Medical bills account for nearly half of all collections notices on consumers’ credit reports, affecting more than 43 million Americans. Meanwhile, it’s been shown that medical billing is fraught with errors and many consumers sent to collections for these debts are penalized too harshly. A new federal requirement hopes to reduce this overly negative impact of medical debt on credit reports.

In an effort to better address the challenges consumers face when it comes to medical debt, the CFPB announced, in conjunction with its new report [PDF], that major consumer reporting agencies will now be required to provide regular accuracy reports to the Bureau on how disputes from consumers are being handled.

“Access to this required reporting information on a regular basis will help us prioritize our work, and it will help us protect consumers even more effectively in this field,” Richard Cordray, CFPB director, says in a statement.

Because medical debts are often the result of unpredictable and costly events such as accidents and sudden illnesses, the CFPB believes they should be weighed differently from non-medical debts. After all, people choose to go into debt buying stuff they can’t afford, but they rarely choose to get an appendicitis that will end up costing them more than a luxury sports car.

Often the CFPB has found that consumers do not even know they owe medical debt until they get a call from the collections agency or they discover it on their credit report.

This occurs because in many cases if a medical bill goes unpaid after a certain amount of time, the medical provider may hand over the account to a third-party debt collector. And the majority of those collections items that end up on consumers’ credit reports are furnished to the credit reporting agencies by third-party debt collectors.

This system has been found to precipitate an ecosystem of errors and confusing processes for consumer disputes.

Complaints related to medical billing most often received by the CFPB involve claims from consumers that information furnished by these collectors to credit reporting agencies are inaccurate due to errors in billing or slow-moving insurance claims.

In fact, the CFPB reports that consumers identifying as having medical debt are more than twice as likely to claim that the debt was paid than consumers with other types of debt.

Today the CFPB took steps to ensure that these issues have less impact on consumers and that credit reporting companies are doing their part to ensure consumers’ records are as accurate as possible.

By requiring major credit reporting companies to provide regular accuracy reports to the Bureau as part of ongoing examinations, officials with the agency believe consumers’ credit reports will improve.

The reports will highlight key risk areas for consumers, including disputes filed with the credit reporting agencies. Some of the metrics in the accuracy report will include:

• Furnishers with the most overall disputes: If a credit reporting company continuously experiences an outsized number of consumer disputes about information from a particular furnisher, the CFPB expects the credit reporting agency to investigate, identify if there is a problem, and take appropriate action.

• Industries with the most disputes: The credit reporting agencies will have to list the top industries they are reporting on, the volume of information received from those industries, and the total number of disputes generated by those industries.

• Furnishers with particularly high disputes relative to their industry peers: For each industry named, the credit reporting agency must also name the top furnishers with the largest number of consumer disputes.

Officials with the CFPB say the new requirements are fundamental in indicating the risks consumers face when it comes to medical debt.

“If a credit reporting company has a furnisher that continuously experiences an outsized rate of consumer disputes relative to its peers, we expect the company to do something about it,” Cordray says. “We expect it to investigate the source of the disputes, identify any problems, and take necessary action. This may include declining to accept information from the troubled furnisher where that step is justified.”

While consumer groups applauded the steps taken by the CFPB on Thursday, they urge the agency to continue taking action against unfair medical debt collection practices.

Chi Chi Wu, staff attorney for the National Consumer Law Center called the CFPB’s action a good first step.

“The credit reporting system needs fundamental reform,” Wu says in a statement, “including better standards for accuracy and real, meaningful investigation of consumer disputes that don’t automatically defer to the debt collector or creditor in a dispute.”

Officials with the NCLC say the CFPB could further protect consumers by:

• examining the larger medical debt collection agencies;
• requiring debt collectors to give consumers a notice before placing or “parking” medical debt on their credit reports;
• require that consumers be given time to deal with insurance disputes or billing errors, or to apply for financial assistance or charity care, before a debt can be reported to a credit reporting agency;
• preventing damage to a consumer’s credit score from medical debts that are disputed or result from billing errors; and
• prohibiting debt collectors from dunning low-income consumers for inflated chargemaster prices.

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