ICFE eNEWS #15-08 - Mar 23rd 2015

Consumer Financial Protection Bureau’s Consumer Advisory Board discusses credit scores and medical debt

UPDATE: Shortly after the meeting described below of the Consumer Advisory Board on credit scores and medical debt, the three major credit reporting agencies, Trans Union, Experian and Equifax, announced a mutual policy of not reporting medical debt into their credit reporting system for six months from the date it is received by the CRAs. The purpose is to give insurance payments to made to creditors by insurance companies time to be processed.

The Consumer Financial Protection Bureau (CFPB) Consumer Advisory Board is an appointed group of experts in consumer protection, community development, consumer finance, fair lending and civil rights convened to provide the CFPB with guidance for its work. Last month, the Consumer Advisory Board (CAB) gathered for its quarterly meeting in Washington, DC, and credit scores and medical debt were on the agenda.

“A credit score can truly unlock people’s financial potential. It’s like a passport to the financial mainstream,” said CAB member Jose Quinonez from Mission Asset Fund at the meeting. That is why many believe medical debt—often incurred unexpectedly—should not be given as much weight as credit-related debts in consumer credit scores.

According to the CFPB, 50 million consumers now have free access to credit scores on their monthly credit card statements, one year after the CFPB launched its Open Credit Score Initiative. Currently, more than a dozen major credit card issuers provide customers with free access to their FICO (Fair Isaac Company) credit score—the magic number that affects whether they qualify for loans, credit cards, insurance, mortgages and jobs, and at what price.

“When companies make credit scores available regularly for free, consumers can see their scores change over time and see the impact of a credit score on their financial lives,” CFPB Director Richard Cordray said when addressing the advisory board.

The CFPB said it learned from recent focus groups that consumers are confused by:

Another area of confusion for consumers is medical debt, also discussed at the CAB meeting. Consumers often don't know what portion of their medical bills is covered by insurance and what amount they must pay out of pocket. Critics of the medical billing process say it is complex and problematic. The Bureau explained that their research found that medical debt is different from other types of debt, yet it is given the same weight in credit scoring models.

The Bureau's research shows that people with medical debt tend to be more likely to pay it off. Others are even unaware that they owe a debt. More than half (52%) of consumers with medical debts in collections tend to owe small amounts, with an average of $579, according to the CFPB. In addition, billed amounts are often incorrect.

The consumer bureau concluded that consumers with medical debt are being "over-penalized" in their credit scores. Consumers with reported medical collections that are later paid by an insurance company are being penalized even more, leaving consumers with lower scores than they deserve. Credit scoring company FICO agreed with the Bureau's findings and has announced it will weigh medical debts in collections less heavily than other debts when calculating credit scores using its latest FICO 9 scoring model. (Currently the FICO 8 scoring model is in wide use, and it could be many years until companies switch to the latest FICO scoring model for making lending decisions.)

VantageScore, a credit rating product created by the three major credit bureaus (Equifax, Experian and TransUnion), excludes paid medical debt. However, it is less used today than FICO scores.

To learn more about the CFPB Consumer Advisory Board, visit the Bureau's website.

The ICFE is introducing a new Certification, accepted for 10 CEs. The Certified Credit Scoring Specialist course covers both commercial and consumer credit scoring. For more information please visit icfe.org
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Sent by:

Paul S. Richard
President - Executive Director
Institute of Consumer Financial Education (ICFE)

ICFE - Institute of Consumer Financial Education - ICFE.info - 619.239.1401