CFPB Proposes To Ban Medical Debt From Credit Reports

On June 11, 2024, the Consumer Financial Protection Bureau (CFPB) published a notice of proposed rulemaking (NPRM) to amend Regulation V, which implements the Fair Credit Reporting Act (FCRA), to generally prohibit consumer reporting agencies (CRAs) from furnishing to a "creditor" a consumer report that contains information about any medical debts of the subject consumer. Under the FCRA, a "creditor" includes, among others, "any person who regularly extends, renews, or continues credit," as well as "any person who regularly arranges for the extension, renewal, or continuation of credit."¹ Through targeted amendments to Regulation V, the CFPB's proposed rule would (1) remove a provision that currently permits creditors to obtain and use medical financial information in connection with credit eligibility determinations and (2) otherwise limit the circumstances under which CRAs are authorized to furnish medical debt information to creditors, unless a specific exception otherwise applies.

The NPRM represents the first of potentially multiple rulemakings to emerge from a small business review panel convened by the CFPB in accordance with the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). Under SBREFA, federal agencies must consult with representatives of small businesses likely to be affected by a proposed rulemaking and obtain feedback on the likely impact of the rule. In September 2023, the CFPB commissioned a panel to consider several proposals related to FCRA topics. These proposals included revisions or amendments to (1) the definitions of "consumer report" and "consumer reporting agency" under the FCRA; (2) the application of the FCRA to data brokers and revisions to relevant statutory concepts, including what constitutes "assembling" or "evaluating" consumer report information; (3) the "permissible purposes" for which CRAs may furnish consumer reports to third parties; and (4) disputes concerning the completeness and accuracy of information in consumer reports, among other proposals.

Background

The FCRA governs the collection, assembly, furnishing, and use of "consumer report" information,² providing a framework for the U.S. consumer reporting system. Through the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), Congress amended the FCRA to, among other purposes, restrict creditors' ability to obtain or use medical information in connection with credit eligibility determinations. Under Section 411 of the FACT Act, the federal banking agencies and the National Credit Union Administration adopted a regulatory exception to the general prohibition on creditors' ability to obtain or use medical information in connection with credit eligibility determinations (the "financial information" exception), if all of the following conditions are met:

1. The information is the type of information routinely used in making credit eligibility determinations, such as information relating to debts, expenses, income, benefits, assets, collateral, or the purpose of the loan, including the use of proceeds.
2. The creditor uses the medical information in a manner and to an extent that is no less favorable than it would use comparable information that is not medical information in a credit transaction.
3. The creditor does not take the consumer's physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.³

The agencies justified the financial information exception to the FACT Act prohibition as both "necessary and appropriate to protect legitimate operational, transactional, risk, consumer, and other needs (including administrative verification purposes)"⁴ and consistent with congressional intent "to restrict the use of medical information for inappropriate purposes." Moreover, the agencies reasoned that the financial information exception struck "a balance between permitting creditors to obtain and use certain medical information about consumers when necessary and appropriate to satisfy prudent underwriting criteria and to ensure that credit is extended in a safe and sound manner."⁵

With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress transferred primary regulatory authority over the FCRA to the CFPB. In December 2011, the CFPB restated the federal banking agencies' regulations as an interim final rule, and on April 28, 2016, the CFPB finalized that interim final rule. The NPRM states that the CFPB's adoption of the interim final rule occurred without the CFPB "assessing or otherwise reconsidering the policy decisions and justifications that served as the basis for the regulations."⁶ Nevertheless, and despite the seemingly clear findings articulated by the agencies at the time, the CFPB now asserts that the federal banking agencies, in adopting the regulatory exception summarized above, "did not cite evidence or provide analysis in support" of the agencies' conclusions regarding the necessity and appropriateness of the exception.⁷

Overview of the NPRM

Definition of "Medical Debt Information"

The CFPB proposes to amend Regulation V to define the term "medical debt information" as "medical information that pertains to a debt owed by a consumer to a person whose primary business is providing medical services, products, or devices, or to such person's agent or assignee, for the provision of such medical services, products, or services." The proposed definition clarifies that medical debt information "includes but is not limited to medical bills that are not past due or that have been paid." And the definition would not include information about debts for medical care charged to credit cards, including medical credit cards offered for the payment of medical services.

Removal of the Financial Information Exception

The CFPB has proposed to remove the financial information exception from Regulation V, while retaining certain elements of the exception relating to income, benefits, and the purpose of a loan. The proposed rule would specify that medical information related to income and benefits includes, among other things, "the dollar amount and continued eligibility for disability income, workers' compensation income, or other benefits related to health or a medical condition that is relied on as a source of repayment." Similar to the existing financial information exception, under the proposed rule, a creditor would be required to (1) use such information in a manner and to an extent "no less favorable than it would use comparable information" and (2) not take into account the "consumer's physical, mental, or behavioral health, condition or history, type of treatment, or prognosis" as part of its credit eligibility determination.

