please this sharing of the subcommittee on oversight and investigations of financial services will come to order i will recognize myself for five minutes or less for you and opening statement this is the second in a series of hearings held by the oversight subcommittee to gain more information about the use of consumer credit information in the underwriting and writing a personal lines of insurance including automobile and homeowners insurance these hearings are warranted because of this practice known as insurance scoring and derivative products referred to as credit based insurance school was or simply insurance school was cries out for careful evaluation to determine whether it is consistent with good public policy we learned at the oversight and investigation subcommittee first hearing in october of two thousand and seven that almost all major insurance companies use credit based insurance school was in some way consequently nearly all americans who drive cause our own homes must also have good credit if they are to avoid paying high insurance premiums regardless of their individual claims history or driving record we also learned through a is the case we also learn from the last hearing that in three out of four lines of automobile insurance credit based insurance scores served in some measure as a proxy for race however given the data concerns with the automobile study that witnesses discussed extensively at the last hearing the full extent of the proxy  effects deal may not be known despite perceived shortcomings of the data the f t c report concluded that there was quote proxy fact close quote from the use of credit base insurance course and as noted by a dissenting commissioner quote given the incompleteness of the data it is unclear whether the actual proxy might be greater close quote even a minor proxy for race gives rise to the most serious public policy concerns i don't think anyone should favor a system in which either directly or indirectly racial classifications allowed to hinder a person in their daily lives whether in being considered for employment getting an education buying a home getting credit or purchasing financial products like automobile and homeowners insurance because of these major public policy concerns t bills have been introduced one h r fifty six thirty three introduced by representative luis gutierrez the chairman of the domestic and international monetary policy subcommittee o financial services would rein in the use of credit based insurance scoring by prohibiting the use of credit based insurance school was where the federal trade commission funds evidence of racial discrimination or that credit based insurance co was serve as a proxy for race the second bill h r six zero six two introduced by representative maxine waters chairperson of the housing and community opportunity subcommittee of financial services would prohibit the use of credit based insurance scores all together in underwriting or pricing personal lines of insurance i'm going to digress just long enough to say that i am a co sponsor of both of these bills  actually think i start with the assumption that there really isn't shouldn't be a connection between somebody is credit score and their insurance premium any more than there should be a connection between somebody's driving record and whether they get credit but i guess i'm willing to race that we can justify their use as a matter of public policy even if they're you is a correlation between credit scores and an end and surance premiums or underwriting of insurance so i'm on both bills i'm trying to keep somewhat of an open mind on this issue but we don't legislate in this committee anyway we just have hearings and build a record so my my presence on either bill one below the other probably has no significance  five six three three and h r six zero six two as well as consider changes or other options that might be appropriate today we look forward to hearing from the my colleague ranking member of the full financial services committee mr baucus for five minutes thank you chairman watt for holding this early second hearing before your subcommittee lending including employment interviews rental applications government licenses mobile phone services as well as insurance which brings us here today  credit scoring actually can help end of it jewels who manage their financial affairs responsibly i believe to get a number of benefits that they might not otherwise receive people have actually benefited from the credit scores through cheaper insurance or availability of insurance and fact i think the f t c confirmed this on a recent study that found the use of credit scores greatly increases fairness and affordability for consumers of insurance products they found that more responsible and thus lower risk drivers get cheaper coverage  but they also found that higher risk drivers enjoy greater access to insurance because insurers can more accurately price their risk further found that credit  quote unquote credit based insurance scores appear to have little effect as a proxy for every predictive factor the f t c analyzed had a slight dispa disparate impact on certain ethnic groups and i think that obviously subject matter of misc legislation for example they found that even prior claims had a disparate impact on various ethnic groups with nearly the same percentage or proxy effect to predictive value as credit based insurance company so the use of credit the texas insurance to farm recently analyzed two million insurance policies and found a direct and nondiscriminatory car between insurance co hours and expected losses found that the average automobile insurance losses for people with the worst credit scores are double those for people with the best credit score while losses on homeowners policies for people with the worst credit score are triple those people with the best scores the texas department further found that the scores were not fairly discriminatory or based on race or income second study this one by the arkansas insurance department yield is similar appears pretty clear that credit scores are one of the most accurate nondiscriminatory predictors of insurance risk available however and i think maybe this would be a good starting point for most after lengthy deliberation have chosen to adopt a model developed by the national conference of insurance legislate or and that model act recognizes the benefits to consumers of using credit based insurance scores hibbett using credit information for increasing rates or denying counseling canceling or failing to renew coverage the model act also includes a number of safeguards including prohibiting ensure from taking adverse action against an insured with no credit history in other words recent immigrants with no credit history would have to be treated as having a neutral credit score in closing mr chairman and used an insurance underwriting process credit scores appear to be highly predictive of a many times lower the cost and thank you very much i asked that my complete statement be entered into the record without objection thank you very much and i thank chairman watt for calling this hearing and i appreciate the comments of the ranking and thank everybody for joining us here this state this i just think that if you have a good driving record if you stop at stop signs you don't go through red lights you don't speed you don't crash into people's cars you don't let your daughter used a car so he could let her boyfriend crash it as they go out dating you act and all of these responsible manners get a good insurance rate guard lists of what your credit score might be and i remember when i wasn't a member of congress i remember going to get my first i couldn't get a credit card to get a credit card remember of montgomery ward is now defunct i think  but that was the only place you got two hundred dollars worth