The Cobbs would love to take advantage of low mortgage rates to refinance their Springfield, Illinois home. But their credit reports list several medical collection accounts, most with small balances of $15 each. As a result, their credit scores are too low to qualify for a low rate. The source of the problem? Medical billing mix-ups that may prove to be incredibly costly in the long run.
Mark Rukavina, director of The Access Project, a healthcare research and advocacy organization that also works directly with individuals with medical debt, brought the Cobbs’ story to my attention after reading my piece about the Medical Debt Responsibility Act of 2011. If enacted, that legislation will require credit reporting agencies to remove medical collection accounts with an original balance of $2500 or less from credit reports 45 days after they have been paid or settled. Rukavina thought the Cobbs are a perfect example of why this legislation is needed, and I agree.
After putting her infant son down for a nap, Melissa Cobb called me to explain what happened. The medical clinic where Melissa was receiving care had switched to a new billing system. “They asked me for my email address,” says Melissa, who gave it to them. “But I never knew what it was for.” Only later did she discover that she had been signed up for a program where she would receive and pay all her bills online. Because Melissa didn’t realize what she had been signed up for, she never saw the bills and didn’t realize they were going unpaid.
It wasn’t until the Cobbs went to refinance their home that they discovered there were multiple collection accounts listed on their credit reports, each for $15. There were also two collection accounts for larger amounts related to hospital visits with their son. Had Melissa known about these outstanding bills, she says she would have paid them immediately, before they were turned over to collections. “We had a Flex spending account that I could have just put them on and not worried about it,” she pointed out.
“We see this repeatedly in terms of the people we work with,” says Rukavina. “People often have a number of bills from different providers, some covered by insurance, and some not. It’s not uncommon to go into the hospital and end up with bills from four or five providers. For many people, they do in fact pay them, but sometimes bills slip by and end up in collections.”
Melissa, who paid the bills off as soon as she learned about them, has tried everything to clean up her credit reports. The clinic refuses to help, and the collection agency has refused her request to at least list the individual copays as a single debt. “Right now I feel like I am left with no options, no defense, no anything,” says Cobb, who has given up on refinancing.
FICO creates the majority of credit scores used by lenders. The most recent version of the FICO scoring model, FICO 8, ignores collection accounts where the original balance is less than $100.
But in the case of mortgage loans, that buffer may not help. A spokeperson for FICO confirmed by email that “Fannie and Freddie currently utilize previous FICO score versions, not the FICO 8 model. These prior versions of the classic FICO score do NOT bypass ‘small dollar’ collections.” Because most conventional loans must meet Fannie Mae or Freddie Mac guidelines, they will be underwritten using the older version of the FICO scoring model.
“The industry has already created enhancements to the scores addressing small dollar ‘nuisance’ collection items that could help families like the Cobbs gain access to more affordable credit” said Tom Quinn, credit scoring expert at Credit.com. “The focus should be on getting widespread industry adoption of these latest versions.”
As for the Cobb family, unless Congress passes the Medical Debt Responsibility Act, they may miss their opportunity to take advantage of historically low mortgage rates. “Apparently it will take an act of Congress to get (these medical collection accounts) removed from their credit reports,” Rukavina notes.
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