Research and Statistics

CFPB: Credit scores for medical debt are unfair


Study by consumer watchdog agency finds unpaid medical debt weighs too heavily on people’s credit scores

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People with overdue medical bills take a harder hit to their credit score than they deserve, the government’s consumer watchdog said Tuesday,  in a report that cuts two ways for consumers.

“We found consumers may be overly penalized for medical debt that winds up on their credit report,” CFPB director Richard Cordray told reporters in a press call. “This is because credit scoring models may be underestimating the creditworthiness of consumers who owe and pay back medical debt in collections.”

Having medical bills sent to debt collectors resulted in credit scores 10 points to 22 points lower than people’s repayment history justified, the bureau’s report said.  Debts that had been repaid, but still appeared on credit reports, were most over-penalized.

CFPB: credit scores for medical debt are unfair

But on the other side of the coin, people with mostly nonmedical debts could wind up feeling worse off. They are being “under-penalized,” the report said.

“Based on their observed performance, the scores of these consumers should have been lower than they were,” said the report, “CFPB Data Point: Medical Debt and Credit Scores.”

The CFPB oversees credit reporting bureaus that created the VantageScore, one of the major credit scores in use by lenders. The report cited VantageScore and FICO, the score used by most lenders, as examples of credit scores. However, the CFPB is not launching regulations to correct the imbalance, a senior official said. Rather, the report marks the beginning of a discussion with credit score companies and the public.

FICO will release a revised formula this year that gives medical collections a smaller impact than nonmedical ones, spokesman Anthony Sprauve said in an email response to questions.

VantageScore Solutions released a statement saying that its newest scoring model at least partly addresses the CFPB’s criticism. The VantageScore 3.0 model factors in whether a bill in collection has been paid, the company’s statement said.  Traditionally, credit scoring models have not differentiated between collections that have been fully repaid and those that remain unpaid. A spokesman wouldn’t comment on whether the company will also look at distinguishing between medical debt and nonmedical debt.

Model  builders “are always working on making the model as predictive as they can,” spokesman Jeff Richardson said.

Medical debts  — which make up more than half of the overdue debts that are reported by debt collectors — are different from other kinds of obligations, the CFPB said. Unlike loans for set amounts, debts racked up by hospital stays and medical procedures are difficult to predict.  Medical insurance adds another layer of uncertainty, as patients wait to find out what costs will be covered.

Based on complaints filed with the CFPB, “many consumers do not even know they have a medical debt in collections until they get a call from a debt collector, or they discover the debt on their credit report,” Cordray said.

The study compared 5 million anonymized credit reports from September 2011 and September 2013. Looking at groups with similar credit scores, it found that consumers whose debts in collection were mainly medical bills had a 12.8 delinquency rate — substantially lower than the 16.2 percent rate for people with mostly nonmedical debts in collection.

[M]any consumers do not even know they have a medical debt in collections until they get a call from a debt collector, or they discover the debt on their credit report.

— Richard Cordray
Consumer Financial Protection Bureau

The analysis concluded that the overpenalty was harshest for people who had already paid their medical debt, resulting in a credit score deficit of 16 points to 22 points less than people with similar repayment histories.

The study suggests that differentiating between types of debt would send scores downward for consumers with nonmedical debt in collections, such as for rent or phone bills.

The CFPB’s study comes after four Democratic senators in 2012 asked the agency to address the impact of medical debt collections on people’s credit. The four, Jeff Merkley of Oregon, Charles Schumer of New York, Robert Menendez of New Jersey and Sherrod Brown  of Ohio, back a bill that would erase medical debts from consumers’ credit reports 45 days after they are paid or settled. The Medical Debt Responsibility Act of 2013 has been before the Senate Banking Committee since January 2013.

The measure could get a boost from the CFPB’s findings, said Chi Chi Wu, staff attorney with the National Consumer Law Center. “This provides data to confirm that medical debt … unfairly penalizes the consumer,” she said.

To protect consumers’ privacy, credit reports leave out the names of medical service providers such as hospitals and clinics. However, medical debts are identified generically and included on the report. So lenders or employers that see a medical bill in collections “may infer that the person is not responsible, when it’s a bill they never even saw,” Wu said.

Outside of the legislative arena, credit scoring companies could adjust their models based on the CFPB’s findings, she said. Whether some consumers would face lower credit scores as a result “is hard to say, especially given the black-box nature of the credit score model,” Wu said, referring to the secrecy around the details of credit scoring formulas.

See related:Congress considers relief for credit damage from medical bills

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