of credit there and then you moved up to j c penney and you got another two hundred dollars there and you paid that bait believe that was the only way to get credit i was a college graduate had a good job i just couldn't get credit couldn't get a mortgage couldn't buy a house but i got those two credit cards finally they gave me a credit card my first visa credit card and i remembered that they suspended it after two years just because arbitrarily they decided one day that i had paid the bills on time and they just suspended it i don't know why i was pretty angry i remember calling the eight hundred number like a hundred times thinking about how much damage i could cause some kind of financial pain on them because they did it for no reason i'm sure they would have done that if they thought i was going to be a subcommittee chairman on the financial services committee one day because i still remember the credit card company that  they didn't cancel my card they said thank you for the thirty five dollar annual fee keep paying but you can't charge anything more on that credit card now look we should all understand our personal experiences and the experiences  consumers in america i just want to reiterate if you drive safely if you stop at stop signs you don't speed you don't have bags didn't you maintain your car and you're a safe driver that should be primarily how it is you get scored in terms of how much insurance i think that should be the ultimate goal and if there is another criteria maybe we should try to balance them thank you very much mr chairman thank you for your statement  affordability of insurance as numerous states federal agencies and private experts have concluded in studies on this topic based insurance scores do indeed make insurance more available and affordable for consumers over thirty years ago congress passed the fa credit reporting act permitting insurers to use credit information to underwrite insurance since the laws and several studies have been conducted on credit based insurance course showing a strong correlation between credit history and the likelihood of filing insurance claims the credit information enables most consumers to qualify for lower insurance rates since most consumers have good credit insurance has even reported that credit scoring may in some cases counterbalance the imperfect driving record of individuals after some questioned legitimacy of using credit scores  under write risk and expressed concern to the scoring message that was discriminated against minorities congress directed the federal reserve board in the federal trade commission f t c to study the effects of this practice on credit insurance markets and report their findings to congress on the two thousand and seven f t c study on the use of credit reports anonyma bill insurances and the commissioners confirm the scores are accurate and objective predictors of risk the conclusion drawn by the f t c shows that financial responsible consumers credit scores decrease insurance rates the f t c also confirm that credit scores make insurance more available for many riskier consumers for which insurance would not otherwise be able to be determined an appropriate premium the f t c approved the f t c disprove concerns an insurance course somehow serves as a proxy for race finding that quote credit based insurance corps appear to have little proxy as little effect as a proxy for membership in racial and ethnic groups in his decisions related to insurance end quote for the commission that insurers do not risk do not use risk models that contain information about race ethnicity or household income the federal reserve board reported similar findings in their study last year on credit the board concluded that credit scoring likely increases the consistency objectivity of risk evaluation thus helping diminish the possibility that credit decisions would be in by personal characteristics or other factors prohibited by law such as race or ethnicity the favorable study b federal reserve board regarding the benefit fisher use of credit scores have been echoed by similar findings in the states for example the texas department surance conducted extensive research on chris corps and reported that there is no way to determine race ethnicity gender age  economic status by checking a person's credit information the texas study also found that drivers with good credit are involved in forty percent fewer accidents than those with poor credit in addition losses of homeownership homeowners insurance for people with bad credit  triple that of people with better credit history in fact a vast majority of states have thoroughly examined the use of credit risk insurance scores and approved or used for pricing risk after years of deliberation a study the national conference for insurance legislatures in seal i l established a model allowing the use of credit information in person with surance as long it is not the sole factor used in underwriting in c i see oil model has been adopted by twenty six of the states a privilege insurers from denying canceling or non renewing coverage due only to credit history according to the n c o i own in most of the states and insurers are unable to deny consumers insurance based on a thin credit history or no credit at all the f t c is conclusion studies on of auto insurance involve the research team of career ph d s economists consulted with communities civil rights consumers and housing groups government agencies and private companies examination of records and then and and independent lead tested data facts are facts inclusive comprehensive and controversial yet after the study was concluded several my colleagues were unsatisfied with the result and challenge the commission's data gathering insisting that f t c subpoena further information from insurers the purpose of this actually is unclear to me considering the fact the commission testified to tober that quote insurance industry was cooperative and forthright with the f t c throughout the process of gathering data and  further testified that the company's extensive cost and drain on resources to the commission in more recent discussions with the f t c have learned that extensive automobile studies have already cost millions of dollars and that is millions of taxpayer dollars and as a compulsory request for data from insurers for the homeownership study would cost taxpayers as much as double or triple the amount we've already paid i'm glad we're going to have a hearing again i hope there may be some new information gathered on what that's going to be the case but i just have a minded apply here your back thank you thank you gentleman for those comments and while that's not the issue directly today we had an extensive discussion about that at the last hearing  and if they decide that they need subpoenas fine if they don't decide they need subpoenas if they can give us a good report that tells us what the impact of credit based coring is then  if i may let me start by thanking you for allowing me to become a part of the committee i thank you and the ranking member for accepting me as a member this is my first hearing and to you and the ranking member i greatly appreciate your having this hearing because it is something that has been of concern to me for some time especially thank the ranking member for his comments he and i have had many conversations and i have found him to be a person who is principled and who moves forward based upon what he sincerely believes to be the case notwithstanding the fact that he and i may have differences we do have one thing in common and that is we enjoy our conversations with each other about our differences  concern with this is as was indicated previously the connectivity between one's credit score and one's driving habits i am looking and hoping to hear information that can help me to better understand that