Adam Parks (00:06)
Adam Parks here with another episode of Receivables Podcast. Today I'm back again with Mr. Dan Smith, CEO of the CDIA, here to talk to us more about credit reporting. But this time I want to go a little deeper into everything that has happened related to medical debt credit reporting over the last 10 years or so. So Dan, thank you so much for coming back again. I really do appreciate your insights from the last episode and looking forward to learning more.
Dan Smith (00:35)
Well, thanks for having me, Adam. I appreciate the opportunity to talk about this issue. It's critical to our industry and it's important that we have a serious debate on these topics.
Adam Parks (00:47)
Agreed. And what I love about what you're saying there is that you're looking for the debate and an opportunity for a discussion, which I think is exactly what needs to happen here. But the value of credit reporting, that is something that we have seen time and time again, creditors only have two levers that they can pull, they could pull the interest rate lever, or they can pull the availability of credit lever. And that's really what they're working with in terms of selecting what loans to give and why and I think it's pretty basic economics, but why would I lend money if I'm never going to be able to recover it? And in order to predict that into the future, we need standardized ways to look at the value or the risk tolerance that each individual consumer or business represents before we lend them money. But before we start jumping into all that today, Dan, could you walk us through a little bit about the value of the credit reporting ecosystem on the whole?
Dan Smith (01:44)
Yeah, I mean, I you hit on the right on the head there. It's the conduit to safe lending, quick lending, accurate. It allows a lender to get you a credit card instantly. ⁓ Credit reporting system is like the backbone to fair and balanced lending system. It allows every consumer in the country
Dan Smith (02:06)
to have access to credit. And in the past, that wasn't always the case. Sometimes it depended on who you knew or where you worked. And if that banker trusted your employer or knew your father, you got a loan. Now it really is up to you and how your behavior has been over the years. that data shows your credit worthiness and it helps a lender make a decision based on data and facts, not on subjective opinions.
Adam Parks (02:35)
Those that don't appreciate the credit reporting system probably don't understand the true origins of the credit card itself in terms of that ability to borrow money on the fly.
For anyone who has not seen the first episode I did with Dan with the full background, you should absolutely go watch that. I'll link that below. Dan, but for anybody who has not seen that episode, can you give us just a quick two minute
understanding of your background?
Dan Smith (03:04)
Sure. So I've been in government relations my entire career. would say the second half has been focused on financial services. I spent four years at Freddie Mac, six years at the Consumer Financial Protection Bureau working for Richard Cordray, Mick Mulvaney, and Kathy Kraninger. I worked on every single policy issue at the CFPB. I worked at the American Bankers Association, the Consumer Bankers Association, now at the Consumer Data Industry Association a wide experience in the entire financial services sector from the policy standpoint, which really gives me that full view of how it interacts and how the lender relies upon data and relies upon the credit reporting system and how the risk manager uses it as a tool to mitigate their risk and the importance of it in lending.
Adam Parks (03:54)
Excellent. medical debt credit reporting has become a hot button issue, but it wasn't always it seems to have been singled out. Was there a particular catalyst or something that started us down the path of specifically looking at that type of debt?
Dan Smith (04:11)
So it's interesting. Most people think it all started with the latest political arena in the 18, 19, 20, 21, 22. But if you go back to 1996, passed the amended the FCRA to, which people don't realize, they actually prohibited medical debt from being on credit reports back in 1996 and it. You what happened? 2003, they came back and they said, we got it wrong.
Adam Parks (04:36)
Okay.
Dan Smith (04:41)
Congress admitted they got something wrong and they amended it to include medical debt. Because they said it's important. You need to know the underlying debts that a consumer has in order to lend to them appropriately. This is like in the content in the legislative history, they said, but if you're going to do it, you have to code it or block the identity of the
Dan Smith (05:07)
the lender, right? So the hospital itself, you can't disclose it because that could be prejudice to the consumer. And I'll give you an example. If you are applying for a loan and you have a medical debt from Sloan Kettering Hospital in New York City. And this was a congressman's example that she gave on the floor in Congress. The lender is going to have a bias and say Sloan Kettering is an institution for people with cancer.
