Negative reports on medical bills termed drag on U.S. housing market

6/19/2011

WASHINGTON -- Negative medical-collection records are playing a little-recognized but significant role in depressing credit scores, ultimately functioning as a drag on the housing market, according to some credit and mortgage-industry experts.

The records are lowering credit scores of otherwise creditworthy loan applicants, disqualifying them from mortgages in today's toughened underwriting climate or costing them higher interest rates, fees, and down payments, these experts say.

According to a 2008 study by the nonprofit Commonwealth Fund, an estimated 28 million Americans were contacted by collection agencies on medical-debt issues during a two-year period and 72 million reported difficulties in paying medical bills.

A bipartisan group in Congress is sponsoring legislation to limit the credit score impacts of paid-off and settled collection accounts that sometimes are the product of disputes and botched record-keeping by insurance companies, hospitals, and doctors.

The bill would require the three national credit bureaus -- Equifax, Experian, and TransUnion -- to expunge medical collection records of $2,500 or less from files within 45 days of their being paid or settled.

Currently, paid-off collections can remain in files for as long as seven years, exerting their heaviest negative impacts on consumer scores during the initial two years.

Craig Watts, director of public affairs for Fair Isaac, developer of the FICO score that is widely used by mortgage lenders, confirmed that "the mere presence of a collection account on the credit report" has an impact on a score. The amount generally has only a minor effect, and the nature of the account -- auto loan, credit card, medical bill -- is not a factor.

But critics say medical bills are different because often the consumer does not choose to spend money but is forced to do so by illness or accident.

Terry Clemans, executive vice president of the National Credit Reporting Association, whose members prepare a large percentage of the reports used by mortgage lenders, said reports of unpaid medical bills are "a serious problem" because many stem from run-of-the-mill disagreements with insurers over co-pay amounts or billing issues with doctors that ultimately were paid in full or settled.

But because hospitals and doctors tend to quickly hand over unpaid or disputed bills to collection agencies -- who then report their actions to the national credit bureaus -- what should have been a routine matter turns into a long-term scar on a credit file.

The idea of Congress intervening and requiring deletion of medical bill records from national credit files does not sit well with everyone. Although the credit bureaus had no immediate comment on the legislation, their trade group, the Consumer Data Industry Association, opposed a similar bill that the House passed 336-82 last September. The association said it is still studying the current bill.

Fair Isaac, for its part, recently posted a blog that warned against "subjective tinkering" with credit scores. "When lenders ... are prevented from seeing these negative records," the company said, "[they] are likely to loan to borrowers who are riskier than they appear."