[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
USE OF CREDIT INFORMATION
BEYOND LENDING: ISSUES AND
REFORM PROPOSALS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MAY 12, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-134
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58-044 PDF WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio BILL POSEY, Florida
ED PERLMUTTER, Colorado LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
LUIS V. GUTIERREZ, Illinois, Chairman
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California PETER T. KING, New York
DENNIS MOORE, Kansas EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania WALTER B. JONES, Jr., North
MAXINE WATERS, California Carolina
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
CAROLYN McCARTHY, New York Virginia
JOE BACA, California SCOTT GARRETT, New Jersey
AL GREEN, Texas JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina TOM PRICE, Georgia
DAVID SCOTT, Georgia PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota CHRISTOPHER LEE, New York
RON KLEIN, Florida ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
C O N T E N T S
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Page
Hearing held on:
May 12, 2010................................................. 1
Appendix:
May 12, 2010................................................. 57
WITNESSES
Wednesday, May 12, 2010
Fortney, Anne P., Partner, Hudson Cook, LLP...................... 44
McRaith, Michael T., Director, Illinois Department of Insurance,
on behalf of the National Association of Insurance
Commissioners (NAIC)........................................... 8
Pratt, Stuart K., President and CEO, Consumer Data Industry
Association.................................................... 42
Rukavina, Mark, Executive Director, The Access Project........... 40
Snyder, David F., Vice President and Associate General Counsel,
American Insurance Association................................. 10
Wilson, John, Director, Analytics, LexisNexis Risk Solutions..... 12
Wu, Chi Chi, Staff Attorney, National Consumer Law Center........ 38
APPENDIX
Prepared statements:
Gutierrez, Hon. Luis......................................... 58
Waters, Hon. Maxine.......................................... 63
Fortney, Anne P.............................................. 67
McRaith, Michael T........................................... 81
Pratt, Stuart K.............................................. 115
Rukavina, Mark............................................... 137
Snyder, David F.............................................. 147
Wilson, John................................................. 180
Wu, Chi Chi.................................................. 186
Additional Material Submitted for the Record
Hensarling, Hon. Jeb:
Written statement of the Independent Insurance Agents &
Brokers of America, Inc. (IIBA)............................ 241
Kilroy, Hon. Mary Jo:
Letters of support from various organizations................ 243
Letter from VantageScore Solutions, LLC, dated May 3, 2010... 255
USE OF CREDIT INFORMATION
BEYOND LENDING: ISSUES AND
REFORM PROPOSALS
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Wednesday, May 12, 2010
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Luis V.
Gutierrez [chairman of the subcommittee] presiding.
Members present: Representatives Gutierrez, Maloney, Watt,
Moore of Kansas, Waters, Hinojosa, McCarthy of New York, Baca,
Green, Scott, Cleaver, Ellison, Klein, Foster, Speier;
Hensarling, Royce, Capito, Garrett, Neugebauer, Price,
Marchant, Lee, Paulsen, and Lance.
Also present: Representatives Kilroy, Manzullo, and Cohen.
Chairman Gutierrez. This hearing of the Subcommittee on
Financial Institutions and Consumer Credit will come to order.
Good morning and thanks to all of the witnesses for
agreeing to appear before the subcommittee today.
Today's hearing will examine the impact that the use of
credit reports and information has on consumers outside of the
traditional use for lending and credit purposes. We will
examine the use of credit-based insurance scores, where the
medical debt is predictive of a person's chances of defaulting,
and finally, whether or not a consumer's credit information
should be used to determine their employability.
We will be limiting opening statements to 10 minutes per
side, but without objection, all members' opening statements
will be made a part of the record.
We may have members who wish to attend but do not sit on
the subcommittee. As they join us, I will offer an unanimous
consent motion for each to sit with the subcommittee and for
them to ask questions when time allows.
I yield myself 5 minutes for my opening statement.
This morning's hearing is about the use of credit
information in areas such as insurance underwriting and
employment purposes. We will hear about important yet complex
and often opaque processes concerning credit board insurance
and insurance scores in the first panel.
In the second panel, we will hear about issues that are
equally important to a vast number of consumers--the little
known or understood use of credit information for hiring and
even firing decisions, and the effect medical debt has on one's
consumer report, even after you paid the medical debt off.
When legislators or regulators attempt to fully grasp an
issue such as credit-based insurance scores, they see a complex
system laden with ever-changing computer applications and
models, but it is precisely this complexity that should make us
here in Congress delve further into an issue that affects every
single American who owns or rents a house, a car, has
insurance, has a job or is looking for a job, or is likely to
incur medical debt.
Do most consumers know that their car or homeowner's
insurance rates may go up due to their credit score? Do they
know that if one of their medical bills goes to a collection
agency and they pay it in full and settle it, it will still
affect their credit report for up to 7 years?
Do people realize that even in these tough economic times,
pre-employment consumer credit checks are increasingly
widespread, trapping many people in the cycle of debt that
makes it harder for them to pay off their debts and harder for
them to get the job that would allow them to pay off the debt?
I wonder--when you go to State Farm or Allstate or GEICO to
get your insurance and they have a credit score, and that
credit score was negative, so they are going to charge you more
for your insurance, do they send you a note in the mail telling
you that you are going to pay more for that insurance?
I think these are all very important questions that the
American public should know. Indeed, the current system
facilitates the denial of employment to those who have bad
debt, even though bad debt oftentimes results from the denial
of employment, a vicious cycle. You cannot get a job, so you
get a bad credit score. You have a bad credit score, so you
cannot get a job.
I wonder who is most likely to be affected, especially in
these economic times. What? Extend unemployment compensation?
What about the national debt?
I have a way maybe we could settle unemployment
compensation, how about letting somebody get a job and prove
who they are without some mysterious number coming out of a
black box somewhere where nobody knows about it.
That is why the subcommittee is holding this hearing, the
second so far this year on the issue of credit reports, credit
scores, and their impact on consumers.
We will look at reports and studies about the predictive
nature of insurance scores and traditional scores among other
things. As we do so, we also need to look at the basic guiding
principles of equity, fairness and transparency.
Some have contended that there is no disparate treatment of
minorities in credit-based insurance scores. Some will say that
even if there is a disparate impact on some groups, the system
still does not need to be changed.
The question of how predictive a credit-based insurance
score is on an insured's likelihood to file a claim is
important, as it is the predictive value of traditional credit
scores used for credit granting.
As long as there continue to be disparities in the outcomes
of the current system for racial and ethnic groups and along
class and geographical lines, I believe the system needs
strenuous oversight and may need fundamental change.
How to correct the disparities in the system with this
disproportionately negative impact on minorities and low-income
groups while maintaining the core framework of credit
information as a risk management tool is a challenge we should
take on.
For example, on issues like the use of credit information
for developing insurance pricing and the inclusion of medical
debt collection in determining a consumer's risk of default, I
have doubts as to whether there are biased uses of data.
The Equal Employment Opportunity Commission, the Federal
Reserve, the Brookings Institution, the Federal Trade
Commission, and the Texas Department of Insurance have all
found that racial disparities between African Americans,
Latinos and Whites in credit scores exist, and we will see this
has wide ranging implications beyond simply obtaining consumer
credit.
Defending a system where decisions such as determining car
insurance rates or even something as vital as to whether or not
to hire someone is based on something that has shown to possess
a degree of bias is difficult, to say the least.
I welcome the testimony this morning of those who believe
the system works, and of those who believe the system needs to
be changed to work in a more equitable, fair, and transparent
fashion.
In the same spirit of transparency, I am making it clear at
the outset that I side with the latter group. I do not think
you need any sort of score to predict that, from my point of
view.
In order to persuade this committee not to move forward on
legislation that would strongly limit what we believe to be
unfair practices, the industry witnesses before us must prove
to me that not only are the practices we call into question
scientifically predictive, but more importantly, they are fair
and equitable to all Americans.
The ranking member, Mr. Hensarling, is recognized.
Mr. Hensarling. Thank you, Mr. Chairman. Thank you for
calling this hearing.
As we all know, last week we were greeted with more bad
economic news in our Nation as unemployment ticked up yet again
to 9.9 percent. Again, unemployment remains mired at a
generational high.
Since the President asked for and the Congress passed the
stimulus bill, approximately 3 million of our fellow countrymen
have now lost their jobs. There are countless stories of
hardship, and countless stories of suffering. We know that the
underemployment rate hovers around 17 to 18 percent of our
country.
By any historical standard, we should already be out of
this recession. We should have robust GDP growth. We should
have robust employment growth. Unfortunately, we do not.
I believe, as do many, that the reckless spending, the
enormous debt and deficit that has been brought up on us by
this Congress, by this Administration, the serial bailouts, the
government takeovers, and legislation passed that ultimately
restricts access to credit have all contributed to the fact
that we are still mired at almost double digit unemployment.
I believe the Administration and Congress are holding back
our economic recovery, an economy that wants to recover.
Economies work on reverse gravity. What goes down must come up
Yet, this recovery has been the most tepid and languishing
recovery in the modern economic era. I did not even mention the
impact of the high cost of the new health care bill and the
threat of a national energy tax.
As I talk to small business people in the 5th Congressional
District of Texas, as I talk to investors, as I talk to
bankers, as I talk to Fortune 500 CEOs, I hear the same message
over and over, and that is, ``I am not willing to expand my
business and create more jobs today. I do not know what the
health care costs are going to be for my employees. I do not
know what the energy costs might be associated with cap and
trade. I do not know what my tax bill is going to be as tax
relief expires at year's end, and I do not know how my Nation
is going to pay for all of this debt.''
More taxes. More inflation. Given this backdrop, I would
hope that any legislation that this subcommittee or full
committee considers, that we would consider jobs to be job
number one for our committees.
I feel we are considering at least three more policy ideas
that are going to further harm job creation in America by
restricting access to credit. All of the ideas before us are
either going to prohibit accurate data from going into a credit
file or prohibit the use of accurate data that may be in a
credit file. To many of us, this all has the distinct odor of
government censorship and even the faint whiff of Orwellian
thought control.
The bottom line is, thinner credit files are going to erode
risk-based pricing of these products, which in turn is going to
lead to less available credit and more expensive credit, at a
time again when our Nation is mired in almost double digit
unemployment.
Should credit scores be used in insurance underwriting? Are
they predictive? I have seen a number of studies that claim
they are but most importantly, I suppose those who are using
them find them to be predictive.
I believe they have an incentive to get it right.
Otherwise, they would ultimately lose money and they would have
to fold up shop. Those who get it wrong ultimately go out of
business. Maybe one insurance company feels those who wear blue
ties are riskier than those who do not. I do not know. I do not
know if that is predictive. It is not logical, but maybe it is.
One company may decide to use it and another one may choose not
to use it.
Information about discharged medical bills. There are a lot
of setbacks that one can have in their life that ultimately
impact their credit: divorce; unemployment; a medical bill.
At the same time, are they predictive? If they are
predictive, if we do not allow that information in, ultimately
small businesses, many of which are organized as sole
proprietorships--
Chairman Gutierrez. The gentleman's time has expired.
Mr. Hensarling. In that case, Mr. Chairman, I will stop
there.
Chairman Gutierrez. I am going to ask unanimous consent
that Ms. Kilroy be allowed to sit in this hearing, and grant
her 2 minutes for an opening statement. Hearing no objection,
it is so ordered.
Ms. Kilroy. Thank you, Mr. Chairman. Thank you for your
leadership in this important issue. I thank the witnesses for
their time here today. I am interested in what you have to say,
particularly about medical debt and the impact it has on the
credit scores for millions of Americans, and their ability to
get an affordable home loan or car loan, long after they have
paid their medical debt.
I ask for unanimous consent to enter into the record a
letter written to me from my constituent, Julia Mueller of
Columbus, Ohio.
She is a responsible young adult, a college student. She
pays her credit cards on time. She purchased health insurance.
She checked with them before she was going to have an expensive
procedure to see if it would be covered. She was assured it
was. That was her understanding until the bills came and her
insurance company denied coverage. She ended up in a year-long
dispute with them on that. It was eventually resolved, but it
destroyed her credit score. Now, she is worried about her
ability after college to buy a car, and to buy a house. I worry
it might even affect her ability to get a job.
I introduced the Medical Debt Relief Act to help hard-
working Americans like Julia who play by the rules, pay or
settle their medical debts, yet find their credit scores
adversely affected for years to come.
Today, we are taking an important step in the right
direction to deal with this important issue. I want to tell
Julia when she writes to me that, ``I am fiscally responsible
and I would like to be treated that way,'' and that is what we
are aiming to do here today.
Thank you, Mr. Chairman. I yield back my time.
