The CFPB’s research teams are committed to helping the Bureau, policymakers, consumers, and others more clearly understand the challenges, risks, and market developments facing consumers.
With your insights, we are able to continually improve our research methods and deliverables.
I would like to discuss two research papers we recently released, and some of the questions that remain.
On Wednesday, we released a market snapshot report on the consumer use of state payday loan extended payment plans, and at the beginning of March, we released a report on the medical debt burden in the U.S.
Both topics have taken on renewed public interest as pandemic-related financial assistance has largely ended, and medical bills received by millions of families during COVID brought into focus the financial burden of receiving medical care.
When a borrower takes out a payday loan, the borrower agrees to pay back the principal and a fee with their next paycheck. If a borrower cannot repay, they can rollover their loan to their next paycheck, but they must also pay an additional fee.
This cycle can lead many borrowers to have to pay more in fees than in principal.
State payday extended payment plans allow borrowers to repay their payday loans and any previously accrued fees in several installments. These plans help borrowers avoid rollovers or default.
Twenty-six states have lending laws that allow payday lenders to operate. Sixteen of those states require or specifically permit lenders to offer extended payment plans.
However, available data demonstrates that usage rates for extended payment plans are generally lower than rollover rates.
Even in Washington state, which has perhaps the most borrower-friendly extended payment plan, the usage rate is a small fraction of all payday loans, 13.4%.
The report highlights several possible reasons, including restrictive state laws and lenders concealing or otherwise deceiving borrowers about payment plans. However, we do not know the most relevant or prevalent causes.
We note that not all states collect or publish data on payment plan use nor has there been significant research by academia or others.
The CFPB is a data-driven agency, and we would welcome any further collection and publication of additional data on payment plans.
We also recently published the report, Medical Debt Burden in the U.S. This study built on work the CFPB has been doing since its inception, including a critical 2014 report.
The 2014 report found both that including medical bills on credit reports unfairly reduced credit scores and that including medical bills on credit reports reduced the predictive value of credit scores. In other words, including medical bills in credit reports hurt both individuals seeking credit and financial institutions trying to assess the risk that any given person would default on a loan.
Our most recent research reaffirmed that medical bills are less predictive. It also illuminated the magnitude of the problem: $88 billion of outstanding medical bills in collections that affect one in every five consumers.
Less than 21 days after we published our report, Equifax, Experian, and TransUnion issued a joint statement to announce they were changing how medical bills would be reported on credit reports.
Beginning in July of this year, paid medical bills will no longer be included on credit reports issued by those three companies. Unpaid bills will only be reported if they have remained unpaid for at least 12 months.
This announcement is a first step, but it is not enough. Several questions come to mind when considering the impact of this announcement.
First, how will this announcement affect communities of color, lower-income consumers, and the under- and uninsured? Will those who do not have excellent insurance coverage, who are also more likely to be from communities of color and lower-income communities, be more likely to carry higher medical bills that will remain on their credit reports than higher-income consumers?
Second, how will this announcement affect coercive debt reporting? Will there now be a strong incentive for consumers to pay medical bills sitting on their reports even if they are inaccurate or not truly owed? Likewise, will debt collectors use this new incentive to their advantage?
Third, is it appropriate to treat unpaid medical bills as a typical “debt”? When it comes to medical bills, patients frequently have no idea what price they will pay. They usually don’t get to shop around, especially when facing emergencies. There isn’t a promissory note or disclosure, like there is with other loans.
Finally, if medical bills are not much help when it comes to predicting repayment on future loan obligations, should they even be included in credit reports? We need to ensure credit reports are fair and provide an accurate accounting of a consumer’s credit obligations, but when it comes to medical billing, the system is rife with mistakes and errors.
I look forward to hearing your thoughts on these questions and understanding how you believe we can ensure the credit reporting system cannot be weaponized, that consumers can access credit on fair terms, and that consumers are not penalized for inaccurate bills and charges.