Saturday, May 31, 2014

CFPB Looks at Medical Collections

A May 2014 released study by the Consumer Financial Protection Bureau indicates medical collections are having a negative impact on credit scores without merit. I couldn’t agree more, medical collections in general seem to be more about poor billing than consumers unwilling to pay. The idea of removing them from the credit scoring models has been tossed around over the years. Perhaps this initiative by the CFPB will get the ball rolling on that.
In my book The Credit Road Map, I have an entire section dedicated to medical collections. Most importantly, steps on how to avoid the issue in the first place. Despite the “thorn in the side” problem medical collections cause credit scores, there is a deeper purpose for the reporting.
Let me explain.
A debt becomes delinquent, any debt (justifiably or not). The debt is sent to collection.
A collection agency reports the collection account to one, two, or all three credit bureaus (not always all three, it varies, but generally all three).
The collection account decreases the credit score because there is risk, something is past due, recent negativity is bad.
A collection account could eventually turn into a judgment, although I do not see a lot of medical judgments, I see way more credit card judgments.
A judgment can turn into garnishment of earnings (wages) or non-earnings (bank account).
This potentially creates instability for the consumer financially, which could result in the inability to pay bills as normal, hence higher risk.
So the initially collection is sort of a call-out of, “hey, we have a problem.”
Although the problem may not really be a problem if we are talking about a small amount, if forced to pay, it may not disrupt the consumer’s typical monthly financial ability to pay obligations.
In essence a collection tells anyone looking at the credit report there is potential for legal liability that may or may not materialize, because when it comes to bad debts, a collection is the first step before pursuing a judgment. Not always, but generally.
In all likelihood the consumer will discover they have a medical collection when they go to finance a house or car. They will be appalled a bill was never sent to them, a phone call was never made, and no opportunity was given to pay the bill in the first place. The debt will be paid quickly, the consumer will move on.
Most of the medical collections I see are for less than $100, and the next level up is less than $300. I do see massive medical collections at times on the $10,000+ range. Sadly there is no distinction based on dollar amount in terms of scoring impact.
I am happy to see the CFPB looking at this issue because it does impact consumers. One of my students in a presentation I gave at the Ohio State University was denied an internship because he couldn’t pass a background check due to his credit. The negative item was a medical debt. You can’t change the damage once it is done in some cases. I could write numerous case studies on medical collections alone, it is that out of control. In fact, I am writing a case study book about various credit scenarios beyond what is in The Credit Road Map. If you would like to be added to the waiting list to be notified of the release this summer send me an email at
Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
NMLS# 276438 AZ#0913109
© Copyright 2014 Patrick Ritchie All Rights Reserved

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