Adam Parks (05:09)
Okay.
Dan Smith (05:33)
this person probably had cancer, I'm not gonna give them a loan. That's not fair, right? But they said, but it's important to understand that debt, you have to code it or block the identity of that lender. So it just says medical debt, XYZ dollar amount, right? And they said, you can do it, no matter what, as long as you code it.
Adam Parks (05:56)
Seems like a fair balance.
Dan Smith (05:58)
Right. It protects the consumer's privacy. It allows for lending without prejudice. And so in 2003, they came and said, actually, we believe it's an extremely important data point that is needed for underwriting. We are going to include it, but this provision protects the consumer. So that was 2003 that this debate started. And then, you know, things have evolved over the years. Our health care system, insurance, the costs have gone through the roof.
It just became a hot topic in politics and was used to help certain campaigns. So it was a narrative driven by the Biden administration that they believed it was important to take medical debt off of credit reports.
Adam Parks (06:41)
I mean, there's one major medical industry item that came up between that call it 2003 timeframe and this renewed energy in let's call it 2014 2015. And that was Obamacare. That that came out in the Affordable Care Act came out in between it feels like, you know, it has been rather politicized in terms of whether or not to include medical debt, but then
I always ask the next question is if if okay, so if you take the medical debt off of the credit report, I don't think that it stops there. I think the question then becomes what's the next item that we're going to remove from the credit report so that everybody can have an equal outcome. And I'm all for equality in terms of opportunity, but equality doesn't exist in terms of outcome.
Dan Smith (07:31)
Yeah, I mean, that is the real concern of the industry is that Congress sets the law, determines what can and can't be on a credit report within the Fair Credit Reporting Act. It's very explicit, it's detailed. They've amended the law many times, right? So they are the ones that make that determination. If you have different policymakers that are not Congress deciding what can and can't be on a credit report, they're gonna make political decisions.
and you're gonna wind up having student loans taken off credit reports. You're gonna have states making the decision if their constituents are victims of natural disasters, for example, a forest fire. Maybe they are gonna say that the mortgage that's in default because of it shouldn't be on the credit report. And before you know it, we're on a slippery slope where the credit report's value becomes so degraded that the lender who gets so much value out of it says,
Why am I buying this? And why am I furnishing the information in the front end into the system? I'm not getting the value out of the back end that I have over the years. It's not predictive. It's not going to help me mitigate my risk. So I'm going to stop furnishing the information. And now what is known as the best credit reporting system in the world overnight becomes degraded, less value and potentially risk of complete failure. And where does the lender decide on how they are going to lend to somebody?
Dan Smith (08:52)
Great question. I don't know the answer to that. They're going to have to do their due diligence on everything, right? Right now you can walk into an auto dealer and you can walk out with a $50,000, $60,000 car and it takes maybe an hour or two and most of that's because of the dealer himself, not the financing. The financing is maybe five minutes of actual putting in the information and getting a proposal. That would go away. They would have to come back to Not the finance.
Yeah.
Dan Smith (09:22)
in two weeks and we may have an idea because we need pay stubs. We need proof of employment. We need your IRS taxes, right? If you're self-employed like that it's a whole other dynamic.
And
when you're talking about autos and you know, that's making autos borrowing for a car sound a lot like borrowing for a house. And just to point out, those are both secured loans. So what would then the underwriting look like for credit cards and other loans in the unsecured space if we can't trust the credit report?
Dan Smith (09:56)
as you mentioned earlier, the interest rate is going to go way up. The amount of credit you get is a lot less. Those that get it are a lot less. The subprime, you might as well forget about it. They're not going to take that risk. They're already the riskiest borrowers. going to focus on the super prime and the prime, right? And you're going to cut out a large segment of the market. Because lenders aren't going to money to people who can't pay it back. And if they can't determine
Adam Parks (10:19)
It's the unintended consequence.