Chairman Gutierrez. The gentlelady yields back the balance
of her time. Mr. Price of Georgia is recognized for 2 minutes.
Mr. Price. Thank you, Mr. Chairman. Mr. Chairman, if the
past 2 years have taught us anything, it is that risk is
unavoidable and ever present.
In order for the economy to work, businesses must be able
to price their products for the risk that they incur. Risk-
based pricing is especially important when trying to determine
the reliability of the insured and the exposure of job
creators.
Credit-based insurance scores have proven to be the most
predictive factor in determining the likelihood of a consumer
filing a claim. This risk model enables insurers to more
accurately underwrite and price for risk, and when this is done
well, everyone wins.
Democrats want you to believe that everyone should not be
judged by their past actions. However, it is the American way
to pull one's self up by working hard and making responsible
decisions. What makes risk-based pricing and insurance scores
important is the ability for people to improve their scores and
lower their rates by paying their bills on time and taking
responsibility for their financial decisions.
What would happen if there was no risk pricing? Everyone
would get the same price regardless of how much an insurer has
to pay to cover a claim. This would result in significant and
dramatic increases in rates to virtually all Americans, less
credit available, more expensive credit, and more job
destruction.
This is clearly not the most wise avenue. I look forward to
the testimony and hopefully our response in wisdom. I yield
back.
Chairman Gutierrez. Mr. Green is recognized for 2 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing.
Mr. Chairman, I am concerned about credit-based insurance
scores, especially as they relate to employment. It is very
difficult to be poor. It is very expensive to be poor. In poor
neighborhoods, goods cost more. In poor neighborhoods, you find
that unemployment is obviously higher for any number of
reasons. It is very difficult to be poor.
When you are poor and you need a job, and it is difficult
to get a job because of credit scores, it seems that we
compound the problem. I am very concerned about how we approach
credit scoring with reference to employing people, especially
people who are poor.
I look forward to hearing from the witnesses and I look
forward to solutions such that poor people will not find that
they are being invidiously discriminated against.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Gutierrez. The gentleman yields back the balance
of his time. I ask unanimous consent that Mr. Manzullo be
allowed to sit on the subcommittee, and hearing no objection, I
recognize him for 1\1/2\ minutes.
Mr. Manzullo. Thank you, Mr. Chairman. There is a
distinction between people who incur medical debt and those who
go out and charge vacations and consumer items. I practiced law
for 22 years and have been through probably 1,000 bankruptcies.
In several of those cases, the people I put into bankruptcy
either exhausted their insurance or had no insurance and they
filed bankruptcy not because they wanted to, not because they
did anything intentionally, but simply because they could not
pay off their medical bills.
I talked to two colleagues of mine in Rockford, Illinois,
who specialize in bankruptcy. The two of them have been through
30,000 bankruptcies together. One had the record for credit
card debt, $140,000.
Mr. Chairman, it was all medical expenses. We have to draw
a distinction here between people who because of their
spendthrift outrageous uncreditworthy conduct go out and buy
things just because they want them, and people who are caught
up, especially today, without insurance or lack of insurance or
many times very high deductibles, co-pays, etc.
I am a sponsor of this bill because it is the right thing
to do, especially with so many credit card companies, the case
that my wife and I had on a simple $150 coat that was put on
layaway, it took us 4 years to clear that. It was not until I
threatened a lawsuit under the Fair Credit Reporting Act that
the credit companies finally backed off on it.
Credit card reporting companies do a job and I understand
what they are doing, but for people who are the unfortunate
victims--
Chairman Gutierrez. The gentleman's time has expired.
Mr. Manzullo. They should not have to suffer the
consequences.
Chairman Gutierrez. My friend, Mr. Watt, is recognized for
a minute.
Mr. Watt. Thank you, Mr. Chairman. I may not even take a
minute. I just wanted to applaud your continuing effort to shed
some light in this area, an area that a number of us started
looking at during the last term of Congress and found some very
disturbing things, like credit scores determine your automobile
insurance rates. I never could quite figure out why somebody's
credit had anything to do with their driving record or how
somebody's credit had anything to do with the insurance rates
that they paid on their homeowner's insurance.
There are a lot of disconnects here, and we need more
information about this so we can make some good judgments and
possibly do some legislation in this area. I think that is why
this hearing is so important, and I applaud the chairman for
the hearing. Thank you.
Chairman Gutierrez. I thank the gentleman. Mr. Garrett of
New Jersey is recognized for 2 minutes.
Mr. Garrett. I thank the chairman, and I thank the ranking
member, and I thank the members of the panel who are here.
Credit information has obviously become an essential and
valuable tool in allowing various market participants to more
accurately price for the risk.
One of the areas we are examining today is how this
information is used by property casualty insurance companies in
determining the premiums they charge to their clients. There
have been numerous actuarial reports that have studied this. By
using consumer-based insurance or CBIS, in determining premium
rates for P&C lines, insurance companies are basically more
able to accurately price for the risk of the consumer and the
rates have significantly decreased for a broad majority of the
policyholders.
Credit scores are really just one of a number of different
data points that insurers consider when determining a
consumer's premium.
If we were to now limit or restrict certain types of
information from being used to allow insurers to more
accurately price for risk, two things are going to happen: One,
more people will pay higher premiums; and two, fewer people
will be able to purchase insurance. Neither of these things are
good.
In the wake of the recent financial crisis, instead of
looking for ways to decrease credit availability and the
accurate pricing of risk, I believe Congress should be
considering policies that will help expand credit for consumers
and small businesses and lower the cost of credit and insurance
premiums for the majority of Americans.
With our current unemployment rate around 10 percent, we
really must work on initiatives to expand economic
opportunities for all Americans, not ways for the government to
micro-manage our Nation's small businesses and risk trying to
restrict the aggregate price of risk.
With that, I yield back the balance of my time.
Chairman Gutierrez. Last for our side, we have
Congresswoman Maloney for 30 seconds.
Mrs. Maloney. Thank you, Mr. Chairman. First, I want to
welcome Mr. Wilson. LexisNexis is headquartered in the district
I represent and I am very proud to represent his company which
is so valuable to our country. The number of consumer
complaints related to credit scores have been going up, and I
look forward to his testimony and others on how we can better
move forward in a way that is fair to consumers and fair to
business. Thank you.
Chairman Gutierrez. We have two panels this morning. The
first panel will focus on the use of credit information for
insurance underwriting and ratings, and the second panel will
focus on the use of credit information in other areas such as
employment.
The first panel consists of three witnesses. First, the
honorable Michael T. McRaith, director of the Illinois
Department of Insurance, on behalf of the National Association
of Insurance Commissioners. I welcome Mr. McRaith here from
Illinois. He is doing a great job out in the State of Illinois.
I am happy to have him here.
Then, we have Mr. David Snyder, the vice president and
associate general counsel of the American Insurance
Association.
Our third witness is going to be introduced by Mr. Price of
Georgia.
Mr. Price. Thank you, Mr. Chairman. Mr. Wilson is a
constituent and I want to welcome him to our panel today. Mr.
Wilson serves as the director of analytics for the Insurance
Data Services Group at LexisNexis Risk Solutions. He joined
Equifax in 1983, and his early experience included roles as a
marketing analyst and as a field operations manager for
electric gas and telephone utility customers, and he then
served as manager of strategic planning and research before
moving to Equifax Insurance Services in New Product
Development. He has worked extensively on the development and
introduction of the first credit scoring models, and has a
wealth of knowledge in this area.
In his current role with LexisNexis, he continues to
support insurance risk scoring models and manages a team of
statisticians and modelers, holds a B.A. in marketing from
Oglethorpe, a grand university down in Georgia, and an MBA from
Mercer University, another great education institution in
Georgia.
We want to welcome Mr. Wilson.
Chairman Gutierrez. You are welcome here. We are going to
start with the gentleman from Illinois, Mr. McRaith. You are
recognized for 5 minutes. There is a clock there. It is green
at the start of your 5 minutes. When there is a minute left, it
will turn yellow. When you see it turning yellow, you have a
minute left. A minute can last quite a while. When you see it
turn red, I will tap. Five seconds later, we hope you will wrap
it up.
Please, Mr. McRaith, you are recognized for 5 minutes.
STATEMENT OF MICHAEL T. McRAITH, DIRECTOR, ILLINOIS DEPARTMENT
OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS (NAIC)
Mr. McRaith. Thank you. Chairman Gutierrez, Ranking Member
Hensarling, and members of the subcommittee, thank you for
inviting me to testify. I am Michael McRaith, director of
Insurance in Illinois, and I serve as chairman of the Property
and Casualty Committee for the National Association of
Insurance Commissioners.
Today, I offer the views of my fellow regulators on behalf
of the NAIC. Thank you for your attention to the use of credit
information in personal lines insurance.
H.R. 5633, introduced and sponsored by the chairman last
year, coincided with our own effort to scrutinize the use of
insurance scores. As regulators, we do not fashion public
policy. Those decisions are made by Congress and State
legislatures.
States view insurance scores from different perspectives.
Some States have banned the use of credit information, others
impose rate bans or prohibit use on renewal or allow only if
credit information would reduce premium. Still others require
only that credit not be the sole basis for an insurer's
decision.
In Illinois, unlike most States, our law requires only that
insurers consider extraordinary life events and does not even
recognize military deployment as an extraordinary event.
In Illinois, an older gentleman from a small town wrote
that he had paid cash for everything his whole life, car, farm
land, etc. His handwritten note explained that he bought car
insurance before the law required, never ate fancy meals or
bought pricey clothes. He even added that he had been married
47 years to the same woman, but confronted a greater than 20
percent premium increase due to his thin file.
Illinois law should be improved.
For the NAIC, we applaud this committee's desire to move
past the rhetoric of interested parties and toward a fully
informed approach. To that same end, the NAIC held public
hearings in 2009. Interested parties, insurers, actuaries, and
insurance score vendors argued that insurance scores allow for
more accurate underwriting and rating.
Consumer representatives argued that credit-based insurance
scores have a disparate impact on members of protected classes
and are premised upon irrelevant if not inaccurate information.
We heard in great length about the studies that support
both positions. In our own States, insurers sell homeowner
insurance in urban neighborhoods where homeowners were
previously stretched to find affordable coverage. Insurers
argue that credit-based insurance scores have facilitated that
market change.
Studies also indicate that individuals of racial and ethnic
minority heritage are overrepresented in low credit score
categories and that credit-based insurance scores discriminate
on the basis of that heritage.
Our national focus has turned. Rather than engage in that
circular debate, we have undertaken a two-pronged strategy to
assist policymakers.
First, we are developing a standardized data call or
detailed interrogatories for personal lines auto companies.
This data call will target the impact of different factors upon
rates paid by consumers: gender; marital status; age; and
credit score, among others.
This data will enable Congress and the States to measure
the consumer and market impact of one State's law versus
another's.
Second, the NAIC is developing a model law to bring
insurance score vendors within insurance regulator oversight.
One panelist indicates in written testimony that those
vendors are already subject to State regulator oversight, an
assertion with which we largely agree.
However, those same vendors argued the exact opposite
before the NAIC, and we intend to eliminate the ambiguity.
As digital information expands insurer access to consumer
specific details, insurance regulators remain vigilant in
protecting consumers against potentially abusive underwriting
and rating practices.
We are watchful for any underwriting or rating formula that
may constitute a proxy for race, gender or other protected
characteristics. Insurance must function as insurance.
For the NAIC, we appreciate the chance to assist this
subcommittee and pledge our continued support of your efforts.
With our two-pronged approach, State regulators intend to offer
reliable, fact-based information for Congress and the States.
As our data call and model law development conclude, we will
deliver the results to this committee and to Congress.
Thank you for your attention. I look forward to your
questions.
[The prepared statement of Mr. McRaith can be found on page
81 of the appendix.]
Chairman Gutierrez. Thank you so much.
Mr. Snyder, you are recognized for 5 minutes, sir.
STATEMENT OF DAVID F. SNYDER, VICE PRESIDENT AND ASSOCIATE
GENERAL COUNSEL, AMERICAN INSURANCE ASSOCIATION
Mr. Snyder. Good morning. Chairman Gutierrez, Ranking
Member Hensarling, Mr. Price, and members of the subcommittee,
my name is Dave Snyder, and I am vice president and associate
general counsel for the American Insurance Association.
In the midst of the financial turmoil and its related
chaos, the U.S. property and casualty insurance sector is
stable, secure, and strong. There are good reasons for this.
We, you and the States never lost sight of our fundamental
shared goals, reduce risk where possible, accurately assess and
assume the remaining risk, and provide effective coverage to
the American people.
As a result, auto and homeowner's insurance markets are by
every measure financially sound, competitive, and affordable.
