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Auto insurers shouldn't use credit scores to assess risk, N.C. congressman says

WASHINGTON — Credit scores can open or close the doors of opportunity in many areas, from buying a home or car to getting approved for a credit card.

But several members of Congress, including Democrat Mel Watt of Charlotte, are fired up over what they see as an abuse of the credit-score system its use by car insurance companies in assessing risk and rates. They are pushing legislation to halt this practice.

These members of the U.S. House Finance Committee are particularly concerned that the practice places an undue burden on minority groups. Citing a July 2007 report from the Federal Trade Commission that had been requested by the committee, Watt said the practice results in higher insurance rates for racial and ethnic minorities, who tend to have lower credit scores.

While the FTC report stopped short of condemning the practice, it showed blacks paying 10 percent more and Latinos 4.2 percent more when insurers based their premiums in part on consumer credit scores.

The congressmen also note a finding in the FTC report that credit-based insurance scores were being used as a substitute for race or ethnicity in specific lines of automobile insurance, including collision, comprehensive and bodily injury.

Ironically, at the time the report was released last year, several groups allied with the congressmen condemned the FTC for understating the full scope of the problem.

According to a July 2007 Insurance Journal article, representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center and the Center for Economic Justice rejected the report’s findings because “the insurance industry controlled the data used in analysis” and the FTC was at fault for using this data “handpicked by the insurance industry.”

These groups said the FTC findings of problems were unavoidable because the correlation with race was so strong that even the manipulated data sample could not fully disguise it. But they said the problem was far more serious than even the report indicated.

Watt said last week that he recognizes the shortcomings of the FTC study and suspects that, had there been a requirement that insurance industry representatives provide data under oath, there would have been much stronger evidence of the use of credit rates as a proxy for race and ethnicity. However, the results still sufficiently document problems for them to be addressed, Watt said.

“If you’ve got a watered-down result, and you’ve still got a proxy effect, that’s enough for me,” Watt said.

The congressman said he’s pushing the FTC to be more aggressive as it completes its next report, which will address the same type of abuse by the home insurance industry.

Along with Illinois Democrat Luis V. Gutierrez, Watt introduced legislation earlier this month to prohibit the use of credit information in consumer reports for insurance purposes, in situations where it results in discrimination or becomes a proxy for race or ethnicity, according to a statement from Watts’ office.

“The introduction of the bill…is a step toward leveling the playing field for purchasers of personal lines of insurance such as automobile and homeowners insurance,” Watt said in a released statement.

“The insurance industry has been increasingly using credit information to underwrite and rate personal lines of insurance. Government studies have shown that credit scores correlate with race or ethnicity, so minorities often end up paying more for personal lines of insurance even when they are safe drivers or have never filed claims.”

Gutierrez, also quoted in the news release, similarly noted the disparate effect on already underprivileged groups.

“For families who are only beginning to establish credit including minority and immigrant communities this practice puts them in a difficult and unfair financial position,” he said.

Introduced March 14, the proposed legislation is the Non-Discriminatory Use of Consumer Reports and Consumer Information Act of 2008, H.R. 5633.

Watt isn’t certain of how the legislation will fare. It will most likely come to the Financial Services Committee, chaired by Rep. Barney Frank of Massachusetts, who is a co-sponsor of the measure. Watt said he may be asked to conduct hearings under the Oversight and Investigations Subcommittee, which he chairs.

The language of the bill is currently tailored to the fairly narrow findings of the FTC study. “If I had my way, the bill would be much more aggressive,” Watt said. “I don’t know what credit scores and insurance rates have to do with one another.”

Watt said the insurance industry might be very unwise to oppose his fairly narrow measure in this environment.

“There are those who may try to amend this bill to make it more aggressive,” he said, indicating the insurers might have far more to lose if they attempt to stymie the limited proposal.

He’s not quite sure how the insurance industry will react, though hopes the legislative process will be constructive.

“I’m not trying to make anyone angry, but to do what makes good social policy,” Watt said. “Maybe we can get the insurance industry to come up with a better system for doing this.”

Editor’s note: This article was provided by The Mecklenburg Times, Lawyers Weekly‘s sister paper in Charlotte.

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