Yes.
Dan Smith (10:26)
then they're not going to give it to them either. Like they... That's right.
Adam Parks (10:28)
Because they only have two levers charge more for the money if you think you might be able to
get it back or don't lend it at all if you don't think that you're going to see that capital again. Yeah.
Dan Smith (10:37)
That's right. And they'll do both. Right? They'll charge the prime lenders more and they'll not lend to the subprime.
Adam Parks (10:46)
Sure. Well, it's a it's a risk versus reward analysis. If I'm going to put the money out onto the street, what's the probability that I'm not going to be able to get it returned and they're either borrowing the money from the Fed or they're syndicating their lines. And, you know, there's always going to be some complications in that calculation. Now, what is so now that we understand what the law actually says, 2003, they come back and they change the they change their tune and they say, OK, hold on.
Dan Smith (10:50)
Yeah.
and
Adam Parks (11:15)
wait, we're going to make additional adjustments to the way that it's happening, but we want to make sure that medical debt is reported at least on the credit bureau. And I can understand that sanitization of the data that's being displayed in the credit report for those non-discriminatory purposes. But then come 2014, 2015, it's like the rules start to change. This is around the time frame where we start hearing about the 180 days. So my understanding was that, you Well, we can report it, but we can't report it till it's 180 days to link.
Dan Smith (11:49)
That was a state effort to deal with the insurance issue. What was happening is debts were getting reported and it wasn't clear if the consumer actually owed it or if the insurance company was going to pay it or if it was an actual debt owed. And so there was an agreement, we'll say, to not put anything on for six months, 160 days I think it was.
Adam Parks (11:52)
Okay.
Dan Smith (12:18)
180 days, something along that line. That was in the 14, 15 era. And so between 14, 15 and now the industry itself has made some voluntary changes beyond that, that removed 70 % of all medical debt from the system. So any paid medical debt comes off the credit report, completely gone anything less than a year old doesn't go on the report until it's a year old. And then anything under $500 does not go on the credit report at all. So your copay, right, the x-ray, the doctor visit that was 150 bucks that didn't get paid. Those we believe cover the situations that happen often with 70 % of the medical debt trade lines
Adam Parks (12:46)
Okay.
Dan Smith (13:08)
have been removed because of that, 70%.
Adam Parks (13:12)
So we saw the 2014-2015 change and then come 2017 the CFPB releases their report. Talk to me about what you learned from that.
Dan Smith (13:23)
that the CFPB's communications department is really good at spin.
Adam Parks (13:28)
Okay, I can accept that. But what does the report actually tell us?
Dan Smith (13:30)
So that report, so the report
was generated and it wasn't a study, it was a data point done by an economist who admits that it was not a thorough, investigate like full-depth study. It not been peer tested, like you don't get the, you can't actually look at the underlying data or how they went about it. So that's one thing, is why not? It's data from 2010 and 2011 from,
Adam Parks (13:54)
Challenging.
seems relevant.
Dan Smith (14:00)
Right. OK. And so it did not was not updated at all between 2013 14 when it was written. They released it in the fashion of using it for credit reporting later on 19 maybe 20 21. Right. They said that well what this what the data point said was that medical debt
Dan Smith (14:29)
is less predictive than other debts.
Okay, it didn't say it's not predictive. It said if I compare, if you have a credit report and on there's a medical debt and you have a loan debt for a mortgage or auto or a credit card, right? That credit card debt is more predictive of future default than the medical debt is predictive of future defaults. Doesn't say it's not predictive. It doesn't say that if you have no debts and you have this one that it's not predictive.
yeah, so you waited.