relationship between one's credit score and one's driving behavior i especially concern myself with this because we have young drivers who have no credit scores it is not unusual for parents to add their children to insurance and these children generally speaking have little or no credit  how is it that they will inherit the credit of their parents and become a risk by virtue of been born into a certain family is that the way it works do they do they have a different standard for young drivers who have no credit score who have not had a track record of driving at all but perhaps they've been to a driving school and they have had all of the safety courses such that one might conclude they they understand the rules of the road they don't have a track record of poor behavior i don't see the connectivity between such a person and a credit score it seems to me that if we're not careful we're going to make it almost impossible to be poor in the richest country in the world the richest country in the world one out of every one hundred  persons is a millionaire but it costs to be poor in america you pay more for your insurance you ride on roads that will do more to your vehicle because of where you live if you're poor generally speaking you probably get more alignments you probably go to a store that has prices that are higher than in some other neighborhoods and i think that at some point we have to examine the notion of whether we ought to do things just because we can maybe you do have the right to do it but the question is is it the right thing to do i am looking for that caus banning the use of credit based insurance scores because from the studies i've seen this is a very effective predictor of the actual risk it's a predictor of the number of claims that the consumers file matches the total cost of those claims credit scoring is not based on race and i think the f t c has a report which came out in july explained this  benefit as as have other studies we've seen a number of studies that have been on the subject in a competitive marketplace which exists throughout most of the auto insurance sector companies have an incentive to provide the lowest actuarially sound rates for their customers in most instances a potential customer can get several quotes on auto coverage in a matter of minutes over the internet or by picking up the phone companies have even begin to offer their prices along with the prices of their competitors in the names of attracting additional business if there are inefficiencies if there are gaps in coverage i think a logical place to look would be the current state based insurance  with the exception of illinois every state subjects property and casualty insurance products to varying degrees of government price controls and of course that discourages companies from operating a affectively and efficiently in those states additionally the bureaucratic delays weigh heavily on the rates paid by consumers now the american consumer is recently found that the cost of excessive regulation at the state level is thirteen point seven billion annually paid for by insurance buyers through higher premiums if congress really wants to improve the ability of consumers with weaker credit histories to obtain more economical quotes on insurance coverage we should be looking at ways to bring more competition to those markets in the wall street journal on may six there's an editorial on the massachusetts miracle and that highlighted the recent move by massachusetts to remove its government set rates on auto coverage and as the editorial noted progressive insurance the third largest insurer in the country in the market may fifth with rates eighteen percent below the old price control rates overall premiums in the state are going to fall eight percent this year as insurers adjust to a world in which they need to compete to attract customers instead of bargaining with their regulator for price hikes if more states saw the economic implications of price controls or of congress would consider our largest increase to create an optional federal charter a greater number of consumers including those this legislation is intended to help would be on the receiving end of more products and certainly with much lower premiums so in closing i'd caution my colleagues against an acting legislation which leads to banning the use of credit scores by insurance providers as one of the many factors included when sent a premium i believe the majority of consumers would see higher costs for insurance products if that happened because their provider would not be able to set actuarially sound premiums and again mr chairman i offer this other alternative and i like to thank you for holding this hearing and look forward to the testimony  appreciate the chairman's recognizing that i do appreciate him holding this hearing as well and i think we should have a discussion about how to improve and how to accurately assess credit risk and  all services and all financial service products but it is interesting here that discussion is about whether or not a credit score should be used and it's one of the tools i think in the tool chest to chest risk and from the indication i've read in some studies is that it's one of the most effective ways of assessing risk insurance is not simply an individual's right but it should be the ability of the company to accurately assess risk so they can more accurately seek payment for that and i think as such credit scores are worthy example of the way an insurance company can assess risk and i don't think it should be the end all be all and from what i understand from the industry it is not but i just go back to my experience in college credit cards and you know my experience is pretty simple you know you go and rack up the credit card debt which i did buying cheeseburgers pizza and many other things in college but i had to pay the consequences for that and my credit score reflected that and as such you know i was a greater credit risk because of how much fun i had college in the payment and how i paid for it and i think that is a fair assessment for how this works i think we should go to an additional step and i would be happy to work with the chairman on this i do think the issue is not about the insurance industry using credit scores i think it should be about how these credit scores are derived and there are a number of different items that are not included on a credit score that could better assess risk for individuals for instance most of us had to pay a power bill every month i think that would be a positive credit indicator and i think if the insurance companies and insurance companies could see that they regularly pay their power bill every month that have never missed a payment maybe that would be a stronger and or rather  their overall credit score on whether or not they'll pay for their insurance and being a greater risk i think that's a fair assessment i think we should look at credit scoring rather than really i think  a symptom of the underlying disease which is how these credit scores are derived i think that's a positive thing i think we have some bipartisan support i look for to work with the chairman on those items and thanks so much for having the hearing today thank the for three minutes thank you mr chairman mr chairman thank you for holding this committee and this hearing today and i attended the last hearing and understand where the majority is coming from in  holding the first hearing and that is it's a pretty interesting narrative thread thread the pearls to suggest that there is a racial component to  predominant american industry manipulating a market place on the backs of minority groups that are full i mean that would be outrageous and all of us would be outraged and we'd be like my i didn't say that ought not to happen but as i listen to the testimony last time and particularly the study