Hearing of the Oversight and Investigations Subcommittee of the House Committee on Financial Services - Credit-Based Insurance Scores: Are They Fair?

Statement

Hearing of the Oversight and Investigations Subcommittee of the House Committee on Financial Services - Credit-Based Insurance Scores: Are They Fair?

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REP. MAXINE WATERS (D-CA): Thank you very much, Mr. Chairman. I'm sorry I could not be here earlier. This has been a very busy day, with so many overlapping hearings going on. But this is a most important hearing, and I thank you for holding this hearing and for all of the witnesses that are here today. I thank you for being here.

I am from California, and I was in the California State Assembly for 14 years before coming to Washington, D.C. And for that entire period of time I worked on redlining. And I was (in insurance ?) And it's been a tough and long battle in the state of California to get rid of redlining in automobile insurance.

And it seems to me, as we have begun to win this battle against redlining in automobile insurance, it's simply being charged more money based on where you live, somebody just have come up with another way by which to exclude and/or charge more money. And I don't care what is said; the information that I have here just basically shows that African Americans and Latinos, a large percentage of them -- here someplace -- are likely to be impacted by this -- this policy of using FICA scores or credit history as a way of determining the cost of your insurance.

Someone probably asked this. You probably discussed it already.

Will someone tell me what the documented relationship is between your credit history and how you drive? Where is the empirical data that connects the two?

MR. BIRNBAUM: Well, I'll jump in and say that there is no data that connects the two. What the insurance industry does is they go into your credit history and they do a data-mining exercise. It's a huge database, and they data-mine it to see which characteristics are associated with claims, with people who are likely to renew their policy, with people who are likely to buy additional policies, people who are likely to be more profitable. Then they build a model that puts a numerical value on that.

There's no theory there. There's no theory about how credit history relates to driving. It's a data-mining exercise. And what you get now is a bunch of after-the-fact rationalizations that blame the victim. You basically say that, "Oh, people -- you know, it's related to claims because people don't manage their finances well and they don't manage their risks well." Well, that's just simply not true. You know, the poor people have to manage their finances better, because they don't have as much to work with.

We know that the people who are penalized from credit scoring are the victims of economic and medical catastrophes. We know that the victims of credit scoring are people who don't have information in their files because they deal with payday lenders, check-cashing operations, and they can't get mainstream credit. The fact is is that there's information out there that call into question the so-called correlation. And this is something I definitely wanted to address.

When I was a regulator in Texas, one of the companies came in and said, "We want to give a discount to people who've been with us longer. Because our loss ratios decline with homeowners as people who've been with us longer." And we said, "Why is that? Why do you think that is?" "Oh, we don't know, but there's a correlation." Well, if we had just said, "Okay, fine, there's a correlation," then we would have basically been going along with unfair treatment, because when we dug a little deeper, we found that what they had given us was a combination of homeowners and renters.

The renters' loss ratio was higher than the homeowners' loss ratio, and the percentage of the people who had renters' insurance in the early years was greater, so the loss ratio was greater. So it appeared as if the longer you'd been with the company, the less likely you were to be to have an accident when, in fact, it was simply a function of what data you were looking at.

I think that's the same thing that's happening here, is that there's not really any relationship between your credit history and the likelihood of a claim. There's something being hidden in the data, because there's -- there are things that happen that are inconsistent with the theory. I mentioned that earlier, about how delinquencies and foreclosures and debt load has increased over a period of time when auto claims have decreased. How do you jibe that with the claim that credit history is related to claims? You don't.

REP. WATERS: Well, I think I would certainly agree with the analysis that you just gave. But I'd like to ask the commissioner -- is it Rosch (pronounces "Rush") or Rosch (pronounces "Roush")?

MR. ROSCH: It is Rosch (pronounces "Rush"), and I'm from California, too, Congresswoman.

REP. WATERS: "Rush." Good. Thank you.

I asked the question about the correlation -- I just received an answer that makes a hell of a lot of good sense to me. But what I want to do is I want to ask you about the conclusion of the commission and what you decided to do about this. It says, "The FTC therefore recently revised and reissued its consumer education materials, including its Spanish language materials, to give greater emphasis to the link between credit history and insurance premiums." I guess that means you're counseling people that if you don't want to have increased premiums, you'd better have a better credit history. I mean, that's what it sounds like. We hope that these materials, the hearing and other efforts, will alert consumers that having the best possible credit history is critical, not only in decisions creditors will make about them, but in the decisions insurance companies will make about them, too. Is that all you intend to do? Do you really think that's credible?

MR. ROSCH: Congresswoman, please understand that there are limitations on our jurisdiction that have been placed on us by Congress.

REP. WATERS: Well, tell us how we can undo that.

MR. ROSCH: The McCarran-Ferguson Act delegates the power to regulate insurance to the states, not the Federal Trade Commission. So we are embarking on an -- we are doing as much as we can do. We're not the only ones who are doing this, by the way. The states are also requiring the same kinds of disclosures, so they're reinforcing what we're doing. But we are doing as much as we can do within the jurisdiction that you gave us.

REP. WATERS: Well, what you basically say is you believe that there is a correlation and that it's all right for the credit histories to be used to determine the premiums and how much money people are paying. You're agreeing with that.

MR. ROSCH: No. No, please, Congresswoman. Please, that is not our -- that is not what our report says. We take no position on whether or not that --

REP. WATERS: But you do take a position in the way that you have decided to handle your so-called consumer education. You're saying, you're agreeing, well, this is what the insurance companies are doing. This is how they determine your premiums. Now, you just make your credit histories better so that you won't have to be charged more money. I mean, that's the conclusion there.

MR. ROSCH: We are doing as much as we can do in the real-world setting, Congresswoman.

REP. WATERS: Well, can you say, "I don't think that there's a correlation. I don't think that there should be a relationship to your credit history and the amount of money that you pay. That's what they are doing, but we disagree with that." Can you say that?

MR. ROSCH: I -- I can say that we do think there is a correlation, because that's exactly what our report to you shows, that there is a correlation. We are not in a position to say whether that is right or wrong, because that is a policy decision to be made, currently, by the states. But if this -- if this body decides that it should be taken over by the federal government, it is a policy decision that we're trying to inform you as much as we can about so that you can make it on a reasonable basis.

REP. WATERS: Well, thank you very much.

Mr. Chairman, I really do thank you. You know, I almost feel like minorities are under siege in so many ways. I just left a hearing about some bills that are being produced about gang warfare and how they want to create databases and identify whole communities as, you know gang communities. I just got back from Jena last week, where we have a prosecuting attorney or DA who's abused his power in, you know, charging young people who happen to be African American with criminal charges. Everywhere I look it appears that there's another instance of really what amounts to discrimination and abuses of power, and that people of color are under siege in this country.

And I don't care -- I'm sure you're doing the best job you can do, Mr. Rosch, but whatever data that you have or whatever your information is that would lead you to believe that there is a correlation between your credit history and the way that you drive is just not believable to me.

And once -- once more, I'm going to end this day feeling rather offended by more information that causes, or undermines the quality of life for, you know, African Americans and people of color, whether we're talking about the home foreclosures or now this new way of redlining.

So I thank you for bringing it to my attention. I just have to go home tonight and rededicate myself to the proposition that I've got to do a lot of fighting. We've got to confront a lot of issues and a lot more people.

But thank you for the information. This hearing is extremely important. I yield back the balance of my time.

REP. WATT: The chair notes that some members may have additional questions for this panel which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.

I want to again applaud this panel. It has been an absolutely eye-opening exercise. All of you have contributed in very, very important ways to this very, very important discussion.

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