Hiding consumers' medical debt from lenders is a terrible idea

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On September 21, 2023, the Consumer Financial Protection Bureau officially announced that it was beginning the rulemaking process to, among other things, eliminate medical debt from credit reports. The bureau previously signaled its intent to promulgate a rule under the federal Fair Credit Reporting Act related to credit reporting. Over the past couple of years, the agency has expressed its disdain for credit reporting medical debt, as well as for certain medical debt products (such as medical credit cards and installment loans).

CFPB leadership believes that medical debt on a credit report is not predictive of future repayment like other credit obligations. Of course, that ignores the fact that any existing debt — including medical debt — competes with other obligations when it comes to making repayment choices and therefore should be taken into account by underwriters. The CFPB also incorrectly presumes that many medical debts are questionable and therefore such creditors should not be able to utilize credit reporting as a collection tool. The three nationwide credit reporting agencies attempted to head off such action when they enacted their own rule to remove medical debts under $500 and delete paid medical accounts. Clearly, the agency did not think this went far enough.

In addition to eliminating the credit reporting of medical debt, the CFPB's outline of proposals and alternatives under consideration also involves expanding the FCRA to govern those who act as data brokers or otherwise engage in the "assembling or evaluating" of consumer information, but were not previously considered a credit reporting agency or subject to the statute.

Most recently, the CFPB convened a small business review panel, which is required under the Small Business Regulatory Enforcement Fairness Act of 1996, more commonly known as the SBREFA process. This panel contains representatives from the CFPB, the chief counsel for advocacy of the Small Business Administration, and the Office of Management and Budget's Office of Information and Regulatory Affairs. The agency needs to consider how its rule will impact small businesses that are likely to be affected by the regulation. Specifically, the panel discusses and receives feedback from small-business representatives on the economic impacts of complying with the proposed regulation and alternatives under consideration. The panel is instructed to issue a report, based on the feedback received, within 60 days after it is convened. The CFPB should consider this report as it issues the specifics of a proposed rule.

After issuing the proposed rule, the bureau must solicit and consider public comments on the proposed rule in accordance with the Administrative Procedures Act. Thereafter, the CFPB will likely publish a final rule which will take effect after an implementation period. The entire process is likely to take many months — perhaps more than a year.

Currently, there are questions about whether the agency even has the authority to issue an administrative rule due to claims that its funding structure is unconstitutional. Under Section 5497 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB receives funding from the Federal Reserve rather than from Congress through the appropriations process. This claim is presently before the Unites States Supreme Court. If found to be unconstitutional, the actions of the CFPB may be vacated.

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Even after the new rule takes effect, Congress can overturn it through the Congressional Review Act, which requires a majority vote to overturn a new agency rule. It is unlikely, however, that there will be 51 votes in the Senate during the current Congress to overturn the rule.

There can also be judicial review of federal agency actions. As such, I suspect we will see litigation filed to prevent enforcement of this rule, with plaintiffs likely arguing it is unconstitutional, goes beyond the agency's legal authority and/or is arbitrary, capricious or an abuse of discretion.

The Dodd-Frank Act states that the CFPB is authorized to "exercise its authorities under Federal consumer financial law to administer, enforce, and otherwise implement the provisions of Federal consumer financial law."  It further authorizes the director of the agency to prescribe rules "as may be necessary or appropriate to enable the bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof."

Does the prospective rule help administer or carry out the FCRA? Unlike Regulation F, this rule will not clarify ambiguity in the statute. Rather, it will seemingly expand the statute to eliminate certain practices that are permissible today and extend its reach to entities never previously subject to it. The new prohibitions will not administer, enforce or implement existing law — they will arguably create new law and improperly usurp the powers solely possessed by Congress. This prospective rule would specifically appear to regulate health care and medical billing and certain data, which the CFPB does not seemingly have the authority to do, rather than (and perhaps under the guise of) general credit reporting practices.

Those claims will certainly be interesting ones to follow, but they won't be brought until after a final rule is issued. So, we will have to continue following this process closely throughout the coming months. Of primary concern are the unintended consequences of such a rule, which may ultimately increase the cost of, and create barriers that limit access to, medical care. It will make it harder for health care providers to collect amounts owed and likely increase the incidence of upfront billing.

Some also question if this is a politically motivated attempt to provide lower-cost or free health care as the Biden-Harris administration previous said it would attempt to "ease the burden of medical debt." This will certainly devalue accounts receivable and could even be construed as an impermissible taking, without compensation, in violation of the Fifth Amendment to the U.S. Constitution.

The courts have a crucial role to perform in our government's system of checks and balances and, given the aforementioned facts, should stand prepared to rein in an executive agency when it exceeds its statutory authority.