from the federal trade commission what i heard was that that wasn't the story there were  consumer groups that were testifying in the more i listen that's kind of like talking on talk radio to the weird caller that calls in the more you listen the more disjointed it starts to sound so i kind of discounted that in terms of testimony and then i been thinking about this i've come to the conclusion that there's a lot of similarities between credit scoring student grades and good student discounts i mean is there a relationship between someone's driving record and performance on a history test is there a relationship between someone's driving record and their performance and their calculus final is their relationship between someone's driving record and their performance their  composition well we can't really articulate what it is but it just so happens to be that always sort of seems to work out and that is a predictor so as i was listening to the hearing last time and then just doing research as this other hearing that's been prompted illinois as it turns out there's a carrier in illinois that is using this and they're actually increasing their book of business into south chicago which is offer more coverage to more people regardless of race and ethnicity and the unintended consequence i think becomes a self fulfilling prophecy and becomes more difficult for folks to get the type of coverage they need the pushed into more residual markets they go there they're forced to go with the substandard insurance carriers with the great names when i have learned is the more glorious the name of the insurance company generally the worse the coverage that i think we ought not to go so i come with an open mind as well but i also having listened to the testimony of the last hearing and being completely underwhelmed and hoping that this bodes better in  the audience and the witnesses recognize that there is a range of opinions on this issue and a willingness and openness to understand how this system works so that we can make good public policy and that's after all what the reason we have the shearing's to try to get more information probably go in a little beyond what we would ordinarily do in opening statements at a subcommittee level but this is an issue that even the attendant suggest d is an issue that people recognize as important than so apologize to all of those in attendance if they haven't wanted to hear  hearing panel and without objection the witnesses written statements will be made a part of the record and each witness will be  recognized for five minutes summary of the testimony but your entire statement will be submitted into the record i'm going to recognize my good friend from florida opportunity having served the florida legislature fourteen years had the privilege of serving with one of our panelists today kevin mccarthy who's a commissioner of the office of insurance regulation in florida we have had been faced with a number of complicated insurance issues in florida some of which have been taken up by this committee and of course today's issue is just another one that requires some expertise of a broad variety and i think mr mccarthy with his work in our department of labor and employment security  and his work on workman's compensation workers compensation issues will be very helpful he has worked in our department for many many years he helped investigation in response found the devastation of hurricane andrew he became our first employment first insurance commissioner that was appointed in two thousand and three and has served neck a passerby ever since but particularly for today's purposes he's very active with the national association of insurance commissioners which as we all know is our fifty state member organization which gives us the state perspective and it's very valuable or establishing federal policies so i just want to welcome commissioner mccarty and look forward to his and our other panelists comments and i think mr mccarthy for being here also and i will proceed with introduce the other two witnesses on the first panel and then i'd like to go back and take the liberty of taking ms waters opening  statement ok with the members the first witness on this panel is ms lydia pons the director of the bureau of consumer protection that the federal trade commission  all of the commissioners were tied up in a meeting today and ask us to allow mr pond's to testify on behalf of the f t c and we told them that we thought she'd do a better representative of the state of north dakota who will be testifying on behalf of the national conference of insurance legislators and we welcome all of them without objection i'd like to deviate and go back and take the test opening statement of ms waters who just was able to get here so we thank her for being here she's one of the co sponsors one of the sponsors she's the lead sponsor of one of the two bills that we're having the hearing about today and i would recognize a gentle lady for five minutes thank you very much mr chairman i certainly thank you for convening this second hearing on the impact of credit based insurance scoring on the availability and affordability of insurance the first hearing you held on this topic last october was very enlightening but also troubling in fact i was sufficiently disturbed by some of the testimony that i along with miss to get terrorist introduced h r six o six to the personal lives of insurance fairness of two thousand and eight to ban the practice of using credit scores in the underwriting of rating or rating of insurance premiums i'm looking forward to hearing our witnesses testimony on this topic but i must say that the findings from the first hearing deeply concerned me the hearing covered a report released in july two thousand and seven by the federal trade commission  report found that credit based insurance scores which are developed and used by the insurance industry serves as a proxy for race in three out of four lines of bill insurance specifically the report found that when credit based insurance scores  used to predict claims risk the predicted risk of african americans and hispanic increases by ten percent and four point two percent respectively converse lee the predicted respond white decreases by one point six percent to address the proxy issue but to go two years and mr awad introduce of course as you have already said legislation they would prohibit the use of credit scores for insurance underwriting when a proxy effect is found however i must disagree with this approach while we must do something to address the disproportionate racial impact of this practice i'm also concerned about the overall fairness of this practice specifically credit scores have little if no bearing on how likely a person is to have a car accident to break speed limits or to otherwise engage in risky driving behavior that could result in an insurance claim i know that the industry maintained that there is some correlation between low credit scores and increased claims risk however a correlation does not imply causation i wonder if we will permit other possible correlations no matter how unrelated to claims  risk to be used to set insurance premiums for example if research is about that there was a correlation between zodiac signs and increased claims risk would it be appropriate to allow such a correlation to be used as a metric for setting insurance premiums to make someone pay more for insurance because of a situation in their financial circumstances that has nothing to do with their risk is a poor driver or irresponsible homeowner is simply unfair it is unfair to recent immigrants to the elderly to low income americans all of whom have little credit history furthermore it is unfair to those americans who have been hit by the foreclosure crisis and announced struggling to rebuild to reestablish their credit i could go on and