Claims are being paid daily by solvent companies. The market is
very competitive by any measure and insurance is taking less of
a bite out of household incomes than in the past.
This is good for the economy because this maximized
competition forces prices down to the lowest feasible level so
people have money to spend on other things.
Insurance scoring has played a major role in creating this
positive market for all concerned. By empowering more effective
risk assessment and pricing, the majority of the population
pays less. Insurance is more available and more people can
receive reasonably priced coverage, instead of being relegated
to the high-risk pools, because insurers have a cost-effective
tool to assess and price for risk, giving them the certainty
they need to provide coverage to nearly everyone.
You have asked us to address certain issues relating to
insurance scoring. In summary, it is race and income blind, and
has repeatedly been proven to be an accurate predictor of risk,
indeed, one of the most accurate.
The States have actively regulated it and insurance
commissioners have full access to all the information they
desire.
In response to your request for recommendations, we suggest
that all States adopt the National Conference of Insurance
Legislators' model law.
Second, the States should make sure they capture and
analyze all of the credit complaints they can and communicate
with insurance companies about them, individually, and any
trends.
We note, for example, from Director McRaith's testimony,
that the rate of complaints under the existing system for
credit-based insurance scores is about 1 complaint out of every
1.5 million policies issued or renewed.
In addition, we all need to work together more effectively
on financial literacy to help the American people understand
how insurance scores are used by insurance companies to provide
them with coverage.
There is one other recommendation we did not emphasize in
our written statement, that is to make it more possible to
innovate on a pilot basis. For example, to introduce more
direct measures of driving performance, such as the ability to
assess risk, based not only on mileage, but how, when, and
where those miles were driven.
One other factor in the strength of the personal lines
insurance market is that we have collectively reduced risk.
Thanks to your leadership and that of safety groups, the
insurance industry, and the States, far fewer Americans are
injured and killed on our highways than ever would have been
expected.
Using fatality rates of 1964, last year alone, we have
collectively saved 120,000 lives and prevented millions of
injuries. This has created a solid foundation of the healthy
auto insurance system we have today.
The insurance industry is focused on building safety as
never before through advocacy of smoke detector laws and codes
requiring sprinklers and disaster resistant buildings, and the
eminent opening of a building construction test center with
wind turbines powerful enough to test the structural integrity
of buildings.
We hope to see a pattern of positive change similar to that
which we helped bring about in auto safety with your
cooperation and assistance.
Thank you for inviting me to speak with you today. I would
be pleased to answer any questions you may have.
[The prepared statement of Mr. Snyder can be found on page
147 of the appendix.]
Chairman Gutierrez. Mr. Wilson, you are now recognized for
5 minutes, sir.
STATEMENT OF JOHN WILSON, DIRECTOR, ANALYTICS, LEXISNEXIS RISK
SOLUTIONS
Mr. Wilson. Good morning. My name is John Wilson, and I am
director of analytics for the Insurance Data Services Group at
LexisNexis Risk Solutions.
LexisNexis provides technology and information that helps
businesses, government agencies, and other organizations reduce
fraud and mitigate risks.
In our Insurance Data Services Group, we provide a variety
of products and services to support the insurance industry,
including credit-based insurance scores.
In my remarks today, I will focus specifically on how our
insurance scores are developed, utilized, and regulated.
Credit-based insurance scores have long been used by
insurance underwriters and actuaries to more accurately assess
risk for auto and homeowner's insurance policies. Insurance
scores provide an objective, effective, and consistent tool
that insurers use with other information such as driving
histories and prior claims to better predict the likelihood of
future claims and the cost of those claims.
Deriving an insurance score follows a straightforward
process. A carrier compiles historical policy experience,
including earned premiums and incurred losses, on a selected
population of risks.
LexisNexis then works with the credit bureau to match that
policy experience to the historical consumer credit from the
particular point in time to which the policy performance data
pertains. Then, using regression techniques, we identify the
credit variables that taken together provide the best
representation of the observed loss ratio performance.
Most credit variables can be grouped into one of five
primary areas: one, how long you have had accounts established;
two, the number and type of accounts that you hold; three,
indications of recent activity, including inquiries and new
account openings; four, the degree of utilization on your
accounts; and five, payment history.
The relevant weight of each of these areas can vary
depending on the line of business being modeled but for any
specific model, the insurance regulator is given access to the
individual variable descriptions, bins, and point assignments.
Insurance scores do not consider factors such as race,
religion, national origin, gender, marital status, age, sexual
orientation, address, income, occupation, disability or
education. Also, inquiries made for account review or
promotional or insurance purposes are not used in calculating
insurance scores. We also exclude medical collections.
It is important to note that while LexisNexis provides
insurance scores, we are not an insurance company. We are not
involved in insurer rate setting determinations or rate
decisions with respect to groups of individuals or individual
consumers.
LexisNexis is also not a consumer credit bureau, and we do
not make credit decisions. Our role is to supply information to
the insurance carriers to assist them in making underwriting
decisions.
The credit-based insurance scoring process is currently
regulated at multiple levels. LexisNexis is considered a
consumer reporting agency under the Federal Fair Credit
Reporting Act and its State analogues.
As required by that Act, LexisNexis provides consumers upon
request with access to all the information in the consumer's
file at the time of the request. We have also set up a process
by which any consumer may order a copy of their insurance score
via our Choicetrust.com Web site.
Additionally, because insurance is regulated at the State
level, LexisNexis must conform its models to specific State
statutes, regulations, and guidelines relative to insurance
scoring.
Most States have adopted regulations based on the model law
on insurance scoring developed by the National Conference of
Insurance Legislators.
Pursuant to State requirements, a third party vendor like
LexisNexis must file its model for review with State insurance
departments. In many States, carriers are required to include
the LexisNexis model filing materials in their rate filing. In
other States, a carrier may be allowed to reference the
LexisNexis model once it has been filed.
Finally, the insurer must gain approval of its rate filing
that may include an insurance scoring component.
As a result, LexisNexis works on an ongoing basis with
State departments of insurance to explain our models and to
create State-approved scoring solutions for our insurance
customers.
In addition, LexisNexis provides two consumer Web sites,
Choicetrust.com and Consumerdisclosure.com, to make information
about our insurance scores and processes more readily
accessible to consumers and to other interested individuals.
In conclusion, credit-based insurance scores provide an
objective, effective, and consistent tool that insurers use
with other information to better predict the likelihood of
future claims and the cost of those claims.
There are existing Federal and State regulation and
approval processes that provide comprehensive oversight by
individual State departments of insurance over insurance
scores, insurance score developers, and the use of insurance
scores.
LexisNexis works cooperatively with State insurance
commissioners and their staffs in seeking approval for our
scoring models.
I appreciate the opportunity to provide the subcommittee
with information on insurance scoring, and I am happy to answer
any questions you may have.
[The prepared statement of Mr. Wilson can be found on page
180 of the appendix.]
Chairman Gutierrez. Thank you so much. I welcome all of you
here. I know there are a lot of questions because I can see
that quite a number of members have shown up this morning.
Let me just take a couple of minutes, and then I will allow
members to ask questions. I will just make some general
comments.
If someone has cancer and they become very ill and they do
not have health insurance, they are likely to suffer great
economic harm, and that is going to affect their credit score.
Let me ask you, if someone becomes ill, is it more likely
they are going to drive quickly, get into an accident, or drive
erratically if they become ill? Their credit score, as we know,
is going to be affected.
Each of you answer the question, please, from left to
right. Mr. McRaith?
Mr. McRaith. Mr. Chairman, first of all, let me say and
also in reply to Congresswoman Kilroy's concern about medical
expenses, we are aware that two-thirds of all personal
bankruptcies are based on medical costs. Three-quarters of
those people filed even though they had health insurance. It is
a significant problem.
Different States have adopted different approaches to
dealing with an extraordinary life event like medical expenses
as you have described, and allowing--
Chairman Gutierrez. If you use my credit score, a
deteriorating credit score, is it more likely I am going to
cause the insurance company additional liability?
Mr. McRaith. To answer that question, I do not know the
answer to that. I am not sure that anyone has explained
directly the nexus between credit score and driving.
Chairman Gutierrez. Mr. Snyder? Am I more likely to survive
cancer and have incredible debt? Is my house more likely to
have a fire?
Mr. Snyder. Mr. Chairman, the answer to that is no. That is
why we have supported language in the National Conference of
Insurance Legislators' model that removes collection accounts
with a medical industry code. That is what was done first, and
then this past summer, the National Conference of Insurance
Legislators tightened that up even more with our support.
It removes the consideration of negative factors resulting
from a serious illness or injury.
Chairman Gutierrez. Just for the record, just so it is
clear to all the members of this committee, you are coming here
representing who? Just so we have it for the record. You are
representing the American insurance industry?
Mr. Snyder. Yes, sir.
Chairman Gutierrez. Thank you. Mr. Wilson, you provide them
with the information, so what do you think?
Mr. Wilson. We have not tried to study the specific
question that you have asked. We also agree that medical
collections should not be used in our scores.
Chairman Gutierrez. But they are used in scores.
Mr. Wilson. They are not.
Chairman Gutierrez. In your credit report, they are. If
someone fails to pay a medical bill, it has a derogatory impact
on my credit report, which is going to have a derogatory impact
on my credit score.
Mr. Wilson. I am not going to--
Chairman Gutierrez. You cannot. It shows up. In other
words, Mr. Wilson, if someone does have difficulty paying a
hospital bill and it goes to a collection agency, does that
show up on the individual's credit report?
Mr. Wilson. It will show up on the credit report.
Chairman Gutierrez. Does it have a derogatory effect on
their credit score?
Mr. Wilson. It is not used in our scores.
Chairman Gutierrez. It is not used in your scores, but it
is used in their credit reports.
Mr. Wilson. It is on the credit report.
Chairman Gutierrez. Thank you. It is used on the credit
report. Everybody has witnesses here. I do not think Mr. Wilson
is too upset at me asking him the questions.
What we are trying to get at here is how is it that people
who have an accident, who have an illness, in the end are not
deprived of insurance even though they had no way of dealing
with this and maybe it does not have anything to do with them.
Let me ask, if I am employed and I become unemployed and
cannot pay my bills because I have become unemployed, does that
mean I am more likely to have an accident or fire in my house?
Mr. Wilson?
Mr. Wilson. Again, the scoring models that do look at
delinquent payments which would potentially be a result of
having lost a job show that those delinquencies are in fact
indicative of greater risk of claim filing.
Chairman Gutierrez. Therefore, I would pay more in health
care insurance? I am sorry. Therefore, I would pay more in car
or home insurance?
Mr. Wilson. You could; yes.
Chairman Gutierrez. I would.
Mr. Wilson. Not every carrier uses credit scoring and the
weights--
Chairman Gutierrez. Thank you. My time has expired.
Mr. Snyder. Mr. Chairman, if I might, just to provide a
further response to that, the extraordinary life circumstances
language added to the National Conference of Insurance
Legislators' model specifically excludes the use of loss of
employment for a period of 3 months or more if it results from
involuntary termination.
Yes, that is a factor which we are trying to work with
consistent with your question.
Chairman Gutierrez. Thank you.
Mr. McRaith. Mr. Chairman, if I could add--
Chairman Gutierrez. I am sorry. I ask unanimous consent for
10 more seconds. Mr. McRaith, please?
Mr. McRaith. They cannot both be true; if medical loss
expenses are not considered, then there would be no reason to
have an extraordinary life exception. Also, the so-called NCOIL
model has been adopted in different States in different
variations, as I said.
The State of Illinois, for example, only requires that the
company consider such an event.
Chairman Gutierrez. Thank you.
I recognize Mr. Price for 5 minutes.
Mr. Price. This is a remarkably important topic and I think
there is a lot of misinformation that is going into the debate,
and there is a lot of hyperbole that occurs. I am hopeful that
throughout the question period in this hearing, we will be able
to sort out some of that.
Mr. Wilson, you mentioned in your testimony that the main
variables, the primary areas where credit variables are looked
at are: length of time of an account; number and type of credit
accounts; indications of recent activity; the degree of
utilization; and payment practices.
In your next statement, ``Insurance scores do not consider
factors such as race, religion, national origin, gender,
marital status, age, sexual orientation, address, income,
occupation, disability or education.''
Given that, why do you think there is all this
misinformation about what goes into a credit score?
Mr. Wilson. I do think some of the comments that were
introductory to this session are accurate, that not every
consumer has a clear understanding of all of the details of
credit reports, credit scoring, or how these things are used in
making decisions about them.
I do think we have tried to be out there making information
available to consumers. We developed training programs for
continuing education credits for agents, insurance agents,
because they are very often the first line of answering
questions about these things.