Dan Smith (15:01)
Right, so how I like to analogize it is a 30 day default is less predictive than a 90 day default. Every data point on the credit report has a different degree of predictability. It doesn't mean there's not value to it. So they just went with the argument that it shouldn't be on there because it's less predictive. Now, their data from 10 and 11,
Dan Smith (15:26)
did not include any of the updated changes that were voluntary made by the industry. So between 14, 15, 18, 19, 20, 21, 70 % of all the medical debt came off. Nothing under $500. Their study at minimum should have looked at that piece. Now this is what's left on the report. 15 million consumers, $48 million in debt, I think it is. if I got my numbers right, right? Okay, they should have said, we're gonna redo the test. We're gonna redo this study data point with the current business practices and see what the predictability is. They didn't even do that. So like it's completely flawed and useless information in my mind. Like apples to apples usually is a pretty common theme. This is like apples to gorillas. Like I don't get it.
What?
Yeah.
Yeah, well, does it the math definitely does not match up when you're taking old data that doesn't include all the changes that have happened. And when we talk about more and less predictive, I mean, that's an opportunity for weighting because no two organizations use exactly the same underwriting standard, right?
Dan Smith (16:36)
And it's up to the lender to decide how much criteria they wanna put on medical debt. There's plenty of lenders out there that don't use medical debt in the credit report as part of their rationale for lending. That is their choice. They're the ones extending the loan. They decide, unless there's a GSE or a government sponsored loan or something where the government sets the criteria, right? But it's really their decision. They need the data. We provide the data. They make the decision and the rationale based on But it's not, they're not just using a standard score, right? It's not like we all use the FICO score to make this decision. My understanding is that all the lenders basically have customized their own scoring models, their own weighting based on the types of products that they're actually lending on, the types of consumers that they're lending to. Help me understand how deep that really goes.
Dan Smith (17:29)
So the whole scoring thing is fascinating and there's different kinds. There's the consumer score that you see, right, which is based on your full report. And then there's the lender scores, there's FICO and there's Vantage score, right. Within that, a lender can go to FICO and say, listen, I have a specialty product that I want and I want these characteristics, I want it weighted that way. I want this data factored into the algorithm.
right, to give me a score based on what criteria I want, right? That doesn't mean that they don't buy the standard FICO classic, right? If you're doing an auto loan or you're doing a credit card, they understand that model. They say, that's the model I want to use based on that number. I know my risk tolerance. I'm going to lend somebody. That's why a credit card happens like that, right? They have trust in that system. But that doesn't mean they can't say, listen, I'm going to start doing, you know, consumer loans.
Dan Smith (18:25)
and I want to go to a population that is moderate to low income and I want to expand access to credit and I want to take these factors and I want to do a test and I don't want your just basic score, I want to modify it and here's I want to have a conversation with you to generate a different score. So there's tons of different scores in different ways, right? What doesn't change and shouldn't change is the underlying data. Data is critical to this and the more data the better.
Adam Parks (18:50)
agreed the more information into one of these calculations, the more accurate it can ultimately become. And now as we look at the challenges that the credit reporting has faced in this regard, we went from this report, the industry takes its own actions, right to try and alleviate this. And now we start moving into the Chopra years really a little bit deeper here, and start seeing that The federal government tries their hand at it. It's not as successful, I guess, as they would like to completely remove it. So they empower the states and now we've got a
Dan Smith (19:24)
Well, I think we should cover the lawsuit because I mean, don't talk about the lawsuit. So in twenty three, the fall of twenty three CFPB started rulemaking in the Fair Credit Reporting Act. In the spring of that year, they put out a notice of proposed rulemaking on medical debt, right, where it was just medical debt, where earlier they talked about a whole bunch of stuff. The actual proposal was just medical debt. They later on did a notice of proposed
Adam Parks (19:26)
Let's let's go back, please.
Dan Smith (19:50)
rulemaking on data brokers, but we can put that aside for another podcast, another date. We'll come back to that one. So in the spring of 24, they put out a medical debt rule January of 25, January 11th, I think it was. They finalized the rule after the election. And we immediately took action and filed lawsuit in the North.