on talking about who i was and cared to but recently you know i have friends who were hit with an extraordinary health crisis who had paid their bills all of their lives had done well and because of the burden that they were confronted with  they fell behind in payment and of course their credit scores went down good people should that credit score have any impact on their ability to purchase insurance i don't think so traditional underwriting standards worked with little problems for several decades before insurance companies began using them for underwriting purposes i'm interested to hear our witnesses explain why these standards were abandoned and how they continue to justify the use of credit scores underwriting given the concerns of race thank you mr chairman i appreciate your accommodating my coming in a little bit late and i will yield back the balance of my time i thank you for being here both for the first hearing and for hearing and for her proposed legislation we are now ready to recognize the witnesses and each one of you will be recognized for five minutes to give a summary of your written we would ask you to at that point wrap up that thought that you involved in we do have a second panel and a number of members who wish to ask questions  so we want to try to keep this moving if we can with that i will recognize ms lady a pons director of the consumer bureau of consumer protection of the federal trade commission for a five minute opening statement thank you very thank you very much chairman ranking member miller members of the subcommittee i appreciate the opportunity to a can you pull that  microphone a little bit closer to you and if somebody has an empty seat beside them would they just kind of raise their hand so so that others who are standing might be able to take stand blocking the door pull the microphone very close to you because i was having a little trouble hearing you make sure the song is are we working now yes better thank you i do appreciate the opportunity to appear before you today as you consider the impact of credit based insurance scoring on the availability and affordability of insurance as members of this subcommittee are aware insurance companies have increasingly used credit based insurance scores to decide whether and at what price to offer consumers automobile and homeowners insurance this industry representatives and other proponents contend that by using these scores insurance companies charge consumers premiums that conform more closely to their individual wisc of loss however consumer advocates civil rights groups and others believe that the use of these scores results in racial and ethnic minorities paying higher insurance premiums than other consumers to provide insight on the effect of credit based insurance scores congress in fact are directed that the commission study the effect of the scores on the availability and  affordability of insurance including the particular impact on racial and ethnic minorities in two thousand and seven the commission released a report discussing the results of a study of the use in effect of credit based insurance scores on consumers of automobile insurance the f t c provided the subcommittee with use about this report during its testimony last october today i'm pleased to provide an update on the f t c is ongoing study on the use and effect of credit based insurance scores on consumers of homeowners insurance last week the commission approved a resolution authorizing the use of compulsory process to obtain data for this study the f t c intends to issue orders to the nine largest homeowners insurance companies representing roughly sixty percent of the market of private homeowners insurance in the united states in two thousand and six the f t c has placed on its website a draft order setting forth in detail the information it intends to seek from homeowners homeowners insurance companies the commission is seeking public comment for thirty days on this draft order consistent with factors direction that the agency consult with consumer groups civil rights and housing group government officials and the public at large on the design and methodology of these studies after receiving public comments and making appropriate revisions the commission will serve orders on the nine largest homeowners insurance firms in the united states the f t c would be pleased to keep the subcommittee and its staff informed as the study progresses i know as you've mentioned that this subcommittee is considering two bills addressing the use of credit based insurance scores h r five six three three the nondiscriminatory use of consumer reports and consumer information act of two thousand and eight would amend the fair credit reporting act to bring him with the furnishing or use of a credit based insurance score if the commission determines that the use of scores results in racial or ethnic discrimination or represents a proxy or proxy effect for race or ethnicity h r six zero six two would ban the use of credit scores in insurance underwriting the f t c has a long standing commitment to law enforcement and education efforts and in fair lending and believes that it is vitally important to protect consumers from illegal discrimination based on race or ethnicity the commission however has deferred to congress as to what legislative measures if any are appropriate in this area i would note however that from a purely drafting perspective h r five six three three wo impose liability based on the determinations of f t c econometric research studies as discussed in greater detail in the commission's testimony the f t c has concerns about using its studies as a trigger for liability thank you for your attention and i would be pleased to any answer any questions that you may have thank you so much for your testimony mr commissioner mccarthy you're recognized for five minutes chairman was ranking member miller and members of the subcommittee i want to thank you for the opportunity to testify on the use of credit based insurance scores in the provision of personal line insurance  products kevin mccarty the insurance commissioner of florida i'm also here representing the national association of insurance commissioners proponents have argued over the years that credit scores are a predictive of the future losses based on the insurance claims experience and are a necessary and inexpensive underwriting tool critics argue that the use of credit scores discriminates against protected classes of people that knowledge e over the years has allowed insurance companies access to enormous amounts of new information including credit  reports some of this information may show actuarial relationships with insurance claims this does not automatically make it inappropriate fair and valid criteria for insurance purposes the most notable example of this is the use of race based rates in two thousand into the ne i see concluded several multi state investigations on companies that historically rated life insurance differently based on the race of the applicant even today caucasians when the united states have a longer life expectancy than african americans based purely on this actuarial science this with indicate a higher premium for life insurance where the outcome of african americans paying more is correct from an actuarial perspective it is certainly counter to equal protections for americans and is an important public policy the use of credit reports represents many potential problems consumer reports studies show that fifty percent of the credit reports contain errors which can be exacerbated today by the increased amount of identity theft and the proliferation of our access to credit stephen if the methodology is worked correctly it is possible that in accuracies and the reports may in fact invalidate their use credit reports also disprove disproportionately negatively affect