The bipartisan Medical Debt Responsibility Act of 2011

[eknight@003]

Now this bill would be an open arms welcome and a victory for consumers with regards to their credit reports.

(Cut N Pasted)

NEW YORK (CNNMoney) -- Medical debts that you paid off long ago can drag down your credit score for years after you've settled them. But recently proposed legislation could mean old doctor bills will finally be erased from your credit report.

Rep. Heath Shuler (D-NC) proposed a bill that would require the three major credit bureaus to remove records of medical debt of up to $2,500 within 45 days of being paid off -- a move that could boost the credit scores of millions of Americans. Currently, any medical debt that gets sent to collections stays on your report for up to seven years -- even if you've paid it off or settled it.

9011PrintThe bipartisan Medical Debt Responsibility Act of 2011 was proposed earlier this summer and will be reviewed by the House Committee on Financial Services, which will decide whether to send it to the House or Senate for their approval (the date has yet to be set, but it could be voted on as early as the fall).

If the Act is approved, medical debts will no longer be factored into the calculation of a consumer's credit score -- making it easier for some people to qualify for or get better terms on credit cards, mortgages and other types of loans.

One medical debt can knock off about 50 points from an average credit score (though the impact varies depending on the information reported about the debt), said Howard Dvorkin, CPA and founder of Consolidated Credit Counseling. And of course, the more debts you have, the less the impact will be.

[Lian]

Apparently, this is contemplated as an amendment to section 605(a) that would not require the deletion of information from one's credit file per se, but rather just take the approach of section 605(a) and block it from credit report inclusion by the CRAs after 45-days. Section 605(a) currently does not prohibit any credit reporting done by a creditor or debt collector. It merely prevents the CRA from including certain information in one's credit file in credit reports they issue to others. Does the legislation contemplate credit file deletion, or just exclusion from CRs after certain dates? Is any information from a medical provider automatically excluded, including, for example, elective cosmetic surgery?

My concern would be the potential skewing of the credit scoring system. Delinquencies are delinquencies.... debt owed, and not timely paid. Evaluation of repayment risk is what FICO is all about. It is a comparative analysis between those who pay timely and those who have not. Exclusion of bads from the analysis would alter the entire analysis.

Credit reporting has become a tool used by both creditors and debt collectors to aid in collection of unpaid debt. What is the impact on the recovery of legitimate debt by its exclusion from credit reporting? Would the legislation also extend to requiring removal of judgements arising from medical debt? Why single out just medical debt? What about debt based on, for example, unemployment? Clearly, the more expansive such exclusions were to become, the more damage they would necessarily inflict on the entire risk analysis under the current system. To date, congress has pretty much stayed out of credit scoring issues. This would be a directive on how one can score. A huge change.

It sounds appealing, but as with most things, the devil is likely to be in the details. And credit reporting is there primarily to serve creditors in their evaluation of consumers, not to serve the need of consumers in score improvement. I am sure the credit industry will have a whole lot to say about such legislation.....