Adam Parks (19:54)
We have to come back to that one.
Dan Smith (20:18)
North Texas District, also known as the Fifth Circuit, which includes Texas, based on the fact that the CFPB had no legal authority to do what they did. They said, CRA can't put it on the credit report and the lender can't use it for underwriting. Completely contradicts the statute. Statute says, you can do it as long as it's coded. No prohibition on the CRA on what they can and can't put on a credit report. They just said, if you put it on there, it must be coded. So we immediately felt that we had to protect the system because if the CFPB today decides medical debt shouldn't be on there, tomorrow they're going to decide student loans shouldn't be on there. And we're in a really bad situation. If you are a lender and you're working around the country, how do you balance and understand what a 750 looks like on a credit score?
when you know there's a possibility a substantial number of data doesn't exist on the report. So I have no idea whether or not you have medical or student loans at this point. And so I go, it's a 750. What does a 750 mean anymore? It means something different if you're in Connecticut versus California or Florida versus California. And so a lender is gonna be so confused, they're not gonna know what to do. So in order to have a national system,
Dan Smith (21:40)
that functions for all consumers, it was important for us to file that suit and say, you can't just make up the law, right? A regulator is accountable to Congress. That's the way it works. Congress wrote a clear statute. The regulator ignored the entire thing and rewrote it. The court back in July 11th ruled in our favor on all counts, said, like, they clearly don't have a legal authority.
across the board, they talked about preemption, how they and states can't pass laws that are in contradiction to the FCRA that are preempted, right? The whole purpose of the FCRA is that there's three different kinds of preemption in there to protect the system so that we have a national system. The two biggest ones are conflict. So the federal law says this and the state pass law says that, and they're a conflict.
Dan Smith (22:37)
the federal preemptions. And there's a subject matter that says very clear that a state can't pass a law that says what can or can't be on a credit report, the subject matter of the report. So we believe it's critical that we defend that practice and that we have a report that is as accurate and complete as possible under the fact that the credit reporting system is voluntary.
Adam Parks (23:03)
Yeah.
Dan Smith (23:04)
Right? It's a completely
voluntary people. People choose to participate in it because of the end value they get. We can't force a large institution or a small institution, demand them to provide that information. That's not the way the system works.
No, but the system itself, the entire ecosystem adds so much value to the lender that it benefits them to partake in the system itself and become a furnisher and actually furnish the data back so that it can be used in the future reports. I mean, it takes a significant amount of time, energy and resources to be able to support a system that is that robust.
So for the credit bureaus to make the investment into actually being able to collect secure and make accessible that data to the right people and play gatekeeper to that data set is just a really important part of that entire ecosystem. But you had no shortage of states that were looking at or pushing for opportunities.
Dan Smith (24:05)
or teeth.
Adam Parks (24:07)
And you never know what's gonna happen at the state level, right? When it comes to these federal things, it's in the headlines, you can see it, you can feel it, and it feels like it takes a little bit longer. But you never know what might happen overnight in a small state.
Dan Smith (24:19)
We now have 14 states that have laws that prohibit medical debt from credit reporting.
Adam Parks (24:25)
So now are you in a position where you now have to go back and fight each one of those independently, even though you got the preemption ruling in the federal suit?
Dan Smith (24:33)
So the preemption ruling is in a district court, right? So it's helpful. We believe the judge nailed it on the head, got it completely right. It's extremely helpful. It's how normal people read the statute. Unless you choose to want to read it differently, which I think is the intent is people deliberately read it to carve out and look at it differently. The judge said, no, it's clear, preempted. Now it's only one district.
Dan Smith (24:59)
So it's hard to go to another state and argue that it's completely preempted. We will, we do, we have said it's preempted for a long time. We are evaluating our options. Our intent with what we do is to look at the entire ecosystem and how can we protect it as a whole so that it maintains its value would be a Herculean task to go try and address that with each one of those states. And even though the rule is clear, it appears that the states either don't understand it or don't want to understand it.
