The Act, introduced by Senator Jeff Merkely of Oregon (and by Rep. Maxine Waters of California in the House), would require that any paid medical debt under $2,500 be removed from a credit report 45 days after it was paid.
The idea behind the legislation is that medical debt is generally not a good barometer of a consumer’s creditworthiness. If someone applying for a loan had an emergency appendicitis five years earlier when he was between jobs and could not immediately pay the full rack rate for the procedure, should his credit be scarred even after he has paid that bill and has no other indicators of being a credit risk?
According to the Fair Isaac Corp. — you might know it better as FICO, the people who make the dreaded score that goes a long way toward determining whether you can get a loan or not — any unpaid debt sent to collections, regardless of the amount, can shave up to 100 points off a person’s credit score – even if this collection is a mistake, made in error, paid or settled, or is in dispute.
“Creditworthy consumers are being denied credit or are paying higher interest rates or higher fees when purchasing a home loan or obtaining credit for credit-related products, due to medical debt on consumer credit reports,” reads the letter (see below for full text). “The Medical Debt Responsibility Act will prevent the credit records of millions of consumers from being unfairly tarnished. Credit records will show that these hard-working consumers, who successfully paid off or settled their medical bills, are more creditworthy than their credit report would otherwise indicate to a prospective lender.”
As we mentioned back in February, this is not the first time that this legislation has been introduced. Previous versions of the bill have died quiet deaths in committee in both the House and Senate in recent years, which is precisely why the advocacy groups — including our kin at Consumers Union — have written to Sen. Tim Johnson, Chair of the Committee on Banking, and Sen. Michael Crapo, the Committee’s Ranking Member, urging them to give the Act the consideration it deserves.
Here is the full text of the letter sent to Sens. Johnson and Crapo —
Dear Chairman Johnson & Ranking Member Crapo:
The undersigned organizations strongly support S.160, the Medical Debt Responsibility Act of 2013, introduced in the U.S. Senate. The bill requires credit agencies to remove FULLY paid or settled medical debt from credit reports within 45 days.
Annually, approximately 73 million Americans experience medical billing problems or accrue medical debt. Medical debt is unique in that it is not typically reported to the credit bureaus when it is paid on time since virtually no healthcare providers report to the credit bureaus. When medical bills are sent to collection agencies, they are generally reported to the credit bureaus and identified as accounts in arrears, which drags down credit scores. The medical billing system is fraught with errors and confusion, further compounding the situation for consumers.
When information is inaccurate, markets make decisions on less than perfect information. With regard to medical debt, this can mean significantly reducing a consumer’s credit score and subsequently impeding economic activity and consumer borrowing capacity. According to the Fair Isaac Corp., any unpaid debt sent to collections, whether for $100 or $10,000, can shave up to 100 points off a person’s credit score – even if this collection is a mistake, made in error, paid or settled, or is in dispute. This can have a dramatic impact on an individual’s ability to obtain a mortgage, a car loan, or any other form of credit, thereby limiting economic activity.
A 2012 Federal Trade Commission report found that as many as 40 million Americans have mistakes on their credit report. The current system punishes consumers regardless of the underlying facts (e.g., mistakes or errors). Congress can create equity in the current system and dramatically increase economic activity and growth by amending the Fair Credit Reporting Act to require the removal of medical collection accounts that are paid in full or settled.
Creditworthy consumers are being denied credit or are paying higher interest rates or higher fees when purchasing a home loan or obtaining credit for credit-related products, due to medical debt on consumer credit reports. The Medical Debt Responsibility Act goes a long way in ensuring that creditworthy consumers obtain the credit they have earned.
The Medical Debt Responsibility Act will prevent the credit records of millions of consumers from being unfairly tarnished. Credit records will show that these hard-working consumers, who successfully paid off or settled their medical bills, are more creditworthy than their credit report would otherwise indicate to a prospective lender. This important legislation recognizes that the current credit reporting system contributes to artificially constrained credit and allows consumers to participate in our economy from a market-oriented policy basis.
We urge Congress to pass this common sense legislation to help responsible consumers and reignite the economy.
Americans for Financial Reform
American Medical Association
The Asset Building Program, New America Foundation
California Association of Mortgage Professionals
Consumer Federation of America
Corporation for Enterprise Development
Leading Builders of America
Mortgage Bankers Association
National Association of Home Builders
National Association of Mortgage Brokers
National Consumer Law Center
The National Consumer Reinvestment Coalition
National Consumer Reporting Association
The Neighborhood Assistance Corporation of America