In a letter to Rep. Brian Mulder dated January 2025, CFPB General Counsel Seth Frotman praised the proposed legislation and confirmed that federal law would not preempt such state-level protections. The letter comes just weeks after the CFPB finalized its own regulation on January 7 prohibiting lenders from using medical bills on credit reports or considering medical information in lending decisions.
The CFPB said medical debt reporting causes harm to consumers because such debt "is less predictive of future consumer credit performance than other tradelines" and unpaid medical bills contain "unreliable information." Frotman noted that 66 percent of consumers with medical debt problems acquired that debt from unexpected emergencies or acute medical needs, and that medical bills are "subject to opaque pricing" that varies based on insurance status and provider billing practices.
The letter emphasized that states have authority to enact stronger consumer protections than federal law requires. In 2022, the CFPB issued an interpretive rule stating that "state laws prohibiting furnishers from furnishing information about medical debt to consumer reporting agencies would generally not be preempted" by the Fair Credit Reporting Act or Fair Debt Collection Practices Act.
Federal courts have consistently rejected industry challenges to state medical debt reporting restrictions. The First Circuit in 2022 upheld Maine's Medical Debt Reporting Act in Consumer Data Industry Association v. Frey, while the Ninth Circuit in 2023 denied a challenge to Nevada's medical debt collection restrictions in Aargon Agency, Inc. v. O'Laughlin. The CFPB noted that Colorado and New York passed similar legislation in 2023.
"The purpose of the credit reporting system is to assess credit risk, not to coerce people to pay debts they may not owe," Frotman wrote, adding that many consumers only discover erroneous medical bills in collections when applying for major loans. The bureau argued that debt collectors have "many other legal remedies to collect legitimate medical bills without resorting to coercive credit reporting."
The CFPB's January regulation has already faced legal challenges, with the agency acknowledging it has been "sued twice in Texas" over the rule. The letter represents the bureau's effort to build state-level support for medical debt restrictions while defending its federal regulatory approach.
The South Dakota bill would join a growing number of states restricting medical debt reporting, with Frotman noting that "several other states have followed suit or are considering" similar legislation following Colorado and New York's 2023 laws.