agency, medical debt is frequently used by lenders to reject loan applications, even though it often results from circumstances beyond a borrower’s control.
In anticipation of regulatory changes, the three major credit reporting agencies, Equifax, Experian, and TransUnion, had already begun removing medical debts under $500 from credit files. The CFPB’s rule would have gone further by banning all medical debt from credit reports and preventing lenders from using such information in credit decisions.
Data collected by the CFPB shows that one in five Americans has at least one medical debt collection account. More than half of all collection entries on credit reports relate to medical bills, with disproportionate effects on communities of color. According to the bureau, 28 percent of Black consumers and 22 percent of Latino consumers carry medical debt, compared to 17 percent of white consumers.
The CFPB was created by Congress in the aftermath of the 2008 financial crisis to oversee consumer protections in the financial sector. Its mandate includes regulating credit cards, mortgages, and debt collection practices. The agency’s authority and independence have faced ongoing legal challenges in recent years.
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