Mr. Price. Providing a score, you are not an insurance
company, you are not a credit bureau, you do not provide
credit, you provide information?
Mr. Wilson. Right.
Mr. Price. There is a lot of information that goes into the
rationale for why a consumer might be excluded from gaining
credit. I would be interested in the opinion of the panel on if
we as a Congress determine we ought to exclude certain things
from being considered, is it possible that would actually harm
consumers as opposed to helping consumers, Mr. Wilson? Mr.
Snyder?
Mr. Snyder. Mr. Price, the FTC estimated that 59 percent of
the people pay less as a result of credit-based insurance
scores. Frankly, in public testimony given by companies in the
States, the numbers are really much higher for many companies.
We would envision first of all a very negative effect on
the vast majority of policyholders directly. Secondly, it would
deprive the market of a critical tool that has allowed the
market to evolve much more toward objective underwriting
individually tailored to each risk, which in turn is giving the
companies the confidence to write virtually everybody.
Under the old system that was sort of pass/fail, you were
either very good, normal or you were relegated to the high cost
assigned risk plans.
Now, because of the tool that is capable of individual
accurate and objective risk assessment, insurance companies are
pretty much able to write anyone who comes to them, which has
resulted in the shrinkage to historic lows of these high risk
pools, so there are a number of harms that would come, some
directly, to the majority of policyholders, and then indirectly
to a market as a whole resulting in less competition and
potentially less availability of insurance.
Mr. Price. And higher costs? Less availability and higher
costs.
Mr. Snyder. And higher costs.
Mr. Price. Mr. McRaith, do you agree with that?
Mr. McRaith. Congressman, we should always be concerned
about unintended consequences and certainly the pricing of one
risk in a company's pool affects the pricing of another risk in
that same pool.
However, we should not accept as gospel that 60 percent of
people benefit from the use of credit-based insurance scores
because we do not know what the baseline is.
Mr. Price. Do you dispute that number?
Mr. McRaith. What I am saying is, I described earlier our
effort with the data call to collect information from insurance
companies. One is to get behind the rhetoric which argues that
a certain percentage of consumers benefit from the use of
credit-based insurance scores. We do not know when we hear the
word ``benefit,'' what is the starting point. We do not know
what the baseline is. That is what we intend to find out. We
will report back to you.
Mr. Price. Mr. Wilson, do you have any comments?
Mr. Wilson. No.
Mr. Price. In the remaining seconds, what factors did
Congress rely on when examining and endorsing the non-lending
uses of credit information while amending the Fair Credit
Reporting Act in 1996 and the FACT Act in 2003?
Mr. Snyder?
Mr. Snyder. Congress continued the ability of insurers to
use credit information for insurance underwriting, and that has
long been the case. Congress continued that through the recent
amendments.
The recent amendments also made the whole credit scoring
system better. Frankly, we have a major interest in making sure
that scores are accurate and that people have access to their
credit history and the ability to correct any issues that may
exist.
I think the Congress improved all of that through the most
recent amendments, but did maintain the long-standing ability
on the part of insurers to use credit for underwriting subject
to Federal law under the Fair Credit Reporting Act, and all
that implies as well as being currently State regulated, all
the State regulation that applies as well.
Mr. Price. Thank you, Mr. Chairman.
Chairman Gutierrez. The time of the gentleman has expired.
Mr. Watt, you are recognized for 5 minutes, sir.
Mr. Watt. Thank you, Mr. Chairman. I want to try to make a
distinction here between causation and correlation. I take it,
Mr. Wilson, you are in the nexus business. That is the
correlation business. What you are saying is, there is a
correlation between somebody's credit score and these factors
that impact driving insurance rates and homeowner's insurance
rates.
I am not clear whether you are prepared to assert to me
that there is some causal connection between those things as
opposed to a correlation between those things.
Let me ask the question directly: Are you prepared to
assert to me that if I have a low credit score, that will cause
me to be a worse driver?
Mr. Wilson. No.
Mr. Watt. Are you prepared to assert to me that if I have a
low credit score, that is likely to cause me to have a fire at
my house?
Mr. Wilson. I am not saying it is causal.
Mr. Watt. You are saying that the correlation factor makes
it more likely that I will be a bad driver; right? That is what
the nexus is in your LexisNexis, I take it. Is that right?
Mr. Wilson. I am not actually familiar with what the nexus
in our LexisNexis--
Mr. Watt. Do not waste my time on hyperbole. Let's talk
about insurance, not LexisNexis. I am sorry. I got you off
track. You are saying there is a correlation.
We have made it explicitly clear that if there is a
correlation between race and bad driving or race and more
likelihood that I will have a fire, that is prohibited; right?
You cannot take that into account. There is no question about
that.
If you find some substitute for race that correlates in the
same way, has the same impact, would you think it would be
appropriate to use that as a factor and then turn around and
say well, no, we are not considering race at all, we are just
considering this correlation factor that we have out here?
Mr. Wilson. You are giving me a hypothetical.
Mr. Watt. No, I am just asking you a question. Would you
think it would be appropriate to do that?
Mr. Wilson. If you could find a pure proxy, you should not
be able to use it; yes.
Mr. Watt. Okay. What about you, Mr. McRaith? I assume you
would not think it would be appropriate to do that.
Mr. McRaith. It is absolutely fair to say, Congressman,
that the States have taken different approaches to this
subject. If one factor were identified to be a proxy, I believe
all States would be opposed to that.
Mr. Snyder. Mr. Watt, if I might add that--
Mr. Watt. I am not sure I asked you anything, Mr. Snyder.
You are welcome to add something.
Mr. Snyder. Thank you, sir. The FTC did conclude that
credit-based insurance scoring is not serving as a proxy for
race.
Mr. Watt. I read that study. We had a hearing about that
study. It did not exactly say that. I understand you want to
get that in the record. Maybe we ought to put that study in the
record. We had it in the record last year when we had a hearing
about this. That is not exactly what it says.
It says kind of there is the same kind of correlation that
you are talking about as legitimate here for credit-based
scoring between this and race. You want to use it on one side
and say we like the correlation on one side and we are going to
use it, and on the other side, we do not like the correlation,
so we want to say no, no, we should not be using correlations
here.
Is there not a strong correlation between these factors and
race? That requires either a yes or no answer. Is there a
strong correlation or is there not?
Mr. Snyder. It found that it was not a proxy for race.
Mr. Watt. I heard that. That is what you testified to
earlier. That is not the question I asked. I want to know, is
there a strong correlation, not whether there is a proxy. I do
not think anybody in here knows what ``proxy'' means.
Tell us, is there a strong correlation or not?
Chairman Gutierrez. The time of the gentleman has expired.
Answer the question.
Mr. Snyder. It found that there were larger percentages in
various demographic groups with lower credit scores than other
groups. It also found that within these groups--
Chairman Gutierrez. Your time has expired.
Mr. Watt. Can I just get him to answer my question, Mr.
Chairman?
Chairman Gutierrez. I tried. We will come back around.
Mr. Watt. I just want to know whether there is a strong
correlation or not. That is a simple question. It is not a
trick.
Chairman Gutierrez. Mr. Marchant, you are recognized for 5
minutes, sir.
Mr. Marchant. Thank you. Mr. Wilson, talk to us about the
relationship you have with your customer. Your customer is an
insurance underwriter, salesman, company?
Mr. Wilson. Right. Our primary customer is the underwriting
department and/or the actuarial department in the personal
lines property casualty industries.
Mr. Marchant. Is a major consideration--would the insurance
company come to you regardless of whether there was credit
being extended to the customer to purchase the product?
Mr. Wilson. Yes. The credit scoring used by insurance
companies is generally not a part of say premium finance
decisions. It is a risk indication.
Mr. Marchant. The credit history that you are looking at
has nothing to do with the fact as to whether the insurance
company is going to get paid for the product they are selling?
Mr. Wilson. Right. It is not about payment of premium.
Mr. Marchant. It is purely a historical fact that gets
plugged into the fact of what they pay for insurance actually;
right?
Mr. Wilson. Right. The credit factors or the score in
conjunction with driving record, in conjunction with coverage
amounts, in conjunction with prior losses, it all goes into the
underwriting or rating of the policy.
Mr. Marchant. If a customer comes to the insurance company
and says, I want this kind of coverage and I am going to pay
cash, the companies still go through the same process, and if
your information taints that customer, even though they are
planning to pay cash or pay for it other than with that
company, it still taints that customer or has the potential to
taint them?
Mr. Wilson. Right. If the carrier does use credit scores as
part of their rating, then it would be used even if the
consumer were paying cash for their premium.
Mr. Marchant. This is the complaint that I get from my
constituents the most. They feel that because they have had bad
credit or they have had a car repossessed or they paid their
last insurance policy and their premiums were slow, they feel
like when they apply for more insurance, the reason why their
insurance--the rate has been raised is because there is a
direct correlation between the late payments on a previous
policy.
You are saying it is the late payments on any kind of
credit they may have?
Mr. Wilson. That is right.
Mr. Marchant. Not specifically on that product, on the
insurance itself?
Mr. Wilson. On the premiums; right.
Mr. Marchant. You give the report to them, but it is up to
the underwriting department to make its own decision based on
your report, how much they weigh each of those things?
Mr. Wilson. That is correct.
Mr. Marchant. What is your experience in that weighing
process? Is it pretty reliable if you have a very low credit
score that you are going to pay more for your insurance?
Mr. Wilson. These scores have been tested not only by
independent parties like actuaries and the Federal Government
and the Texas Department of Insurance, but also by carriers
themselves.
Carriers would not use these tools if they did not work
well for them. There is a great deal of variation, however, in
the weight that individual carriers assign to credit score in
their overall rating programs.
Mr. Marchant. Mr. Snyder, in your particular instance,
would a driving record be a significant factor in your
information that you gave to an underwriter that bought your
service?
Mr. Snyder. Absolutely. Auto insurance rating generally
involves not only credit information but the age of the driver,
the prior driving experience, the make and model of the
vehicle, and on and on. The ultimate underwriting and rating
decision is based upon many factors, only one of which is
credit.
Chairman Gutierrez. The time of the gentleman has expired.
Mr. Moore is recognized for 5 minutes.
Mr. Moore of Kansas. Thank you, Mr. Chairman.
Our Oversight and Investigations Subcommittee held the
first in a series of hearings last week on the topic of the end
of excess, a broad look at lessons learned from the crisis.
I believe that one lesson from the financial crisis is we
need to go back to living within our means and that is true for
our government, for financial firms, for businesses, families,
and individuals.
Mr. Snyder, I agree with the point you make in your
testimony that we need to increase financial literacy, which
will be the focus of one of our subcommittee hearings in our
lessons learned series.
We need to teach personal finance to our students in high
school and college, ensuring that our young people are fully
empowered to make sound financial decisions.
Mr. Snyder, as we think about credit scores, how can we
encourage individuals to regularly review their credit report,
correct any misinformation, and learn how to build their credit
scores?
Mr. Snyder. Thank you. It is a message which we try to
repeat on Web sites. Attached to my testimony is some
information where we talk about what goes into an insurance
score and the need to stay on top of it. There are adverse
action notices that make that point as well. I know the credit
industry is doing a lot.
Frankly, we look forward to increased cooperation with the
Congress and the States on improving financial literacy. We
have done some work on our own. We would like to work
collaboratively to see what we can do to raise the level of
financial literacy for everyone in this country.
Mr. Moore of Kansas. Mr. McRaith or Mr. Wilson, do either
of you have any comments?
Mr. McRaith. Financial literacy is important for all
sectors of consumer finance. Insurance in particular can be
very confusing to the average family, the average small
business. States are committed to helping consumers understand
how their insurance policies are underwritten, how they are
priced, and providing whatever direct consumer assistance we
can.
Mr. Moore of Kansas. Mr. Wilson?
Mr. Wilson. I would agree with the gentleman.
Mr. Moore of Kansas. Mr. McRaith, in your experience as a
State regulator, how accurate are these credit scores? Do they
get abused in how are they used by insurance firms? Do credit
scores assign reasonable value if one is comparing medical debt
to excessive spending habits, and do insurance firms focus more
on credit scores or the inputs that provide the credit scores?
What is your view?
Mr. McRaith. Congressman, in fact, we understand a broad
range. What one company does and the weights that one company
might assign to one factor like a credit score might be
significantly different from another company.
Of course, different States have different parameters.
There is a wide variation. I think one State estimates a
variance of credit score affecting a rate from 7 percent up to
the high double digits. That indicates that companies use this
one factor of credit scores in a way that--companies use them
differently based on their proprietary or pricing formula.
Medical expenses and the debt associated with medical
expenses frequently is a problem for consumers. State law
varies with respect to whether consumers can be penalized for
that or what is the recourse the consumer might have in the
event that consumer is penalized for medical debt.
