Yesterday, AFSA submitted comments to the CFPB on its proposed rule concerning medical debt.  In the letter, AFSA highlighted four specific issues with the proposed rule:

• The CFPB lacks authority for this rulemaking
  • At the outset, the CFPB lacks the authority to prohibit credit reporting agencies from providing medical debt information in consumer reports. The Fair Credit Reporting Act (FCRA) limits the CFPB’s rulemaking to the “uses” of medical information, but not explicitly give the CFPB authority to restrict that information from being included in consumer reports. In fact, the FCRA specifically permits providing medical information, so long as it is properly coded to mask the provider or nature of the services.
• The rule does not provide a clear definition of medical debt
  • The final rule should affirmatively state that “medical debt information” does not include medical payment products or general purpose credit. A broader definition of medical debt information, which includes all debts related to a transaction arising from a medical service, product, or device, would make it difficult or impossible for the consumer reporting agency or the lender to determine which transactions or portions thereof were for medical purposes or were medically necessary.
  • For instance, a debt related to an in-house credit transaction with a pharmacy that provides pharmaceutical compounds would be covered by the broad nature of the CFPB’s definition, even if the transaction results from the purchase of non-medical items that were purchased.
• There are conflicts with existing regulations and the CFPB’s own enforcement action
  • The proposed rule does not adequately address the potential conflict with lenders’ obligations under Regulation Z and Unfair, Deceptive, or Abusive Acts or Practices (UDAAP), along with responsible lending principles to analyze a consumer’s ability to repay any credit extended. In addition, if enforceable medical debt is scrubbed from the analysis, a cycle-of-debt situation could occur, where delinquent borrowers have no choice but to refinance existing credit in the hope that they will be able to repay it further down the line. This is not part of a responsible lending system.
  • Even if the Bureau does not believe it should be on credit reports, non-reporting does not delete valid debt, and consumers are still responsible for paying it back. As a result, the ability-to-repay analysis will be missing the consumers’ obligation and put the consumer at risk of default. To account for this increased risk, lenders might have to raise the cost of lending across the board.
  • Further, one of the CFPB’s recent enforcement actions contradicts the proposed rule, meaning that both compliance and non-compliance would leave financial companies open to enforcement actions from the CFPB. This Catch-22 situation would leave lenders stymied and would cause a contraction in the lending system.
  • In a recent enforcement action, the Bureau accused a finance company of not being thorough enough in its ability to repay analysis, and therefore claimed the company was “abusive.”  In the complaint, the CFPB states that the lender “does not consider—or even require dealers to ask about—the borrower’s recurring debt obligations, rent or mortgage payment, or any of the other necessary expenses an individual incurs each month, including the cost of food, healthcare, or childcare” [emphasis added].
  • AFSA noted this inconsistency in its comments to the Small Business Review Panel, however, it has gone unaddressed in the rulemaking. Now, the CFPB is considering removing medical debt from consumer reports that financial institutions use in credit determinations, the very conduct cited as “abusive” in the enforcement action. This either negates previous CFPB enforcement action or institutes a rule which would allow the CFPB to categorize every lender as “abusive.”
• The rulemaking would disrupt a working consumer reporting system
  • The consumer reporting ecosystem works best when information in consumer reports is accurate and comprehensive. The system is intended to serve as a mirror, providing a truthful and verifiable reflection of consumers’ financial condition and history managing their use of credit. This system rewards people who use credit responsibly and tells the unvarnished truth about those who fail to keep up with their financial obligations.
  • But even in cases of consumers who default on their obligations, the consumer reporting system is not punitive. The system reports facts about delinquency and default until such time as those events are removed from the system with the passage of time. The system is designed to forget past events.
  • This proposal suggests the CFPB wants the consumer reporting system to be a lens rather than a mirror. The CFPB would hide accurate information about consumers’ financial condition from lenders in the service of other policy priorities. This is the wrong approach. We should be working to fill the consumer reporting system with accurate information that tells the truth about consumers’ financial condition and credit usage so that consumers and creditors each make the best possible decisions regarding future extensions of credit.