The government has worked tirelessly to mend the country’s broken housing market. But could the answer be as simple as passing a bill that would dismiss unwarranted medical debt on the credit reports of consumers?
The Medical Debt Responsibility Act has been introduced by the U.S. Senate to assist millions of consumers who are financially penalized and unable to access credit due to medical debt, often billed in error.
"This will have a very positive impact on the housing market," said Rodney Anderson, executive director of Supreme Lending, a mortgage banking firm.
Anderson, who was able to provide a ground-level perspective of how medical debt is affecting potential homebuyers, performed a research study of 5,100 borrowers who applied for a mortgage with him. Of those borrowers, 2,200 of them had at least one medical collection of their credit report that lowered their credit score. "Most of these are really small bills," Anderson added.
The bill will require the creditor or credit rating agency to expunge the medical debt from the consumer’s record within 45 days from the day it is paid off or settled.
"It is an injustice that small medical bills, which are often confusing and inaccurate, can prevent an otherwise creditworthy consumer from qualifying for a mortgage, refinancing their home or buying a car," said Anderson.
Anderson, who has been fighting to improve the quality of information that is used to allocate credit to consumers, says there is no doubt that passage of the Medical Debt Responsibility Act will push growth in the economy and grant creditworthy borrowers access to the credit they’ve earned.
The consequences of medical debt are often more severe and more frequently inaccurate than most people think. Health insurers process one in five medical claims inaccurately, according to a June 2011 American Medical Association survey. This results in more than 30 million processing error claims filed each year.
Reported medical debt — as little as $100 or less, often made in error — can subtract as much as 125 points off someone’s credit score and can cling to an individual’s credit report for up to seven years, Supreme Lending pointed out.
"A good credit score is critical for Iowans that want to obtain a loan, a new credit card, or a mortgage—but medical debt, even when paid off, can leave an unfair mark on a credit report," said Iowa's Senator Tom Harkin.
Even when medical bills are paid on time and in full, healthcare providers do not report them to the credit bureaus. Typically, the bills are only reported after they've been assigned to collection. Because of this, credit bureaus are given incomplete and biased information.
"Oregonians shouldn’t have to pay more on their mortgage or their credit card simply because they had the bad luck to need medical care," said Oregon's Senator Jeff Merkley. "Unforeseen accident or illness can happen to any one of us. We can’t change that fact, but we can change the law so that responsible working families aren’t hit with unfair credit reports for years after medical debt has been paid off."
Coming at no cost to the government, the Medical Debt Responsibility Act would provide a simple solution to impact consumer credit reports, making it easier for consumers to get a mortgage and into a home.
"This is not about subprime. These are not subprime borrowers. These are credit-worthy borrowers," Anderson added.
In the coming weeks, similar legislation is expected to be introduced in the U.S House of Representatives.