It is inaccurate to say that companies do not consider
medical debt as part of a credit score. It is also inaccurate
to say that all States allow medical debt to be exempted as an
extraordinary life event. Some States do. Some States do not.
Mr. Moore of Kansas. Do either of the other witnesses have
a comment? Mr. Snyder?
Mr. Snyder. Yes, sir. With regard to the latest point, we
support the enactment of the National Conference of Insurance
Legislators' model, including extraordinary life circumstances,
including the provision on use of serious injury or serious
illness with the individual or family member.
Mr. Moore of Kansas. Thank you.
Mr. Wilson. I think I would just add that even in States
that have not adopted an NCOIL model or an NCOIL-like model, we
still do not consider medically coded collection items in our
scoring.
Mr. Moore of Kansas. Thank you, Mr. Chairman. I yield back
my time.
Chairman Gutierrez. The gentleman yields back the balance
of his time. Congressman Lance, you are recognized for 5
minutes, sir.
Mr. Lance. Thank you, Mr. Chairman. Good morning to you
all.
Commissioner McRaith, if credit-based insurance scores were
not used by insurers as one factor out of many for setting
premiums, what other factors, in your opinion, would be more
heavily weighted and what would be the likely effect on rates?
Mr. McRaith. Congressman, the availability of data to any
one insurance company at this point is so expansive, it is
impossible to determine exactly what or to conclude what
factors would replace a credit score. Some companies are using
all of the sub-components of a credit score right now for
pricing and not relying solely upon a credit score in and of
itself.
What we expect is that eliminating one rating factor will
shift costs. There are some people who might pay more. Others
might pay less. When you affect the price of one person in a
risk pool, you are going to also affect someone else in that
same pool.
Mr. Lance. That is obviously my point, and whether that
would be fair to others where the risk would be shifted is
obviously a question of great concern.
Mr. Snyder, do you have an opinion on that?
Mr. Snyder. I would agree with the comments of Director
McRaith on the potential impact on people paying more as a
result.
Mr. Lance. Mr. Snyder, could you move your microphone
closer?
Mr. Snyder. Yes. I would just indicate my agreement with
the comments Director McRaith just made, that if some people
pay less, many more people will pay more.
Mr. Lance. From your experience, what might be those
factors if we were to eliminate this factor?
Mr. Snyder. Well, in one sense it might force the industry
to go back to larger classifications and rely more on those,
such as territory and other factors which themselves were
controversial.
With the addition of credit-based insurance scores, you
have added a degree of objectivity and individual tailoring
that did not exist before, and it allows both not only accurate
rating and underwriting of individuals but has improved
availability in the market because the confidence companies
have that they have the ability to price every risk and
therefore, many more risks are being written in the voluntary
market.
Mr. Lance. Credit scores are individual. I recognize a
once-in-a-lifetime situation should be excluded. Credit scores
are individual in a way that geographical territory is not and
may be bitterly unfair to those who live within the territory,
and actually in my judgment may be extremely harmful to those
whom we are trying to help.
Mr. Wilson, your thoughts?
Mr. Wilson. That is certainly a possibility. There are only
so many factors that have been demonstrated to have a
correlation with expected loss costs, and insurance companies
do try to use them as effectively as they can to write risks.
Mr. Lance. What would your view be on a risk based upon
territory?
Mr. Wilson. Territory has been demonstrated to be strongly
indicative, but as you know, it is broad, and one of the
benefits as we saw it for credit scoring is it was individual.
Mr. Lance. Yes. It is my observation that in several other
areas, unrelated to the discussion this morning, Congress has
inappropriately tried to pressure those. Fannie Mae and Freddie
Mac certainly come to mind.
I trust as we move forward on this issue that we do not
engage in the type of behavior in which Congress was certainly
guilty regarding that matter.
I yield back the balance of my time. Thank you, Mr.
Chairman.
Chairman Gutierrez. The gentleman yields back the balance
of his time. Congressman Hinojosa is recognized for 5 minutes.
Mr. Hinojosa. Thank you, Mr. Chairman. Chairman Gutierrez,
I want to thank you for holding this important hearing on a
very important issue, consumer credit.
I commend my colleague, Congresswoman Mary Jo Kilroy, for
introducing H.R. 3421, the Medical Debt Relief Act of 2009. The
intent of her legislation is admirable. I agree with her that
medical debt should be removed from credit reports 30 days
after that debt has been repaid or settled, and that it not
continue to hurt the credit rating of that individual, having
gone through so many difficulties with sickness.
I am concerned about one issue involving credit reporting
agencies. They buy and sell information from virtually all
adult residents in the United States. For a long time, we have
been encouraging them to provide credit reports in languages
other than English, especially Spanish.
Mr. Chairman, I would ask that each credit reporting agency
provide in writing their proposals to provide credit reports in
languages other than English or that we at least have an
opportunity to debate that.
I would like to ask my question to Mr. Snyder. I am
interested in legislation that would require that every adult
American citizen 21 years or older receive a free credit score
on an annual basis.
Would the American Insurance Association support such
legislation?
Mr. Snyder. I think we would. We are interested in having
both transparency in the process as well as accuracy in credit
scoring. I have not checked with my other colleagues in that
industry. Perhaps they have a view of that. I certainly think
anything that makes the process more transparent as the
Congress has done recently is something worthy of very serious
consideration.
Mr. Hinojosa. I am glad to hear you say that.
Mr. McRaith, do lenders or insurance lenders pay for the
credit reports they obtain from the credit reporting agencies?
Mr. McRaith. Insurance companies typically will contract
with a vendor that will provide or develop the insurance score
on which the underwriting decisions and pricing are determined
by that insurance company.
Some of the larger companies have their own independent
proprietary insurance scoring formula.
Mr. Hinojosa. I see. Mr. Chairman, with that, I yield back.
Chairman Gutierrez. The gentleman yields back. Mr.
Neugebauer?
Mr. Neugebauer. Thank you, Mr. Chairman.
I want to go back to one of the things that seems to be a
common theme, and I do not want to put words in people's mouth,
but that the credit scores are used in part of the underwriting
process. What is not standardized is some companies put more
weight on that credit score than others.
If I am a company and I am competing for business, if I am
overly penalizing people for their credit scores and using that
as a higher rate, I am probably losing business because I would
say I would be pricing myself out of the market.
Is that a reasonable assumption?
Mr. Snyder. Yes, sir; that is.
Mr. Neugebauer. Basically, the checks and balances of how
that information is being used is in the marketplace today;
right?
Mr. Snyder. Yes, there are many checks and balances in the
marketplace, and the additional check and balance of detailed
regulation at the State level.
Mr. McRaith. I would add, Congressman, that the companies
pursued the profitable risks, and if in fact credit-based
insurance scores identify prospectively less profitable risks,
the pricing might be geared towards reducing the likelihood of
that less profitable risk from enrolling with that company.
Mr. Neugebauer. Which is probably prudent business,
wouldn't you say?
Mr. McRaith. I would say that is the business judgment of
the company; absolutely.
Mr. Neugebauer. What we want is these companies--I do not
want to do business with an insurance company that is broke. Do
you?
Mr. McRaith. No, that is exactly right. We want financially
strong companies able to deliver on the promises they make to
consumers.
Mr. Neugebauer. I think one of my colleagues asked the
question and I want to rephrase it just a little bit, is it
fair to say that because of the underwriting tools, credit
report being one of them, and other information, that people
can actually effectively lower their insurance costs by good
behavior?
Mr. Snyder. Yes, absolutely. The system very much rewards
that behavior, not only on the road but in terms of responsible
management of credit.
Mr. Neugebauer. Mr. Wilson, any reflection on that?
Mr. Wilson. I would agree. You do have the opportunity to
modify your profile, your risk profile, and therefore become a
better risk.
Mr. Neugebauer. We have gotten into the business around
here it seems like that we kind of are trying to get government
to pick the winners and losers. We do it with legislation that
hand-ties a process that works and rewards good behavior where
people who pay their bills, drive safely, demonstrate certain
characteristics that they are responsible, and they get to reap
the benefit from that.
It seems to me if we go in and sterilize that system,
basically it becomes harder to determine who is the higher risk
or the more profitable, so what happens is in order for a
company to counteract that, I guess they just raise everybody's
rates.
Would that be a fair assumption?
Mr. McRaith. I think it would in fact pricing, Congressman.
As I mentioned in my opening statement, we see homeowner
insurance companies, for example, offering insurance in
neighborhoods where previously it would have been very
difficult for them to price a homeowner policy.
Having said that, actuarial justification is not in and of
itself a sufficient reason to allow a rating factor to be used.
In our examples over time, I will not bore you with it
right now, actuarially justified factors that Congress or the
States later determine should be prohibited.
Mr. Neugebauer. Should we be careful as we go down that
road?
Mr. McRaith. I think those are the public policy questions,
of course, that Congress and the State legislatures answer
every day.
Mr. Neugebauer. One of the things that I think about is I
know there are different insurance products, for example, they
ask you if you are a smoker. If you are not a smoker, there is
a discount. There must be a reason actuarially that non-smokers
get a discount.
Would you agree with that?
Mr. McRaith. Absolutely. The one example that I recall,
Congressman, is several years ago, there were life insurance
companies charging higher premiums to African-American
enrollees because their life expectancy was shorter. The
country and States determined that was inappropriate.
I am not disagreeing with you. I think we want companies to
be accurately pricing their products and financially strong.
All I am pointing out is that actuarial justification in and of
itself is not sufficient.
Chairman Gutierrez. The time of the gentleman has expired.
The gentlelady from New York is recognized for 5 minutes.
Mrs. McCarthy of New York. Thank you, Mr. Chairman. I thank
you for having this hearing. I thank the panelists for their
information.
We know that some individuals do not have traditional
credit reports. Some have alternative reports that are created
by items such as rental payments and utilities, to create a
credit history. Those kinds of reports typically are different
than a traditional credit report in underwriting.
For all of you, the current economic downturn has resulted
in financial struggles for many of our constituents. As a
result, they have seen their credit reports negatively
impacted, even though they have had a good history from the
past.
How could this affect an individual's ability to renew
their insurance? I will throw that out to all of you.
Mr. Snyder. Thank you. Lending scores and insurance scores
are very different. We have included some materials in our
statement from FICO, which is one of the major modelers,
indicating they have not seen an overall pattern of insurance
scores declining.
It is because of the different make-up of the scores. You
have heard no doubt and read newspaper articles about lending
scores. That has not been the case with insurance scores. They
continue to be very stable over time, and they continue to
reflect differences in risk.
Insurers also have the ability to adjust their rating tier
so that if you have an overall decline in the economy, you can
understand that across-the-board, so you have not had the
impact on insurance scores that has occurred with regard to
lending scores that you might otherwise assume would be
occurring.
Mrs. McCarthy of New York. Just a follow-up question, so
many homes have actually de-valued in their worth, and yet they
are continuing with basically--I just thought of this when you
were speaking. My homeowner's insurance basically has gone up
even though my home value has gone down. Are you seeing a trend
like that across the Nation?
Mr. McRaith. Congresswoman, we have seen homeowner
insurance premiums increase. We perceive that not to be a
reflection of the value of the house necessarily, more a
reflection of the economic challenges.
Investment portfolios of insurance companies, of course,
did not provide the return they had been seeing over the years,
and as a result, we expect premiums increased for many
companies to reflect the decrease in portfolio return.
Mrs. McCarthy of New York. It has nothing to do with
basically--to rebuild the home would be lower, but you are
still paying a higher price.
Mr. McRaith. Right. In fact, one question that I have heard
with some frequency is, since construction costs are less now
because construction workers are generally less expensive, why
is the cost of my premium not declining as well?
Again, the premiums are not necessarily tied to the value
of the home or the cost of replacing that home. They are
connected with that but not directly and solely connected with
that.
I would also add in terms of the question that you asked
Mr. Snyder earlier, we do have that concern and have explored
that question. For example, many credit card limits decreased
through no act or fault of the consumer as a result of our
recent financial challenges nationally. That affects the credit
ratio for that individual consumer.
Does that then affect the insurance score? That remains to
be an open question and we have heard conclusions on both sides
of that question.
However, our effort, as I mentioned earlier, is to provide
Congress with more fact-based information and reply to some of
those questions, and we expect to have that survey done by the
end of this year.
Mrs. McCarthy of New York. Thank you. Mr. Wilson?
Mr. Wilson. Yes. I guess I would note that we also track
information on our insurance applicants' scores, and while we
have seen some adverse changes as an example, a slight increase
in delinquency rates and in some cases, as Mr. McRaith
mentioned, a reduction in the limits on credit cards, we have
also seen some positive changes.
