The CFPB produced a report in March that contained a startling statistic: An estimated 58% of the debt that is in collections and on people’s credit records stems from medical bills. And nearly one in 10 adults (approximately 23 million Americans) owe at least $250 in medical debt, according to a Kaiser Family Foundation report. That means consumers that have a medical debt collection mark on a credit report – and there are a lot of them – can find it incredibly difficult to be approved for a mortgage.
But relief is on the way. Experian, TransUnion and Equifax have announced that beginning July 1, paid, $0 balance, medical debt collections will no longer appear on credit reports. In addition, medical collections must be a year old before they will be reported – doubling the current cushion of six months. In other words, medical collections that are between six and 12 months old (even if they have a balance) which are currently being reported will no longer be reported effective July 1st. They will, however, be reported again when they reach a year old if they have not been paid.
What’s Behind these Changes?
There are good reasons for these medical debt reporting updates. To put it plainly, medical debt is often an unexpected and unavoidable financial burden. And it is usually not a choice. Very often, the cost of a procedure or a service is a big unknown. Many people are forced to play detective as they try to determine what’s inpatient, outpatient, in-network or out-of-network – and what procedure codes represent and whether they are accurate. On top of that, providers and facilities often issue separate bills for many procedures. It simply isn’t realistic to expect patients and their loved ones, who are already burdened with the need for medical care, to figure out if their bills are correct given today’s head-scratching medical billing practices.
Add to all of that the fact that billing and collections systems often resemble complicated mazes that are plagued with errors. And then there are the back and forth negotiations between medical providers and insurance companies which can drag out for months, often leaving patients in the dark about how much money is actually owed.
Bottom line: Medical collections do not accurately reflect a person’s ability or willingness to pay back the debt. In fact, current credit scoring models know that medical collections are not a good indicator of risk.
Nevertheless, the standard scoring models that are used by the mortgage industry are very dated (XPN 1999, TU 2004, and EFX 2005) and consider medical collection records as seriously derogatory. Currently, a credit score only takes into account that they exist and when they occurred (the open date). The balance field is not considered. In other words, a medical collection that is paid in full has the same impact as a medical collection that is unpaid – as illogical and unfair as that may seem.
In addition, disputing a medical collection does not provide much of a benefit to consumers either. During the dispute process, only the balance and payment history are shielded from the score. For external collection company accounts, the balance is never considered by the score, and they do not contain a payment history. So, a dispute really does nothing to impact a score – positively or negatively – unless, of course, the collection is not reporting correctly and is removed as a result of that dispute process.
And to add insult to injury, the existence of a single collection account (even if it is nearly seven years old) will keep a consumer in a specific scorecard associated with derogatory behavior. This means that all of the credit data reported will be scored based on the existence of that collection account.
The good news is the mortgage industry is expected to adopt more recent and relevant scoring models within the next two years. But in the interim, these changes by the credit bureaus will go a long way toward making it easier for people who have had to deal with the burden of unexpected medical bills to rebuild their credit.
How Can Lenders Use this Information to Assist Consumers?
In the past, lenders would typically instruct applicants with medical debt to negotiate with collection companies to remove the record in exchange for payment. But as of July 1st, you should advise your applicants to pay off their outstanding balances because those records will automatically no longer be reported. If they have a balance, rescoring to a $0 balance would result in them no longer being reported.
Know that additional changes are forthcoming next year as well. The bureaus have indicated that during the first half of 2023, medical collections that are under at least $500 will no longer be included in credit reports.
For many Americans who hope to achieve the dream of homeownership but have been burdened with medical debt through no fault of their own, these changes are very welcome. And for lenders who thrive on making that dream a reality for creditworthy applicants, these changes are long overdue.
Rosa Mumm is VP of Score Optimization at Xactus, the leading verification innovator for the mortgage industry, and has 15 years of experience in mortgage credit scoring. She can be reached at [email protected].