Limitations on CRAs

In the NPRM, the CFPB also has proposed a new subpart to Regulation V that would otherwise limit the circumstances in which a CRA may disclose medical debt information to a creditor. Under this proposed subpart, a CRA could include such information in a consumer report for the purposes of a credit eligibility determination only if two criteria are met: (1) the CRA has reason to believe the creditor intends to use the medical debt information in a manner that is not otherwise prohibited by Regulation V and (2) the CRA is not otherwise prohibited from furnishing a consumer report containing medical debt information, including by state law.

CFPB Justification for the NPRM

The NPRM arises from the CFPB's preliminary determination that medical debt information is not necessary and appropriate for credit eligibility determinations. The CFPB cites to a "significant body of research," much of which the agency has conducted itself, as well as "marketplace changes" that the agency claims raise "questions about the necessity and appropriateness of creditors' use of medical debt information in credit underwriting." For example:

• Cause of medical debt. The CFPB cites to research that suggests, unlike other types of debt, medical debt often results from circumstances over which "consumers have no control," such as accidents or sudden illnesses, preventing a consumer's ability to "shop around" for medical services.
• Medical debt as being prone to error. Based on third-party surveys and complaints received by the agency, the CFPB asserts that "medical bills commonly contain errors and are frequently disputed by consumers," which leads the agency to question the accuracy of consumer bills.
• Limited predictive value of medical debt. Through research conducted by the agency in 2014 and described in a technical appendix to the NPRM, the CFPB claims that "medical debt information has relatively limited predictive value." CFPB research purportedly shows that, for example, medical collections "are less predictive of future consumer credit performance than nonmedical collections."
• Medical debt collection practices. The inconsistent nature of medical debt furnishing and collection practices, often through third-party debt collectors, "limits the value of such information for credit underwriting," according to the CFPB.
• Industry participants' lack of reliance on medical debt. Recent steps by the three major credit bureaus to stop reporting medical collections that are under $500, less than a year old, or paid indicates, according to the CFPB, reduced market reliance on medical debt information.
• State and federal restrictions on medical debt. Despite recent action by state governments and federal agencies to reduce or eliminate medical debt collections from credit determinations, the CFPB has not observed any discernible effect on creditors' underwriting standards or a reduction in the availability of credit as a result of these actions.

Takeaways

As discussed in our May 2024 Advisory, the CFPB is expected to continue an aggressive rulemaking agenda following a recent ruling from the Supreme Court affirming the constitutionality of the agency. Notably, CFPB Director Rohit Chopra has committed to "pursuing additional work when it comes to the emerging ecosystem of medical financial products." Testifying before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Chopra also noted that the CFPB was "moving forward" with a rule under FCRA "to restrict uses of certain sensitive data by data brokers."

Many aspects of the proposed rule are ripe for public comment. For example, the CFPB has sought comment on, among other topics, the following important issues:

• The CFPB's interpretation that debts owed to third-party lenders (including a medical credit card issuer whose products are offered for the payment of medical services) do not constitute "medical debt" for the purposes of Regulation V.
• The CFPB's preliminary determination that a creditor's consideration of financial information concerning a consumer's medical debt is not "necessary and appropriate" to protect legitimate operational, transactional, risk, or consumer needs.
• The CFPB's removal of the financial information exception for expenses, assets, and collateral, including creditors' use of medical devices as collateral, for credit eligibility determinations.

Public comments must be received on or before August 12, 2024.

If you are interested in submitting comments on the proposed rule, or if you would like more information about how the NPRM or the CFPB's SBREFA proposals may impact your business, please contact any of the authors of this Advisory or your usual Arnold & Porter contact. The firm's Financial Services team would be pleased to assist with any questions about the targeted adjustments proposed to Regulation V, other consumer reporting rulemaking under CFPB consideration, or financial regulation more broadly.

In addition, Arnold & Porter will host a webinar on July 24, 2024, during which attorneys from our Financial Services and White Collar Defense and Investigations practice groups will discuss the CFPB's regulatory and enforcement priorities in light of the U.S. Supreme Court's recent affirmation of the CFPB's funding structure. This informative session will cover a range of topics, including the NPRM and other FCRA-related proposals outlined by the CFPB as part of the SBREFA process. Please click here to register.

Footnotes

1. 15 U.S.C. § 1681a(r)(5).

2. 15 U.S.C. §§ 1681c-1681x.

3. 12 C.F.R. § 1022.30(d).

4. Fair Credit Reporting Medical Information Regulations, 70 Fed. Reg. 33958, 33962 (June 10, 2005); Fair Credit Reporting Medical Information Regulations, 69 Fed. Reg. 23380, 23382 (Apr. 28, 2004).

5. Fair Credit Reporting Medical Information Regulations, 69 Fed. Reg. at 23384.

6. NPRM at 24.

7. Id. at 30.

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