We have seen fewer inquiries, fewer recent account
openings. We have also seen many consumers are actually paying
down their revolving indebtedness. That, I think, has tempered
the changes in the scores.
Chairman Gutierrez. The time of the gentlelady has expired.
Mr. Royce, you are recognized for 5 minutes, sir.
Mr. Royce. Thank you, Mr. Chairman.
Instead of dealing in the abstract, I would like to focus
on a few facts here. I come from California. In California, we
continually rank among the highest rates for auto insurance in
the country. A study just came out, again, California is in the
top five, as we always are. Despite the fact that many safe
drivers in California have decades of driving experience and
clean driving records, they are also paying the highest
insurance premiums in the Nation.
My home State also happens to ban the use of credit scores
for insurance. I was going to ask Mr. Snyder, is there a
correlation between the fact that the insurance rates are so
high and the banning of credit scores?
Mr. Snyder. We think there is. California has an unique and
incredibly restricted rating system. According to economist
David Appel, that cost California consumers $10 billion
throughout the 1990's because loss costs, which we were pleased
to participate in, for example, through highway safety, anti-
fraud measures declined dramatically.
The entire State played a role in that, and we were there
to support it.
Because the regulatory system was so rigid, companies were
not able to respond as rapidly as they would in a free market
to those declining costs, and the difference calculated just
during one decade was the cost to California consumers of about
$10 billion.
We think there are huge subsidies within the system as a
result of that strict rating regime that is in place. We also
think it would fail any cost/benefit analysis and is grossly
inefficient--a totally unique system with major negatives about
it.
Mr. Royce. It seems that the essence of this issue when you
get down to it is whether or not a credit score has a
predictive value when it comes to auto insurance scoring. I
know study after study, and I think you mentioned the FTC
study, they all conclude that a credit score has a strong
predictive value and is a net benefit to the market.
The result, I think, in that study, said the use of credit
scores produce a situation where 59 percent of policyholders
pay less as a result of that use.
What happens when we remove this risk indicator? Is there a
viable alternative out there to credit scores that you can
think of that is as good?
Mr. Snyder. Right now, no. That was actually confirmed in
the FTC study. The fear would be if you eliminated an
individual objective factor like credit scores, they would be
forced to go back to larger risk classifications or more
reliance on larger risk classifications in the past, such as
territory and other factors like that.
I think what the FTC concluded is there was not another
factor out there that was able to assure the same
predictiveness as we currently have.
I think that would be the fear, that we would have a system
less accurate, actually less fair, and one relying on larger
classifications rather than on the more individual risk
classification.
Mr. Royce. The FTC concludes that risk-based pricing
benefits the majority of market participants. The observation I
would make is that if there is a flaw in the marketplace in
terms of anti-competitive pricing or the availability of
insurance, we should look at the fragmented antiquated
regulatory model that exists in the United States that is
unlike that anywhere else in the world, where we have this
regulatory model overseeing the industry where we have 50
different markets instead of one national market, and I think
recent estimates put that cost of the fragmented State-based
system at $14 billion in higher premiums every year for
consumers.
If we could focus instead on enhancing competition, instead
of unnecessarily limiting tools in the marketplace, it would be
much better for the consumer, although I am sure many of our
elected State insurance commissioners would have to find other
things to focus on.
It would certainly move us into a national market for
insurance. It would certainly not only reduce the costs but
produce a much more competitive industry, especially when you
look at what Europe is doing right now as it goes to one market
for all of Europe for insurance.
Chairman Gutierrez. The time of the gentleman has expired.
Mr. Royce. Thank you, Mr. Chairman.
Chairman Gutierrez. You are very welcome. Congressman Baca,
you are recognized for 5 minutes, sir.
Mr. Baca. Thank you very much, Mr. Chairman. I thank you
and the ranking member for your leadership on this issue which
is important to a lot of us, especially as we represent diverse
groups of individuals within our communities.
I am concerned from both aspects that it impacts everyone
but also how it impacts many minorities as we look at the
credit rating. I heard a lot of you talk about it when
Congressman Moore said we needed more financial literacy.
The problem is on this literacy, where does it go and what
kind of outreach are we doing in making sure that when we
target it, the different diversities, that they are actually
aware of the credit scores that they are going to get, and if
they get it, when do they know they are getting a credit score?
Right now, as we look at its impact, it is not only on the
automobile but also as we look at the health bill that is
coming before us.
Maybe any one of you three can explain that, and since no
one has clearly explained the casual connection between credit
scores and insurance risks, are customers at least made aware
of the credit scores that are used when they purchase that
coverage?
Is there an adjustment during any period of time to their
rates they are getting because they may have improved or
something may not have been accurate during that period of time
that the credit report went out, but yet you underwrote your
insurance policy or health coverage, which means they are
paying a higher premium.
Another question: I am going to try to get all my questions
in all at once. What effect does it have on our seniors? A lot
of our seniors right now, when you look at their credit
ratings, a lot of them get their checks once a month, there are
adjustments in there, and then the ratings are there.
Do we have any studies on the impact on a lot of our
seniors? What are their rates compared to someone elses?
How are we doing it in terms of geographical areas on the
credit scores? People who live within certain geographical
areas get a higher score versus individuals who do not live in
those geographical areas, based on the high risk? Therefore,
their premiums are a lot higher, yet their income does not
change, but they are being impacted.
When does the insurance company review the credit scores,
after the initial purpose, or do they make adjustments in the
ratings at one period or another, so this way the rates can
also be lowered?
If there are two individuals who get a credit score,
husband and wife, say one or the other gets a higher score than
the other. How is it underwritten, based on whom? The higher
score or the lower score, or is there an adjustment in between?
All three of you can tackle all of these questions.
Mr. McRaith. I will do my best to answer them quickly.
Congressman, first of all, in terms of financial literacy, the
States are committed to improving the literacy of consumers.
Mr. Baca. States are committed, but do we know that they
are really doing that? In a lot of minority areas, do they
really know they have gotten a credit score based on their
automobile or their health bill that will be coming up right
now because we are saying we want to make it affordable, but
``affordable'' means you have to have a good score as well. If
you do not have a good score, you are going to be paying a
higher premium on that health coverage.
Mr. McRaith. We absolutely have to do it better than we are
doing it right now. I think this hearing illustrates all the
reasons for that.
I would point out I am not sure knowledge of the impact of
a credit score affects whether someone is able to pay their
medical expenses. Literacy is one component. It is not
necessarily going to put the dollars in someone's pocket to
help them pay during a difficult time in their lives.
Mr. Baca. No, but if a score is given, that means their
premiums are higher. That makes a big difference based on if
you have a fixed income as a senior, that impacts me, because
today I have to decide whether I pay for groceries, pay my rent
or pay for my insurance policy.
Mr. McRaith. That is exactly right. That gets to your last
question, the impact on seniors and other people with fixed
incomes. We also hear from the disabled community, of course.
They are on fixed incomes.
Under Illinois law and under many States' laws, individuals
who do not have credit records are to be treated as
``neutral.'' What exactly ``neutral'' means varies from State
to State. It largely means they do not get a benefit of a great
credit history and they do not get penalized for having a
negative credit history.
By and large, that is how people on fixed incomes are
treated.
Mr. Baca. But that is not a standardized process or
procedure that is used in other States. It is only in Illinois.
Mr. McRaith. No, that is generally the practice across the
country, not in every State, but it is generally the practice.
In terms of geography and credit scores, I believe
different studies have shown that different parts of your
district, for example, will generally have higher credit
scores. Again, we have heard today higher credit scores result
in lower insurance premiums.
Chairman Gutierrez. The time of the gentleman has expired.
Congressman Hensarling, you are recognized for 5 minutes, sir.
Mr. Hensarling. That was quick, Mr. Chairman.
Chairman Gutierrez. A triangle has three corners. Five
minutes has those many seconds, unfortunately.
Mr. Hensarling. Thank you, Mr. Chairman. I did not know we
would be getting a geometry lesson here as well.
I will beg the forgiveness of our witnesses. I missed your
testimony trying to straddle two meetings. I am one of the
Republican appointees to the President's Fiscal Responsibility
Commission. We have our work cut out for us. I was attending
some of those proceedings. We may cover some ground that has
already been covered and I apologize to you about that.
I guess the central question I have with regards to the use
of credit scores in insurance ratings, clearly, there are those
who feel this is predictive. Otherwise, I do not understand why
they would be using it, but particularly as I look at the
incredibly high unemployment rate that remains in our country,
how important is it to small insurers and small businesses that
they be able to use credit-based insurance scores?
In your dealings in the marketplace, again, your
observation, how important is it to small businesses and small
insurers?
Why don't we start with you, Mr. Snyder?
Mr. Snyder. I think it is very important. I think the use
of credit-based insurance scores in the personal lines of
insurance has proven to be very important for the market. It
has allowed a degree of objective and individually tailored
decision making that more accurately assesses risk than was
possible before.
The risk assessment is good in and of itself because how
else would you price an insurance product but to reflect the
risk within that product, and the danger of moving away from
that, I think we have seen perhaps too much of in other
sectors.
Secondly, it has had an overall positive availability
impact on the market for personal lines. That would be true if
you are an individual.
In commercial lines, credit information has long been used
because everyone understands that one of the first things that
is reduced is maintenance of critical equipment and other
things like that, and that leads to safety issues, which in
turn leads to increased insurance risks.
I think it is important up and down the line in terms of
assessing for risk and then pricing for risk.
Mr. Hensarling. How many years of history do we have now to
observe as far as the use of credit scores in our credit-based
insurance scores?
Mr. Snyder. In personal lines, about 15 years or so.
Mr. McRaith. 1993.
Mr. Hensarling. Thank you. It is a fairly substantial time
period. Mr. McRaith?
Mr. McRaith. Just to build on Mr. Snyder's comment,
Illinois has more insurance companies competing for personal
lines insurance than any other State. We have seen some of
those smaller companies able to compete because of their
ability to accurately price. They state the reason they can
accurately price is the credit-based insurance scores.
Mr. Hensarling. I personally have not seen it, has not come
across my desk, have there been any studies that would indicate
kind of the overall economic impact that is derived from
credit-based insurance scores? Is there something like that out
there that has crossed your desks?
Mr. Snyder. There is some data. Professor Powell may have
some data which we can provide to you. He testified previously
before Congress last session.
We have a report that proves the reverse, which is we have
very good data about California where credit-based insurance
scores have not been permitted, that loss costs went down
dramatically, but because of the absence of free market
pricing, the prices that were actually charged in the market
lagged the downturn in loss costs, because companies simply
could not go through the very elaborate process that you have
to go through there.
I think there is strong evidence--
Mr. Hensarling. What happened in California?
Mr. Snyder. What happened in California is that you have a
situation with massive cross subsidies, a very inefficient
system with a huge overhead cost, and for many years and I
think now, overall prices that would be lower if the free
market were permitted.
Mr. Hensarling. If we were to somehow restrict the use of
credit scores in insurance pricing, what you see in California,
would you predict might spread nationwide?
Mr. Snyder. I think that is right.
Chairman Gutierrez. The time of the gentleman has expired.
Congresswoman Waters is recognized for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I was just
going over some information with my staff. I want to thank you
for holding this hearing. I wish that we could get at some of
the information that is so desperately needed to try and
understand how decisions are made to determine insurance rates,
and what is taken into consideration.
From everything that I can gather, there may be 500
different variables that are taken into consideration. We just
do not know and understand what that is all about.
I am told that all kinds of studies are done, including
studies about your Zodiac sign.
Let me just raise the question: How many variables are
taken into consideration by members of the Association for
determining insurance rates? I will address that question to
Mr. David Snyder, who is the vice president and associate
general counsel for the American Insurance Association.
Mr. Snyder. Thank you, Ms. Waters. That will differ from
insurer to insurer. There are dozens of variables that are
considered. Many different credit variables, as well as other
variables, such as prior loss experience. In automobile
insurance, make and model of car. In homeowner's insurance,
prior loss experience, proximity to a fire station, and on and
on.
The whole effort is to try to combine these factors, to be
as accurate as possible in predicting future risk of loss and
therefore, pricing for it.
Ms. Waters. Do you think it would be helpful to set some
standards so that people can have a good understanding about
what is taken into consideration no matter what insurance
company you go to, rather than having all of these variables
that are not identified in any insurance policy that I know of,
to tell people how the decision was made?
Should we have some standards?
Mr. Snyder. There are general legal standards, but to
encourage competition in the market, the models and the
variables are all subject to insurance commissioner review on a
State by State basis. That is the system that has been
followed, general legal standards, and then allowing the
companies to innovate and experiment, and subject to both legal
standards and actuarial standards.