recently divorced recently naturalized citizens of the elderly those of certain religious beliefs that do not believe in the use of credit and younger individuals who have not established credit histories the overwhelming problem with the use of credit scoring is the relationship between credit scores and race ethnicity income the two thousand and four texas insurance department study previously reference that african americans have an average credit score of ten to thirty five percent below that of caucasians hispanic scores were roughly five to twenty five percent below i do not believe the insurance industry uses credit scoring to intentionally discriminate or impact minorities yet recent pericope studies demonstrat impact on these protected classes i'm also concerned about other tools that share many of the same credit characteristics of using credit scoring a year ago i held a public hearing in florida on occupational and educational rating as an underwriting factor for private passenger auto testimony at the hearing and information gathered as a result of that indicated that underwriting practices insurers would refuse to study the underwriting practices on minorities and low income consumers i'm especially troubled by the growing use of occupational and educational rating and would encourage the subcommittee to broaden the scope of its investigation to consider these unfair regulatory practices the two thousand and seven f c c report was very disappointing the narrative appeared very one sided in support of the predictive powers of credit scoring while equally downplaying the negative impact on protected classes of citizens i did agree with one aspect of the f t c report that state insurance regular regulatory community has identified credit scoring as a problem and has taken action as previously mentioned forty eight states have passed some legislation limiting the use of credit scoring many states have adopted laws that require regulators to have access to the internal operations of the credit scoring models that the decisions are not based soley on credit reports and that big consumers be notified of the use of these reports and if there is any adverse decisions in their credit scores it is my sincere desire that the federal government assist the states in its regulatory efforts to address the important issue and better protect our consumers the proposed bill h r fifty six thirty three has many favorable provisions my colleagues around the country and i welcome a more comprehensive study by the federal trade commission to determine if the use of credit reports discreetly impacts minorities and does in fact create a proxy effect i am also personally in favor of h r sixty sixty two which implicitly accepts the notion that credit scoring discreetly impacts minorities based on a two thousand and seven study thank you for holding this hearing and for inviting me to participate i look forward to your continued leadership on this very important consumer protection issue thank you so much for your testimony representative keyser state representative state of north process using objective methods which are blind to ethnicity gender income and other factors credit scoring may offer a consistent accurate and valid way to underwrite and rate risk and may mean lower prices for many consumers primarily the holes with lower risk however and coyle have taken the position that as the state legislature we are concerned about any abuses that might occur relative to the application the credit scores we encourage laws that understand and accommodate and benefit consumers for example our model has looked at the impact on seniors has looked at the impact on young people has addressed the situation where people have an extreme financial crisis occur in their life and we have a tempted to adopt that an address that there are twenty six states which have currently adopted the end coil model that has been developed and it appears to be working relatively well in those states we believe that an appropriate approach is to allow the states to take the and coil model and to modify it when appropriate for their state well what is the end coil model and what does it do  is nondiscriminatory it assists the young old and those who suffer extraordinary advance and it requires the provision updated credit information it goes beyond  prohibiting and church from calculating scores based on income gender addresses zip code ethnic group religion marital status or nationality it also brought him canceling or non renewable coverage due soley to a credit score or basing renewal rates soley on credit consumer protection under the and quite language and then sure must use data taken within ninety days from the time of adverse action it must be disclosed to the consumer that when adverse action is taken a consumer has the right to appeal or or object to it the insurance companies are required to review any objection and to address it relative to consumers for young people for all people that don't have credit many of the panelists in their opening comments address that the end qual model requires either in the cases of what we would term then credit that the credit be to you that either is neutral on the credit score or in a positive manner inquiries are another big issue relative to credit scores insurers then qual model offers commonsense restrictions on how insurers can treat inquiries that credit card companies make before sending out promotional offers inquiries based on consumers wisely shopping around for deals on audio and home loans collection accounts related to sickness or other medical advance bad credit resulting from extraordinary events like divorce illness or death of a spouse as mentioned earlier then while model says that insurers can give these extraordinary victims a credit past in those situations the unsure must reenter right and re rate using new data that can so if the consumer has overpaid as a result of a mistake made then they are eligible for a credit or refund for that amount if the insurer does take an adverse action due to credit the ensure must give up to four good reasons why the insurer must be clear up front the credit will be used in conclusion we appreciate the work of the subcommittee to ensure that credit history is used fairly the twenty six states regulating credit scoring based on the end coil model have responded effectively to an issue of mandan a timely solution states as diverse as new york and north dakota texas and maine have successfully used this model to meet their very different demographics we ask that you recognize the effort states have made to balance consumer protection with the need for healthy insurance markets and that one size fits all doesn't work better legislation that would set aside the laws of the states is unneeded and may actually bring higher rates for consumers who are benefiting from their good credit thank you for the opportunity to appear and then quite look forward to working with your committee mr chairman thank you so much for your testimony and think all of the witness  the witnesses for being here today i'll now recognize each member of the subcommittee for questions of this panel and i recognize myself with five minutes i may be a little aggressive in forcing the five minutes again since we have a second panel to go after this panel also represents a cause or how if at all would you distinguish between the use of credit scoring here and the policy the public policy position documented relationship we've said as a matter of public policy this is unacceptable and even more recently on the house  the house at least and i think maybe even in the senate we have passed a bill that that prohibits genetic information from being used how do you how do you distinguish this from that if you able to do that wellness jerram and i'm not sure i'm one hundred percent qualified to