Journal of Financial Planning: August 2024
What if more than 15 million adults in the United States suddenly saw their credit scores rise by more than 20 points on average? On June 11, 2024, the Consumer Financial Protection Bureau (CFPB) proposed a rule that, if accepted, could do just that.1 The proposal would remove outstanding medical bills from most credit reports and introduce other measures, including privacy protections, that could lead to enhanced financial flexibility and opportunities otherwise out of reach. Financial planners will play a crucial role in such an evolving regulatory landscape. They must be prepared to provide guidance and advice tailored to their client’s best interests. This article explores the implications of such an enormous change to consumer finances and how financial planners may best position themselves and their clients for success.
Financial advisers provide value by evaluating their client’s interests and goals, and then prioritizing achievable targets through actionable strategies. The proposed rule by the CFPB underscores the importance of this principle. The difference between a Google search and an individual financial adviser is that the adviser tailors their expertise to the client’s current and long-term concerns. Should this proposition become a reality, advisers must consider all the consequences for their individual clients.
According to the CFPB report, this proposed rule, if finalized, would (1) eliminate the special medical debt exception, which broadly permits lenders to obtain and use information regarding medical debt to make credit eligibility determinations, and (2) establish guardrails for credit reporting companies, which prohibits them from including medical debt on credit reports sent to creditors when creditors are prohibited from considering it.
Consider Lauren, a financial planner, and her client, John. First and foremost, Lauren must assess whether John’s personal credit score involves any outstanding medical debt. If John’s credit rating doesn’t currently consist of medical debt, he would have no direct effects. However, Lauren should advise John to consider timing any planned borrowing before the rule is implemented to take advantage of his relatively higher credit score when compared to those whose scores have been diminished by medical debt.
Alternatively, Lauren finds that another client, Robert, carries medical-related debt affecting his credit ratings. Lauren may want to counsel Robert to delay potential borrowing until the guidelines proposed by CFPB become a reality. That way, Robert could benefit from any loans he takes after the rule goes into effect. An increase in his credit score could make Robert a more attractive borrower and decrease the interest rate costs of any planned financial spending. This advice becomes even more valuable if Robert has a credit score just below a good rating. In such an instance, the difference between his current and expected score could translate to significant cost savings.
In their mission to assist such clients with achieving their goals, advisers must create a roadmap for reaching financial milestones and emphasize the importance of maximizing and improving their credit rating to pave the way. Should the CFPB plan become a reality, advising clients to take full advantage of their credit score based on their situation is paramount.
Financial advisers must also assess the impact of this proposed rule on their corporate clients, especially hospitals. While current federal regulations already mandate the establishment of financial assistance policies, these only apply to nonprofit healthcare organizations. For-profit and public healthcare organizations are not subject to this and make up approximately 40 percent of the market. Even the 60 percent represented by non-profit providers are still largely allowed to set their own financial assistance and charity care policies, leaving millions of Americans across all income levels with significant medical debt. As a result, implementing these new credit rating guidelines would likely alter the financial standing and operations of all healthcare organizations.
In such a reality, hospital debt would become significantly less imperative to pay back for many patients, changing how individuals settle their outstanding medical bills. For example, if Michael owed money to NL Hospital in the amount of $20,000 for medical services received and owed $40,000 elsewhere, he would be incentivized to pay off the other debt before paying NL Hospital since payment toward the other debt improves his credit ratings. As NL Hospital’s financial adviser, Terrance should inform the hospital about these potential scenarios and develop a plan to encourage patients like Michael to pay off their debt more easily. Terrance should guide consideration of the additional hardships the company’s billing and collections efforts will face. It may be appropriate to offer incentives to ensure patients like Michael continue paying off their medical debt in a timely manner.
Financial planners should also be mindful of the following: First, credit reporting agencies will certainly consider challenging the proposed rule as it will affect and alter their historical credit reporting practices. The challenge would assert that the rule exceeds the CFPB’s statutory authority and imposes undue burdens on their operations without sufficient justifications. Such burdens include being required to ascertain whether a debt is a medical debt or is a partial medical debt. This interpretation issue would put credit reporting agencies at risk of liability for violating the proposed rule. Any such action has implications for the clients of financial planners, both individual and corporate. Secondly, creditors, including financial institutions and lenders, will certainly challenge the proposal’s legality as an unfair limitation on the ability to assess creditworthiness. They would argue that excluding medical debt from credit reports undermines the ability to make informed lending decisions, potentially increasing risk in their portfolios. Historically, failure to pay one debt is a marker of an increase in credit risk. Litigation in this context could involve claims related to the rule’s impact on contractual rights and risk management practices. Thus, financial advisers and planners must consider the proposed rule from all angles to ensure that they deliver the best advice to their clientele.
Endnote
- Consumer Financial Protection Bureau. 2024, June 11. “CFPB Proposes to Ban Medical Bills from Credit Reports.” www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-to-ban-medical-bills-from-credit-reports/.