Medical debts are wounding consumers with unfair black marks on their credit reports, consumer advocates told Congress this week, as scrutiny of credit reporting intensifies.
Consider the debt collection practice of “parking,” for example. Collectors frequently put debts, usually small ones, on your credit report without even telling you. It spares collectors the bother of calling you, and the “parked” debt sits on your report, weighing down your credit, until you discover it — maybe when you’re turned down for a mortgage or a car loan.
“‘Parking’ harms the consumer because he or she never has the opportunity to address or contest the debt,” said Chi Chi Wu, staff attorney at the National Consumer Law Center, in a report about medical debt reporting. If they were simply told about the bill, consumers might ask insurers why it wasn’t covered, or seek charity care from the medical provider.
Parked debts, which are associated with utility bills as well as medical bills, were one of the credit reporting problems that came under scrutiny at a hearing of the House subcommittee on Financial Institutions and Consumer Credit Wednesday. Complex medical bills, aggressive debt collectors and error-prone credit reports are a toxic combination for consumers’ financial well-being, critics say.
Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, called for a major upgrade in the Fair Credit Reporting Act, which governs credit reporting. Among other measures, her proposals would remove paid-off debts from credit reports entirely, and erase most unpaid demerits after four years, instead of seven.
Used to screen applications for jobs as well as loans, “a person’s credit report is too important … to contain inaccurate and incomplete information,” Waters said in a statement announcing the measure.
Representatives from banks and credit bureaus said the credit reporting system is a boon for consumers as well as the financial system, because it evaluates them for loans on an objective basis. More than 10,000 “furnishers,” including banks, utilities and debt collectors, provide information to credit bureaus, according to the Consumer Data Industry Association.
But critics said that errors and unfair practices must be addressed. Given the frequency of errors on credit reports and the difficulty people have in getting them corrected, “there’s no question our consumer reporting system needs to be reformed,” said Rep. Gregory Meeks, a Democrat from New York City. About 5 percent of credit reports contain errors serious enough to put consumers in a lower credit tier, the Federal Trade Commission found in a 2012 study.
At the hearing the National Consumer Law Center submitted a report on how medical debt reporting in particular can put an unfair burden on consumers.
“Medical bills result from services that are frequently involuntary, unplanned, and unpredictable, and for which prices quotes are rarely provided,” Wu wrote in her report, “Strong Medicine Needed: What the CFPB Should Do to Protect Consumers from Unfair Collection and Reporting of Medical Debt.” Confusion about insurance coverage frequently means patients don’t expect charges, and may even be unaware of them, she said.
The thought of medical procedures might prompt fears of big dollar figures, but the vast majority of medical bills on credit reports are small, the NCLC report said. About 86 percent are $500 or less, according to Federal Reserve figures, and 94 percent are under $1,000.
In addition to the “parking” issue, the report takes aim at medical billing practices that charge uninsured patients more than others, sometimes several times the cost that insured patients are charged. Hospital “chargemaster” lists result in discriminatory pricing that imposes the steepest costs on the poorest patients, the report said. Left unpaid, those inflated debts weigh down consumers’ credit reports.
“Chargemaster,” shorthand for a hospital’s charge description master or CDM, represents the full-price rate, which is described as a starting point for negotiations. A look at one California hospital’s chargemaster list found 50-cent pain pills marked up to $36.78 each and $1 IV bags going for $137.
Recently FICO, owner of the most widely used credit score, said it will reduce the weight of medical debts in its next scoring model, FICO 9. While FICO’s move should give some relief to consumers eventually, the Consumer Financial Protection Bureau could act directly through its supervisory authority over large collectors, Wu said. The CFPB has found that more than 99 percent of medical debts on credit reports are reported by debt collectors, not health care providers.
Wu called on the CFPB to expand its supervision to include collectors who largely or entirely collect medical debt. Such agencies are now generally exempt from the CFPB’s examinations, which focus on collectors of credit card debt and other financial obligations. The bureau could also require collectors to give consumers notice before parking a black mark on their credit report.
Waters’ proposal would also restrict the use of credit reports for employment screening and extend safeguards for student loan borrowers and victims of predatory home loans. Waters said that negative marks on credit reports can reveal private issues such as medical problems or marital disputes.
Erasing negatives from credit reports sooner than seven years would have unpredictable consequences for evaluating people’s credit, said Barret Burns, president and CEO of VantageScore, a credit score founded by the three major credit bureaus.
Instead of dropping demerits from credit reports earlier, he said,
the information could be restricted when used in employment screening,
Negative marks lose their predictive value over time, but serious delinquencies do remain relevant to people’s creditworthiness for seven years or longer, he said. If people are granted credit who can’t handle it, “You wind up hurting the people you’re trying to protect.”