answer that question but let me say that then coyle as as the policy makers in the state on insurance predict risk and i question although it's done that grade point averages for high school students can be a valid predictor of risk for insurance companies that family history can be a valid predictor for help when i have an application for life insurance or health insurance that age can be a valid predictor and those are all valid predictors we are committed to protecting the industries opportunity to use valid predictors and at the same time protecting the consumer to ensure that invalid application predictors doesn't occur in the end goil model what we to make a distinction between or is there a distinction between being a a valid predictor of risk versus a valid predictor of claims it not from being a valid predictor of risk mr chairman from the standpoint of risk of having an accident or something yes i would agree but from an insurance company's management standpoint i would argue that the claim itself is the exposure to risk that the insurance company have if there were the factors that kept people even if they were in accidents automobile accidents from making a claim the fact that this predicts their willingness to make a claim which is what the insurance policy was written for would be acceptable under the what you're saying if i understand your question i'm not sure mr chairman but my insurance agent oftentimes tells me even though you have a claim you sometimes are better off the page that damage yourself because it is a relatively minor can claim then to apply it to your policy and do the deductible plus one hundred two hundred dollars i am well served a responsibility sample you are well sir but would a poor person who didn't have the option of paying back claim himself be well served i guess that's the question can you just comment  on that mr mccarthy and then i'm going to thank you mr chairman i agree with my colleague that the measurement is a measurement of claims there's no evidence to suggest that we regardless of your credit score that you have more accidents certainly reasonable analysis of that data is that credit scoring is really a proxy for economic class income and as a consequence if you have lower income you're not able to do as the representative have suggested enable to pay out of pocket and as a consequence you're actually people with more money will forego making a claim knowing that their insurance premiums may go up in the future and have the ability to make that economic choice lower income people do not have that option and so what is interesting about the analysis done by the federal trade commission is addressing the issue of claims which i think can be reasonably explained by you having the wealth to pay for those claims out of pocket  confident the integrity of your initial report that the analysis you performed and the findings are correct in that report the commission definitely was confident in the reliability of its initial report and you know that one of our commissioners did that is it fair to say that if he doesn't support the legislation that would ban credit scores the commission hasn't taken a position on the in the perception it's not for the quality of the materials perceptions reasons you're doing it well there was certainly a lot of concern expressed about our our initial report and whether it was whether it was adequate because we obtained the information voluntarily and for you know a host of procedural reasons and we feel that by using these these our subpoena authority we can address those concerns and i should add to that the fact that we use subpoenas we use subpoenas often when we are collecting information in studies and it certainly isn't meant to suggest that the every state law except why it's even your own state's preempted that is correct the any i see this because i mean it is not is not supporting that that's what you said you were you were representing them and that's i don't really think the factual in their opinion i mean if i look the data set up for all the states and your station reviewed the use of credit scores extensively that it's basically true that only one state out of fifty six jurisdictions have actually banned the use of critical hours including yours i said i personally favor h r six sixty two i just want to make sure the record is very clear that that's not the position national association of insurance commissioners in fact of as i said fifty six jurisdictions clearly states only one state bans it so i mean there's a huge difference between that and i mean this would overturn your own state law yes i understand that and i want to clear i may have fun going back home want the perception to be created there anybody think that you represented the opinion of national socialist your insurance commissioners in fact it seems to be quite the opposite in fact your state legislators would disagree with your opinion today based on what they voted into law  the national association supports continuing studying the issue is deeply concerned about the disparate impact on i have no problem with continuing and that's what we're doing today and supports h r six fifty six thirty  three mr kaiser on because he testified to state let's knishes skeptical about credit scores but oakley found that they increase availability affordability for consumers and their racially blind and help keep insurers agree that if this were enacted it would really harm seniors and i could not agree more strongly and also and while opposes this legislation thank you very much for testimony the gentleman from illinois july two thousand and seven f t c report found i read it that credit based insurance courts are a proxy or substitute for race or ethnicity in three out of four lines of automobile insurance collision comprehensive bodily injury but in your written testimony for this hearing this morning you state that the f t c quote found that credit based insurance scores appear to have little effect as a proxy for your written testimony appears to be backing away from the conclusions of the f t c as report i hope that's not the case i want to ask you for the record to use them by the original f t c report the commission certainly does stand behind  original report if i could i i think that there are that it may be worth explaining a little bit about this proxy effect proxy when used in you know to a conversation it's kind of like an absolute substitute something substitutes for another thing it's a it's an all or nothing and when we use proxy effect in  in the study we were talking about the effect as you understand of course of the pickle and i understand we only have five minutes but when i read the f t c report and i hear your and i read your comments and your written statement for this committee today they seem to be different they seem to be backing away they seem to be kind of like kind of like well let me reinterpret let me reevaluate what c really meant one they issued their report they seem different i think that most people might say i just want to ask you if there are different because i read the original report which gave birth to the legislation that we're proposing we didn't just base it on thin air we read your report today it seems like yeah it's a proxy but it's no big deal really not that relevant it's really not that important that seems to be the way i interpret what testimony you referred to quote economic advantages to insurance company from using credit based insurance course that have largely been ignored by empirical studies including the two thousand and seven f t c study what are these economic advantages and why do they deserve any scrutiny insurance industry and insurance trade associations would argue that using credit scoring is an inexpensive underwriting tool that it would be more expensive to underwrite if they did not have