On August 12, we submitted a public regulatory remark to the Client Monetary Safety Bureau (CFPB) in opposition to a proposed rule that will ban medical payments from credit score experiences. Whereas this rule goals to extend entry to credit score, it’s more likely to do the other. When potential lenders know that sure data shouldn’t be being disclosed, they are going to be hesitant to lend to potential debtors, chopping off entry to credit score. In brief: whereas this rule will scale back the provision of credit score, it won’t lower the demand for credit score. Low-income People, the earnings group with the most medical debt, will flip towards black-market lenders to make up for the shortage of credit score out there. 

Analogous outcomes may be seen with the CFPB’s rules on payday lenders. In 2016, the CFPB proposed a rule beneath the Dodd-Frank Act that will regulate payday lenders within the identify of client safety (though these lenders have been already regulated by state regulation). Analysis from economists in addition to the CFPB confirmed that present state rules on payday lenders restricted low-income People’ entry to credit score, main the CFPB to delay the rule’s implementation in 2019 and withdraw the rule in 2020. It did, nonetheless, concern a rule regulating “junk charges” that can possible end in low-income People dropping entry to credit score.  (Different causes for opposing regulatory motion in opposition to “junk charges” may be discovered right here.) 

Related outcomes adopted CFPB rulemaking on mortgage servicing. This rule took impact in January 2014 with the goal of defending owners by requiring stricter reporting requirements kind “preliminary charge adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, immediate crediting of mortgage funds, and responses to requests for payoff quantities.” It had a big affect on neighborhood banks, which deal with offering conventional banking companies to native communities. These banks are the main supply of banking for many rural areas, small cities, and concrete neighborhoods. Whereas a examine from the Authorities Accountability Workplace (GAO) characterised the impact of the rules as modest, the GAO admitted that information high quality for assessing how banks supply loans to companies wants enchancment. The GAO did discover that the inhabitants amongst neighborhood banks declined by 24 p.c (as a consequence of mergers amongst neighborhood banks and decline in new financial institution formation charge) and, among the many consolidated neighborhood banks that remained, lending elevated – albeit at a slower charge as a consequence of regulatory compliance. Different analysis decided that merger-induced financial institution closures considerably decreased entry to credit score, particularly in rural areas. In the long run, compliance prices are all the time and in every single place a stealth barrier to competitors, decreasing choices for shoppers whereas garbed in ethical rectitude and properness.   

When these rules inevitably yield unintended penalties, the CFPB can not say they weren’t warned. 

Learn our full public remark to the CFPB Under: 

August 12, 2024 

Mr. Rohit Chopra 
Director, Client Monetary Safety Bureau 
The Federal Reserve System 
VIA Digital Submission via Rules.gov 

Re: RIN 3170-AA54 Prohibition on Collectors and Client Reporting Businesses Regarding Medical Data (Regulation V); Feedback of the American Institute for Financial Analysis (AIER) in opposition of proposed regulation. 

Pricey Mr. Chopra, 

The American Institute for Financial Analysis (AIER) submits this remark in opposition to proposed modifications regarding medical data of Regulation V beneath the Honest Credit score Reporting Act (FCRA). The proposed rules would create a regulatory surroundings that will end in potential lenders hesitant to supply loans due to a identified lack of knowledge. This is able to lower entry to capital, significantly amongst low- and middle-income People. 

The proposed regulation would prohibit all “medical debt data” together with,   

[I]nformation that pertains to a debt owed by a client to an individual whose main enterprise is offering medical companies, merchandise, or units, or to such particular person’s agent or assignee, for the supply of such medical companies, merchandise, or units. Medical debt data contains however shouldn’t be restricted to medical payments that aren’t late or which were paid.¹ 

Though the regulation goals to extend entry to credit score for these with medical debt, as proposed the regulation would have the other impact. The end result of this regulation could be the era of “data asymmetry,” the place potential debtors would have extra data than potential lenders. Potential lenders would know of this data asymmetry and fairly concern “antagonistic choice,” the place debtors might make the most of undisclosed medical data to profit from an change with potential lenders. This antagonistic choice would imply lenders could also be hesitant to lend to some debtors, impose greater rates of interest, or go away {the marketplace} altogether. The extra lenders go away the market, the extra competitors is lowered, elevating borrowing prices and decreasing the quantity and kind of market contributors – to the detriment of debtors. 

The results of knowledge asymmetry and antagonistic choice would have the harshest results on low-income People. In 2021, the US Census Bureau discovered that 19.9 million households (15 p.c of all American households) had medical debt.² Of that 19.9 million, 2.9 million households (14.8 p.c) had family earnings beneath the poverty threshold and 4.2 million (3.2 p.c) households have been enrolled in a number of social service program.³ With this information, many lenders could assume that low-income People in search of a mortgage are more likely to have undisclosed medical debt. This will imply rising their borrowing charges to compensate for a lack of knowledge, providing reducing borrowing charges if medical debt is disclosed voluntarily, or they might select to cease lending to low-income People altogether. The demand for credit score will persist no matter its falling provide, which is able to reduce off the already-limited entry to credit score that low-income People have. For these residents the choice could also be illicit sources of earnings or black-market lending by way of organized crime to entry credit score. 

In the end, the proposed treatment could also be worse than the illness. Of the households surveyed, 80.3 million (60.5 p.c) had lower than $1,000 of medical bills, 109.6 million (82.6 p.c) had no family members staying in a single day in a hospital, and 96.8 million (73 p.c) reported having no family member with poor or truthful well being. ⁴ In the meantime, 45 million households (34 p.c) had a family web price of beneath $50,000. Whereas eliminating medical debt from credit score experiences could assist a comparatively small portion of households which have medical debt, the injury achieved by doubtlessly limiting entry to credit score via these rules and decreasing competitors in credit score markets would do far higher injury to People hoping to entry credit score. 

Given the out there information as mentioned on this remark, the Bureau’s proposed regulation concerning medical debt shouldn’t be a vital, and correct, interpretation of FCRA, and AIER recommends its rejection. 

Sincerely, 

Thomas Savidge
Analysis Fellow, AIER 

Peter C. Earle, Ph.D. 
Senior Analysis Fellow, AIER