Ms. Waters. Have members of your Association done their own
studies? There is not one, two, three, four or five studies
every year done by the Association or do they all do different
studies?
Mr. Snyder. For anti-trust reasons, the Association cannot
discuss how individual companies do their business. I am very
aware they are constantly reviewing their data, constantly
reviewing their factors, constantly subject to insurance
commissioner review on their models and programs and the
factors used in them.
Ms. Waters. What is the difference between defending the
fact that they all use variables unknown and different for
competitive purposes and the question that I just asked about
the studies? Do you know something about that? You can talk
about that but you cannot talk about the studies. What is the
difference?
Mr. Snyder. I can talk about generally from published
reports what the companies have said in the media, but they do
not share with us--
Ms. Waters. Any of the companies using the Zodiac study?
Mr. Snyder. Excuse me?
Ms. Waters. Are any of the companies in your Association
using the Zodiac study?
Mr. Snyder. Using which study, ma'am? I am sorry.
Ms. Waters. Zodiac.
Mr. Snyder. Zodiac study?
Ms. Waters. Yes. Are you aware of that?
Mr. Snyder. I am not aware of it.
Ms. Waters. Never heard of it?
Mr. Snyder. I have not.
Ms. Waters. Thank you. Do you believe that given the way
decisions are made by insurance companies to charge or to not
insure--is the Association satisfied that your companies in the
Association are acting in the best interest of the consumers?
Mr. Snyder. Yes, so far as we know.
Ms. Waters. Do you know of any changes that you would
recommend that should be taking place to have them do a better
job of acting on behalf of the consumers?
Mr. Snyder. The answer is I cannot recommend to them how
they do their business.
Ms. Waters. Can you recommend to us?
Mr. Snyder. What we do support is reasonable regulation and
their ability to innovate and compete in the market.
Ms. Waters. Mr. McRaith, you represent the National
Association of Insurance Commissioners. You must hear from
commissioners all over the country about the problems they have
with whatever regulation they may be responsible for in their
States.
Have you heard any of your commissioners complaining about
loops or gaps in their oversight responsibilities--
Chairman Gutierrez. The time of the gentlelady has expired.
Ms. Waters. --that could be closed?
Chairman Gutierrez. Answer the question. Ten seconds,
please, Mr. McRaith.
Mr. McRaith. As you would expect, Congresswoman, there is a
wide variety of viewpoints among regulators across the country
on the use of credit-based insurance scores.
Chairman Gutierrez. Mr. Green, you are recognized for 5
minutes, sir.
Mr. Green. Thank you, Mr. Chairman. Thank you to the
witnesses.
Let's first review some intelligence that I have received.
The intelligence indicates that credit-based insurance scores
are not, ``n-o-t,'' held out as being predictive of an
individual's likelihood to have an automobile accident or
experience damage to their home. True or false?
Mr. Wilson. Right. Scores are--
Mr. Green. If you would, just true or false. If this is
true, would you kindly raise your hand, please?
[No response.]
Mr. Green. Nobody agrees this is true?
Mr. McRaith. I am sorry. The question is?
Mr. Green. I will read it again. Credit-based insurance
scores are not, ``n-o-t,'' held out as being predictive of an
individual's likelihood to have an automobile accident or
experience damage to their home. Is this true?
Mr. Snyder. They are predictive of making a claim.
Mr. Green. Is it true that they do not predict that a
person is likely to have an accident?
Mr. Wilson. Models perform for groups of individuals rather
than for individuals.
Mr. Green. Do you know whether it is predictive of whether
a person will have an accident? I am not hearing you say yes or
no. I do not know.
Mr. Snyder. It is predictive of having an accident and
making a claim; yes.
Mr. Green. A credit score can predict whether a person will
have an accident?
Mr. McRaith. It is my understanding, Congressman, that a
credit score indicates a likelihood of submitting a claim.
Mr. Green. I am not there yet. I am talking about the
likelihood of having an accident, which I thought was going to
be the easy question, by the way.
Let me ask again: Will a credit score predict whether a
person will have an accident?
Mr. McRaith. I have not seen any study that indicates that
to be true.
Mr. Green. Your answer is yes or no?
Mr. McRaith. I would love to answer your question,
Congressman. I simply do not know whether that is true or not.
Mr. Green. You do not know whether a credit score will
predict the likelihood of having an accident?
Mr. McRaith. You have probably read--
Mr. Green. Let's move on. Let's go to Mr. Snyder. Mr.
Snyder, do you know the answer? Is it yes, no, or you do not
know?
Mr. Snyder. My answer would be the same as Director
McRaith, which is the studies indicate the greater likelihood
of submitting a claim.
Mr. Green. I am not there yet. I want to talk about
accidents. Do credit scores predict whether people will have
accidents?
Mr. Snyder. They predict insurance risks including
accidents and claims.
Mr. Green. They predict accidents? Okay. Let's go to Mr.
Wilson. Do they predict accidents, Mr. Wilson?
Mr. Wilson. They are correlated with accidents.
Mr. Green. Credit scores will predict whether a person is
going to have an accident?
Mr. Snyder. It measures--
Mr. Green. Excuse me. Mr. Wilson has the floor right now. I
am sorry.
Mr. Wilson. I would agree it measures the likelihood.
Models perform for groups of individuals.
Mr. Green. Credit scores predict the likelihood of a person
having an accident? That seems to be where you all are.
Mr. McRaith. I cannot agree with that. I do not know that
is true. What I know is it indicates the likelihood of a claim
to an insurance company.
Mr. Green. If this is what you believe, I see what the
problem is. This is a real problem for us. If you believe that
a credit score is likely to predict that a person is going to
have an accident, what is the correlation between the credit
score and the likelihood of an accident?
My thought was you would all say no, it is not likely to
predict this, that it is likely to predict whether a person
will file a claim. That is what I thought you would say. Now
you have completely revamped my thinking, given that you seem
to think that a credit score can predict whether a person will
have an accident.
Mr. Wilson, I will give you one more chance. Are you sure
that a credit score can predict the likelihood of having an
accident?
Mr. Wilson. For an individual?
Mr. Green. Yes.
Mr. Wilson. Again, models perform for--
Mr. Green. Is your answer yes or no? Sometimes when you
finish, I do not know whether you said yes or no. Maybe your
answer is, ``I do not know.''
Mr. Wilson. I do not think I know.
Mr. Green. Okay. You do not know. Let's go to our next
expert, Mr. Snyder. Again?
Mr. Snyder. It predicts the likelihood of having a claim
and you are not going to have a claim for certain types of auto
policies unless you are in an accident.
Mr. Green. Does it predict the likelihood of having an
accident, is the question.
Mr. Snyder. It predicts a likelihood of accident
involvement.
Mr. Green. You are not going to answer the question. It is
a simple question. Is it likely to predict that you are going
to have an accident?
Here is what my intelligence tells me. It is likely to
predict that you will file a claim. That is what it is likely
to predict. That seems kind of reasonable when you think about
it. If that is the case and it predicts whether you are likely
to file a claim, then the question becomes this, or maybe the
statement is this, that the fact that one is likely to use
one's credit--pardon me--one's insurance, if you have an
accident, then that says to me you have a lot of people who are
poor, who can barely pay for their insurance. They have an
accident. I can tell you without having a study that they are
likely to use their insurance, and they are likely to want to
take advantage of something they paid for.
Chairman Gutierrez. The time of the gentleman has expired.
Mr. Green. Thank you, Mr. Chairman. I yield back.
Chairman Gutierrez. Mr. Cleaver, you are recognized for 5
minutes, sir.
Mr. Cleaver. Thank you, Mr. Chairman.
I am interested in the extraordinary life circumstances and
whether or not the three of you agree that extraordinary life
circumstances should be taken into consideration with regard to
an individual's credit score.
Mr. McRaith. Yes.
Mr. Wilson. Yes.
Mr. Cleaver. It does not exist. Who is taking that into
consideration?
Mr. McRaith. Certain State laws require that a company, an
insurance company, consider an extraordinary life event if the
insured, the policyholder, reports and submits that to the
insurance company.
Mr. Cleaver. California and Hawaii.
Mr. McRaith. California and Hawaii prohibit the use of
credit-based insurance scores. Some States, like Illinois, for
example, require that the insurance company review and consider
an extraordinary life event. Some States require that the
insurance company actually make a reasonable exception to the
rate due to an extraordinary life circumstance.
Mr. Cleaver. That is where I am. That is where I am going.
Mr. Snyder. Sir, the National Conference of Insurance
Legislators recently amended its law to include specific
provisions on extraordinary life circumstances. This was done
fairly recently. Some States have already enacted it this past
legislative session and it is something we support for all
States.
Mr. Cleaver. All of you support that?
Mr. Wilson. Yes.
Mr. Cleaver. I have a friend who is in the hospital now
suffering from cancer. Last summer, he ate a cheeseburger. I
have concluded that cheeseburgers cause cancer.
I know someone who had two automobile accidents, so
therefore, automobile accidents cause bad credit.
Point out the illogic in that. Either one, the hamburgers
or the accidents.
Mr. McRaith. Congressman, as a Chicago Cubs fan, I think it
is true the Cubs have not won the World Series since Theodore
Roosevelt was President. Until he comes back, we are not
expecting a victory.
Mr. Cleaver. Yes. I agree. We are in the age of deniers. We
will deny everything.
On a credit score, and this goes back to Mr. Watt's
questions earlier, in my hometown, Kansas City, Missouri, some
of us protested years ago because the newspaper, in the real
estate section, in identifying the location, would always say,
``East of Trust.''
Trust in Kansas City has been unfortunately and painfully
the Mason-Dixon line separating the African-American and Latino
communities from the majority community. They eventually
stopped doing that because they realized that they were sending
subliminal information, maybe not even so subliminal.
On a credit score, is not the address of the individual
listed?
Mr. Wilson. It is on the credit report. It is not used in
scoring.
Mr. Cleaver. You just made the point I am trying to make.
It is on the report. Mr. Watt was saying can that be a proxy, a
substitute. I am saying if it is on the score, is it not also
logical that it gives some additional information about the
individual?
Mr. McRaith. Yes.
Mr. Cleaver. Thank you. Mr. Snyder?
Mr. Snyder. As the gentleman indicated, the address is not
included in the score that we use.
Mr. Cleaver. Yes, I said that at the beginning. The
gentleman said it, but I said that at the beginning.
The question was and I apologize, is it not very likely
that is some additional information that is being given about
the individual, more than the numbers?
Mr. Wilson. Many--
Mr. Cleaver. No, I want Mr. Snyder to answer, please.
Excuse me.
Mr. Snyder. Certainly no demographic information. No other
information than the number.
Mr. Cleaver. You just said the address is on there.
Mr. Snyder. I heard the gentleman say it was not.
Mr. Cleaver. It is not? That is unbelievable. You are
saying--
Chairman Gutierrez. The time of the gentleman has expired.
Ms. Kilroy, you are recognized for 5 minutes.
Ms. Kilroy. Thank you, Mr. Chairman.
Chairman Gutierrez. You are very welcome.
Ms. Kilroy. Thanks again to the witnesses for their input
here this morning.
I wanted to bring up an issue that a constituent and friend
and actually former Member of Congress brought up to me, Robert
Samansky, who spent a great deal of his personal time over the
last 6 months working with my staff and our committee staff to
understand and analyze the way credit-based insurance scores
are being used and explained to insurance consumers.
He was not able to be here with us this morning. I am going
to follow up, Mr. Wilson, with some written questions for you
regarding his specific circumstances. I hope you will be able
to provide me with some answers. Thank you for that.
There is a disparity between his overall excellent credit
record and his Choice Point credit-based insurance score. I
have looked at his materials. I do not understand it.
Could you explain to me how someone with an exemplary
overall credit score could end up with a mediocre credit-based
insurance score?
Mr. Wilson. Sure. One of the key considerations is the
target that is being modeled. A credit score for financial
purposes is generally targeting the likelihood or the odds of
someone going delinquent on a loan payment in the next 2 years.
The bank has a pool of loans. They know who has gone
delinquent and who has not gone delinquent. They model for
that. The credit characteristics that are most correlated with
loan delinquency come into that model.
By contrast, an insurance company is going to look at loss
ratio for a pool of policyholders. They will use the
correlation between the credit factors and the observed loss
ratio to produce a rank ordering.
Because the target is different, the credit characteristics
and their weights are different.
Ms. Kilroy. What kind of--
Mr. McRaith. Congresswoman, to answer your question more
directly, if your friend is older than a certain age, he is
likely to see his premiums increase. A credit-based insurance
score is not solely based on credit. There are many other
factors that are considered as well, including the age of the
driver.
Ms. Kilroy. When Mr. Wilson suggested earlier that age was
not taken into account?