the ability to use credit scoring freely as one of many tools in the running running situation the concern is even if notwithstanding that it is a predictive and that it is industry that it was our understanding and our association that that report had been shared i have no evidence to support that but that was our understanding was a common understanding and we were the reason it came to our attention because we would certainly would welcome the opportunity as the consumer protection for the state insurance regulators would have welcomed the opportunity to have reviewed the port in advance as well to provide some guidance and hopefully we'll have that opportunity to work collaboratively with the f t c in the future on the members of this committee or getting their will that's been my experience in the last sixteen years so i'm sorry if i'm not sorry for the insurance industry or questioning their motivations or their tactics thank you very much that seniors didn't have higher credit scores i don't know if you've seen that fact but if this legislation were in place could it cause higher insurance rates for those with higher credit scores chairman and represent mchenry i think that's the important point to be made today that if this legislation were to pass there would be losers and there would be winners those people who currently are having the advantage of having good credit are going to pay higher premiums those who have for whatever reason not as good a credit score are going to pay less there's no free lunch   surance companies are going to make their money now the question is do you reward good behavior in the form of good credit or not and and yet good credit is a fine thing but we and again has been very deliberative on this and we have attempted to protect those unique situations that occur young people old people with no credit line those people who have extraordinary circumstances those people and i went through it in my testimony mr chairman but the point is there is a way to address the application of credit scores to make it as as reasonable as as possible and as fair as is possible without throwing credit scores out the disadvantage of some groups who have worked very hard to establish good credit mr mccarthy  that do you have a response to that i don't recall your question so i apologize if you are actually listening to represent of kaiser i'm asking if you have a response to what he just said i don't know if you are doing what many behind you are doing is listening to something else but what our concern is with regard to credit scoring is first of all with with in terms of potential impact on redistribution with regard to senior citizens our evidence and our research has found that many senior citizens have been credit files my grandfather for instance didn't have a credit card paid his rent  cash his credit score probably would not be very good although he was certainly financially responsible but the rep is absolutely right if you eliminate a underwriting tool for the terminations of premiums paid eight lee as an innate racial component to it my concern is both historically insurance has been for two purposes one is to provide for financial security and number two is to los prevention and with regard loss prevention i don't see how credit scoring really supports that act that insurance principle says which we want to do is to get people to drive or responsibly and i don't see how improving your credit score serves the purpose of law people not also have to pay for insurance therefore their record of paying or not paying another financial service products could be an indicator of whether or not they will pay for a renewable of their insurance well that's possible but the but the insurance pay is paid premium is paid up front it is yet under state mandates doesn't insure have to cover them for thirty days and there are a gap by which ensures have to cover if you failure to pay your policy will result in cancellation of your policy but you have given thirty days to do that give them a notification but they'll notify you if you don't make that payment they're not behind in terms of collecting the premium they will cancel you and have earned the premium that you have paid up there should be an expense associated with that as well if you're slow to pay or you have to send out multiple notices so w ensure when they be wise to know that going up front yes they would be a credit score be useful then but a credit score be useful frank in my opinion i think that there are enough built in costs and expenses if you premium finance that the companies who use premium financing are able to secure and to pay for those initial charges interesting against the experiences of the driver for example an automobile insurance you know i would i would think that the indicators of you know whether or not you have a lot of ticket you had accident that our study told us exactly what role it played i think we do ask anybody without a study you f t c the federal trade commission do you know whether or not they make these decisions solely on credit scores  combination of factors it's based on a combination of factors how do you know we know that from talking to people what are the other factors other factors like  this information what are the other factors how do they do this age are driving history claims made in the past there is a myriad of factors that could be used most states have passed some laws that say that you cannot use credit scoring as the sole factor but that can be somewhat misleading it could be the predominant factor in some insurance companies not all but some insurance companies heavily rely on it because of its predictive predictability the animal george kaiser do you know the weight that credit scores have on the decision of the cost of  insurance how heavily does it weigh german represented by our insurance commissioner could answer that question because everything is filed and our insurance are there any companies who use it so lay off is that the two percent of the decision is it seventy five percent of decision how does it work in our state and i believe in all states that have adopted the and coil model b twenty six states at least  it cannot be used soley and we have by definition said slowly would be fifty one percent cannot be weighted so it could be a significant weighting factor cannot answer th specific combination of factors factors used or the weights applied all right let's see mr mccarthy would you agree that if you use credit weighted to make a decision that a reduce your cost of investigations end up collecting and gathering information so that you can make a determination about one's ability to  to pay does it reduce to cost the personnel costs of the investigation because the betting costs according to industry spokesman an industry trade associations there is a substantially cheaper to use a credit scoring mechanism that is to do traditional underwriting where you know as i have looked at this and i've tried to figure out why there is an argument that somehow credit scoring is a strong indicator and it just doesn't make sense to me i cannot make sense out of it and i don't even know why the f t c would spend the taxpayers money to study it except i guess us to do it i mean it just doesn't make good sense so i'm trying to figure out why and as i listen to all of this i recognize that the cost of reviewing an application and determining what kind of experiences these drivers in automobile insurance have had whether or not it cost a lot of money to do that and so to just go to the credit score really reduces the the insurance company and i'm beginning to believe that's really what this is all about  right it is a predictor that is used in some cases well that is absolutely nonsensical i know some of the smartest people i mean geniuses who are just don't get good grades but they