Fair Isaac Corp., a San Jose based company and producer of the FICO credit score, announced August 6th they will no longer calculate paid medical debts against consumers. This will be the new FICO-9 credit score model and will be available to lenders this fall. Not all lenders will be using the new score, so not all consumers will benefit immediately from these changes. Experian announced they have already implemented these changes for certain products they offer to lenders. The move follows months of discussions between credit industry heavy-weights and the Consumer Financial Protection Bureau (CFPB). The CFPB was born from the Dodd-Frank Act in 2010 following the “too big to fail” financial collapse. The CFPB was given charge to look out for consumers where the industry players have failed. They have been producing memos and public reports for many months indicating the negative scoring of medical collection debt was unfair to consumers and hurts too many people, and they may write rules requiring scoring companies ignore paid medical debts.
In the US Congress, bills have been proposed to do just this. Now that FICO scores will not include paid medical debts, it looks like the threats of Congress and the CFPB have made that wish come true without having to pass a law or write a rule. The threat was enough to get business to make the changes. It is likely only a matter of time before the other credit bureaus follow suit and all scores negate paid medical debts.
So – is this a good thing or a bad thing? If you are a consumer who pays their medical debts, its a great thing! You will likely qualify for credit where others in the same position failed in the past. What about us, the collection company? Probably a good thing. We process thousands of “disputes” from consumers who have paid their bills and think that is enough to remove those items from their credit report. Now they are correct, and we will be able to offer that to people as a positive when they pay their bill. We should also see the time and cost of processing disputes go down.
Is it a good thing for the credit industry and other consumers who normally pay their bills? That has yet to be seen, but we have a recent example of the federal government requiring the credit industry to loosen their reigns and allow more people to get credit than had not qualified in the past. Do you remember the “housing bubble”? Lets look at the macro economic factors that created this horrendous time period in our country’s economy:
As long ago as 1997, I remember reading a credit trade publication discussing the US Congresses’ new program to allow Freddie MAC and Fannie Mae to make loans to people based on their credit score. For those old enough to remember buying a home before 1997, you may recall the weeks it took to review documents, submit applications, testimony, give blood, and offer up more collateral than the home was worth. Congress came to the consumer’s rescue and told banks – “just use the credit score”. Brilliant! Now we could prequalify for a home in minutes. Someone forgot to tell Congress that credit scores are built on the probability of a consumer defaulting on a consumer loan over the next 2 years with a contract length at no more than 7 years. Not exactly the same thing as a 30 year mortgage.
Anyway, the Clinton Administration pushed it forward. Not to be outdone, the Bush Administration pushed it again, with President Bush himself saying in a speech it was the American Dream to be a homeowner. Congress fell in love with the plan and told Freddie and Fannie to max it out. The Bush treasury Department was getting nervous and wanted to audit Freddie and Fannie, but the Congress told the Administration to mind their own business and there is nothing to see here. That $15 million bonus to the head of Freddie was just fine! Then they told the big banks and mortgage companies to quit bothering with some of those details in the credit application, like verifying income and residency. Just make the loans! Everyone loves owning a home and home values were skyrocketing! It was spectacular everywhere!
Following WWII, the average household home ownership (according to IRS tax return figures) has been around 64%, give or take a percentage. At the height of the bubble, that number was 75%! It’s a lot of homes to move to get back to the balance of 64% homeownership in the US, and we continue to see record high foreclosures and sales, slowing down only enough to keep the price from falling through the floor again. Now banks are accused of keeping “zombie foreclosures” – foreclosing the home but not taking legal ownership so as to not have to take the loss of the loan and then try to sell another home in a glutted marketplace.
So – is it a good thing? Like most things the federal government makes happen, its a good thing in the short run while politicians get the votes of those they “helped”. Will it create a new “credit bubble”, with more consumers getting credit who really shouldn’t? It appears we are all going to find out together.
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