Dan Smith (25:32)
don't care to write, right. It could be either or both.
Adam Parks (25:35)
I think it's a lot of they just choose not to, they see it in front of them and they say try and stop me. But it creates a little bit of friction there now I know there's been a lot of loud voices in this discussion you know what was the biggest turning point for you between where this kind of started out in the what's called the 2014 2015 versus where we are today. Is it the the ruling that came out in, July? Or, you know, what do you what do you see is that big turning point into
Dan Smith (26:04)
So the big turning point was when the final rule came out and you could go through it and see where the agency totally ignored the law.
Adam Parks (26:15)
Okay, it was no longer conjecture and discussion. It was now written, documented right here in black and white for me to read. Okay, when they had to show their cards.
Dan Smith (26:18)
That's right. This is what the law says. And we're gonna do this because we think this is the right thing to do. And we are going to redefine definitions because in order to get to the premise we want, we're gonna ignore the law and rewrite it the way we want it to be interpreted. And if you allow a regulator to do that, then we are in much more serious problems, right? As a society.
Agreed. forget financial services for a minute. There's a lot of regulatory agencies with a lot of
Dan Smith (26:50)
Just that's why we have three branches of government right? And so the administrative branch doesn't write the laws, Congress does. And the judges interpret the laws, right? So the regulator doesn't play either role in that. They implement the law. And this agency was playing the legislator and the judge at the same time.
Adam Parks (27:14)
kind of common practice for an omnipotent government agency.
That's just my personal, humble, non-regulated opinion over here. So Dan, I mean, this has been a great conversation. I definitely feel like I've got a little bit of a history lesson and a better understanding as to the value attributes. Is there anything from a medical debt credit reporting perspective that I haven't asked you or haven't covered?
Dan Smith (27:36)
No, I think it's important to keep in mind why data on a credit report is important, both negative and positive, alternative data. Like it is foundationally one of the most important things in lending. And so we need to keep the integrity of it. We need to grow it. We need to bring more data into the system.
We have to continually evaluate that data for its value, right? The system, the players in this space continually look at does this help in predictiveness? Does it harm the consumer? Right, we do a lot of self-policing in terms of the information. So that's about when you get into dialogue and debate. Like, debate is good, right? Rogue policy decisions aren't.
or
not.
Dan Smith (28:24)
But debate and conversation is helpful. We've come a long way in medical, right? The industry has moved itself to voluntarily remove 70 % off the medical debt because we had a dialogue and a debate about it.
I would argue that more data is actually better for the consumers because the opportunity for alternative data like stable rent payments, for example, there's a lot of those little things that consumers are paying day to day that are not necessarily helping to build their credit the way that it potentially could should it be allowed to be included within the credit reports themselves.
Dan Smith (28:58)
And so we are a big proponent of alternative data. We have the system in place to accept rent reporting. There's about 5 % of consumers have rent reporting. There's challenges to that, right? And we have to address and debate those challenges and have policymakers fix the problem to have more information included, not less.
Adam Parks (29:10)
Sure.
Well, as an American, I'm quite proud to have you overseeing and helping to empower our credit reporting system. It really is essential to everything that we do.
It's about that ability to understand who that person is and what their identity is and are they truly credit worthy before providing them with that next layer of lending.
So for those of you that are watching, if you have additional questions you'd like to ask Dan or myself, you can leave those in the comments below and we'll be responding to those on LinkedIn and YouTube. Or if you have additional topics you'd like to see us discuss, you can leave those in the comments below as well. And I'm gonna try and get Dan back at least one more time to talk to me about the data broker rules, because I got some strong opinions on that one as well. But I wanna continue to learn more about the credit reporting system, Dan, and I really do appreciate all of your insights.
Dan Smith (30:09)
Adam, thank you. Appreciate the opportunity.
Adam Parks (30:11)
Absolutely, and thank you everybody for watching. We'll see you all again soon. Bye everyone.
