The nation’s three major credit bureaus have announced plans to overhaul how they handle medical collections reporting, wiping tens of billions of dollars in debt from U.S. consumers’ credit reports. Additionally, these changes impact how paid collections impact a person’s credit score.
The announcement of these changes comes from the Consumer Financial Protection Bureau’s (CFPB) claims that consumers were facing unfair punishment, because they fell behind on payments because they lacked health insurance or had been forced to pay thousands of dollars out-of-pocket before their insurance kicked in.
These changes will impact consumers nationwide, and the more you know about current credit reporting standards, the more you can improve your screening process. Here’s what you need to know about the credit reporting changes coming in 2022 so you are prepared when it is time to screen new renters.
Credit Reporting Changes: Changes to Paid and Unpaid Medical Debt Reporting
Medical collections result from unpaid medical bills sent to a collection agency. They can appear in your renters’ credit reports, even if they already paid the bill or if it was reimbursed by insurance.
Reporting Unpaid Medical Collections
The three credit report companies—Equifax, Experian, and TransUnion—said that by July 1, 2022, they would stop reporting any unpaid medical debts until the bills are 365 days past due. At that point, the debts would be reported for seven years. Currently, the bureaus allow bills to be reported as soon as they are sent to a collection agency.
Reporting Paid Medical Collections
Paid medical collections will no longer appear on a person’s credit report. Once this change goes into effect, the only medical debt on your renters’ report will be for accounts they haven’t paid and were sent directly to a collection agency.
If your rental applicants pay off this type of debt, it should come off their credit files within 45 days after paying it off.
Reporting Small Medical Collections
Starting in the first half of next year, the credit bureaus plan to remove all unpaid medical debts of less than $500. This change will be gradual and not all at once, so you and your renters may see some of your debts falling off right away while others take a little longer.
Changes to General Paid Collections Reporting
In addition to changes in how the credit bureaus will report paid medical debt, all paid collections will now fall from a person’s credit report instead of remaining for seven years.
Previously, your rental applicant’s credit score would have reflected past collections that the person paid, but now these will fall entirely from the person’s report.
What Do the 2022 Credit Reporting Changes Mean for Landlords?
This year’s credit reporting changes could impact your tenant screening process as a landlord. Removing unpaid medical collections from a person’s credit report does not absolve them from paying the debt, impacting how much of their monthly income is available to pay rent.
This would apply to individuals who fall into the one-year grace period before their unpaid collections appear on a credit report.
Paid collections disappearing from credit reports provide less information about a person’s past ability and responsibility to pay.
Ideally, a person’s paid collections would indicate a change in their financial habits that allows them to pay their bills, rent, and utilities on time, but some landlords and property owners believe history may repeat itself, and they want to choose applicants with a strong pattern of paying on time.
State and Local Changes to Tenant Screening
In response to the pandemic, some states are taking individual action to change which factors landlords may consider when screening new applicants.
For example, Oregon has implemented laws that disallow landlords from denying a person’s rental application due to debts incurred during the protection period of the pandemic. This law will stay in effect until 2028.
Other states, like California, have created similar laws to protect renters as a result of the pandemic. As a landlord, it’s important to check how your local laws may impact your tenant screening process.
Expect More Changes to Credit Reporting
While the three major credit bureaus are changing how they report medical debt and collections, President Joe Biden has taken action to establish federal credit reporting laws that would greatly impact your screening process.
If passed, the new legislation would create a new publicly-owned credit bureau with its own guidelines for credit reporting.
The best thing to do is stay up-to-date with credit reporting changes and adjust your tenant screening process as you see fit. By optimizing your tenant screening process, you can stay compliant with your local laws and show fairness to each person who shows interest in renting your property.