Mr. Wilson. Age is not used in our scores.
Ms. Kilroy. It does come into play later on, is that what
you are saying?
Mr. Wilson. Yes.
Ms. Kilroy. The answer that he got from his insurance
company was it was based on his credit score and they gave him
some reason codes, again, I have to say I do not see the
correlation.
You mentioned earlier you wanted to be transparent and we
want to get behind some of the rhetoric on credit-based
insurance scores. I am still kind of stuck here. It is pretty
opaque to me. There is a lot of rhetoric out there in terms of
how this happens.
Mr. McRaith. Yes, I would agree, Congresswoman. I would say
it is possible that both sides can be right, that credit
scores--credit-based insurance scores are predictive. It is
also possible that they might have a disparate impact on racial
and ethnic minorities. Both of those could be true.
Ms. Kilroy. You mentioned earlier, Mr. McRaith, about the
large number of medical bankruptcies in this country, and that
is certainly true. My bill is really not focused on that really
significant problem.
My bill is focused very narrowly on people who actually
paid their medical debt. They might have had some confusion
with the large number of bills.
Let me give you another example of a lawyer in my
community. Her daughter was in a significant accident. They
life-flighted her to a hospital. She had a grocery bag full of
bills as a result.
She worked with her insurance company and paid everything
off and never heard anything again until years later, about 5
years later, she went to get a loan to do an addition on her
home and discovered her credit score was dinged because of a
$100 co-pay on that medical life flight that they had never
billed her for, that the municipality had never billed her for,
but somehow it had gone to collection. That collection effort
never came to her.
Mr. McRaith. Those are real problems that people and
families all over the country face every day. The States, I
think, are trying to impose some requirement that insurance
companies acknowledge that exceptional, extraordinary life
event.
Ms. Kilroy. Even if it is not an exceptional, extraordinary
life event, if somebody has paid their medical debt, do you
think it is reasonable to have that disparaging comment removed
from their credit score?
Mr. McRaith. In my opinion, I think it is reasonable to
have it removed. I think it is unreasonable for it to remain.
Ms. Kilroy. Thank you very much.
Chairman Gutierrez. The time of the gentlelady has expired.
I thank you all very, very much. We have a second panel,
and I thank the first panel. I am being a little biased, I
thank Mr. McRaith from Illinois. Thank you for all the fine
work you do for the citizens of Illinois. Thank you for your
testimony.
We are going to go quickly to the second panel, in which we
will continue to show the fairness of the Democrats. We had two
industry people and one person for the consumer. Now we are
going to have two industry and two consumer witnesses.
Thank you. We would ask everybody to please end their
conversations and have a seat.
We are going to introduce these wonderful witnesses and go
to our second panel. The second panel consists of four
witnesses: Ms. Chi Chi Wu, staff attorney, National Consumer
Law Center; Mr. Mark Rukavina, executive director, The Access
Project; Mr. Stuart K. Pratt, president and CEO of Consumer
Data Industry Association--and someone who knows his way around
here; and Ms. Anne Fortney, partner, Hudson Cook LLP, another
person who knows her way here.
You are all welcome. We are going to give 5 minutes to Ms.
Chi Chi Wu. Please, you have 5 minutes.
STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL CONSUMER LAW
CENTER
Ms. Wu. Mr. Chairman, Representative Hensarling, and
members of the subcommittee, thank you very much for inviting
me here today. I am testifying on behalf of the low-income
clients of the National Consumer Law Center. And, Mr. Chairman,
thank you for holding this hearing about the use of credit
reports in areas beyond lending, such as employment and
insurance. And we also thank you for inviting us to speak about
the need to fix a scrivener's error in the Fair Credit
Reporting Act.
The use of credit reports in employment is a growing
practice, with nearly half of employers involved in it. It's a
practice that is harmful and unfair to American workers. For
that reason, we strongly support H.R. 3149, and we thank
Chairman Gutierrez and Congressman Steve Cohen for introducing
it. This bill would restrict the use of credit reports in
employment to only those positions for which it is truly
warranted, such as those requiring national security or FDIC-
mandated clearance.
We oppose the unfettered use of credit histories and
support H.R. 3149 for a number of reasons. The first and
foremost is the profound absurdity of the practice. Considering
credit histories in hiring creates a vicious Catch-22 for job
applicants. A worker loses her job, and is likely to fall
behind on her bills due to lack of income. She can't rebuild
her credit history if she doesn't have a job, and she can't get
a job if she has bad credit. Commentators have called this a
financial death spiral, as unemployment leads to worse credit
records, which, in turn, make it harder for the worker to get a
job.
Second, the use of credit histories in hiring discriminates
against African-American and Latino job applicants. We have
heard how study after study has documented, as a group, these
groups have lower credit scores, including the FTC study that
did find the disparities in credit scoring. These are groups
that have been disproportionately affected by predatory credit
practices, such as the marketing of subprime mortgages and auto
loans and, as a result, have suffered higher foreclosure rates,
all of which have damaged their credit histories.
The Equal Employment Opportunity Commission has expressed
concerns over the use of credit histories in employment, and
recently sued one company over the practice.
Third, there is no evidence that credit history predicts
job performance. The sole study on this issue has concluded
there isn't even a correlation. Even industry representatives
have admitted, ``At this point we don't have any research to
show any statistical correlation between what's in somebody's
credit report and their job performance, or likelihood to
commit fraud.''
Finally, as we have testified here before, the consumer
reporting system suffers from high rates of inaccuracy, rates
that are unacceptable for purposes as important as employment.
And the estimates range from 3 percent, which is the industry
estimate, to 12 percent, from the FTC studies, to 37 percent in
an online survey.
In an environment with 10 percent unemployment, a 3 percent
error rate in credit reports affects 6 million American
workers, and it's not acceptable. And, remember, a consumer who
has an error in her credit report, and is able to fix it--which
is very difficult--can reapply for credit. But very few
employers are going to voluntarily hold up a hiring process for
one or more months to allow an applicant to correct an error in
the credit report.
The issue at stake is whether workers are fairly judged on
their ability to perform a job, or whether they're
discriminated against because of their credit history. Oregon
recently signed a bill into law restricting this practice.
Other States are considering it, and Congress should do the
same and pass H.R. 3149.
The second issue I want to talk about is a scrivener's
error. The amendments of 2003 may have inadvertently deprived
consumers of a 30-year-old pre-existing right they had to
enforce the FCRA's adverse action notice requirement. This is
the notice given when credit or insurance or employment is
denied, based on an unfavorable credit report. That was
intended to limit the remedies for a totally new notice--the
risk-based pricing notice--at 1681m(h). However, due to
ambiguous drafting, a number of courts have interpreted this
limitation to apply to the entirety of section 1681m of the
FCRA, including the pre-existing adverse action notice.
Congress can easily and should fix the scrivener's error,
because it was never part of the legislative bargain struck by
FACTA. In fact, FACTA's legislative history indicates that
Congress had absolutely no intention of abolishing any private
enforcement of the adverse action notice requirement, and an
uncodified section specifically states that nothing in FACTA
``shall be construed to affect any liability under section 616
or 617 of the Fair Credit Reporting Act''--that is the private
enforcement provisions--``that existed on the day before the
date of the enactment of this act.''
And there is more evidence that Congress didn't
intentionally abolish the private enforcement. If it had done
so, the banking and credit industry would have trumpeted that
change. In fact, the industry has never made that claim, with
only the American Banker noting that FACTA perhaps
inadvertently eliminated the existing right of consumers and
State officials to sue for violations of the adverse action
provisions. Even 4 years later, in a hearing before the full
committee, my fellow testifiers today declined to claim that
FACTA had intentionally abolished this private remedy.
Now, despite the clear legislative history, several dozen
courts have, unfortunately, held that FACTA abolished this
private remedy, depriving hundreds of consumers of their
rights. We think that the documented cases are perhaps only the
tip of the iceberg, so we assume that customers' damage has--
Chairman Gutierrez. The time of the gentlelady has expired.
Ms. Wu. We thank you for the opportunity to testify, and
look forward to your questions.
[The prepared statement of Ms. Wu can be found on page 186
of the appendix.]
Chairman Gutierrez. Let me describe it once again. You get
the green light at 5 minutes to start. When you get to the
yellow light, you have a minute. Time yourself.
Mr. Mark Rukavina, you are recognized for 5 minutes, sir.
STATEMENT OF MARK RUKAVINA, EXECUTIVE DIRECTOR, THE ACCESS
PROJECT
Mr. Rukavina. Chairman Gutierrez, Ranking Member
Hensarling, and members of the subcommittee, I thank you for
the opportunity to address the committee today. My name is Mark
Rukavina, and I am executive director of the Access Project. We
work nationally on health care issues, and have since 1998. And
our research played an instrumental role in revealing the
problem of medical debt.
Medical debt is money owed for any type of medical service
or product. That money may be owed directly to the provider of
the service, or to an agent of the provider, such as a
collection agency. In my testimony today, I would like to
discuss the use of medical debt in assessing one's
creditworthiness. And more detailed information is found in my
written testimony.
First, some background on medical debt. Data gathered by
the Commonwealth Fund found that during 2007, the most recent
year for which data are available: 49 million working-aged
Americans and 7 million elderly adults had medical debt or
medical bills that they were paying off over time; and 28
million working-aged adults were contacted by collection
agencies for medical bills.
What makes medical bills unique? Few Americans understand
that nearly two-thirds of the people who have medical debt had
insurance at the time of the incident for which they owe money.
While insurance provides protection, patients still have out-
of-pocket obligations that they must pay.
Americans are often confused by their health insurance
coverage. One national study found that nearly 40 percent of
Americans did not understand their medical bills or the
explanation of benefits. They did not know what service they
were supposed to pay for, the amount they owed, or whether that
amount was correct. Nearly one-third let a medical bill go to
collection, and one in six did not know whether they should pay
their health care provider or their insurance company.
Given this, it is not surprising when claims that are not
promptly paid get sent to collection. The confusion regarding
medical claims payment also carries over to credit reports.
Many Americans mistakenly believe that unpaid medical bills
have no influence over a credit score. The lack of clarity may
stem from statements made by industry representatives.
Testimony from the previous panel was an example of this.
However, in recent testimony before this committee, a
VantageScore representative said that their score does not
factor medical debt into the calculation of a consumer's credit
score. Following that hearing, a letter was sent to the
committee to clarify that this only applies when that medical
debt is reported directly by a health care provider. They also
clarified that they include all collection accounts, including
those related to medical debt, when calculating a credit score.
Given this, it is important to understand how most medical
data appear on people's reports. According to Experian, data
provided directly by medical providers accounts for only 7/
100ths of one percent of the data that they gather. TransUnion
states that medical debts are not typically reported unless
they become delinquent and are assigned to collections.
So, here are the facts. Forty percent of Americans are
confused by medical bills. Consumers and some credit scoring
agencies appear confused as to whether medical data are used in
calculating credit scores. Medical data can only drag down
one's score. I say this because medical debts that are paid off
directly to providers aren't used in calculating one's score.
Medical accounts are only included on credit reports if they
are deemed delinquent and sent to collection. This system is
stacked against consumers, and penalizes those who experience
illness.
Even when proper action is taken, and one pays off a
medical bill, the Fair Credit Reporting Act allows for this
bill to remain on a person's report for up to 7 years. This
leads me to question the predicted value of medical accounts,
which has also been questioned by some of those in the
financial service industry. Some lenders disregard them when
reviewing loan applications.
A study published in the Federal Reserve Bulletin found
that nearly one-third of Americans with a credit file have a
collection account on their credit report. The study found that
more than half of the accounts in collection are medical
accounts. It went on to state that, ``some credit evaluators
report that they remove collection accounts related to medical
services from credit evaluations because such accounts often
involve disputes with insurance companies over liability for
the accounts or because the account may not indicate future
performance on loans.''
It is estimated that in 2008, Americans spent $277 billion
in out-of-pocket costs. This resulted from millions of invoiced
medical bills. Millions of Americans had bills sent to
collection as the result of a lengthy insurance claim
adjudication process or confusion due to numerous bills
generated from one visit to a hospital. Those who paid their
bills in full are often very surprised when they learn that
despite such actions, the bills continue to plague them and peg
them as poor credit risks.
Such data errors harm consumers, and these inaccuracies in
credit reports slow America's economic recovery. H.R. 3421
addresses this problem, it corrects these errors on credit
reports. Specifically, it would require--
Chairman Gutierrez. The time of the gentleman has expired.
Mr. Rukavina. --that only those medical accounts that have
been paid or fully settled be removed from a credit report
within a certain period of time.
[The prepared statement of Mr. Rukavina can be found on
page 137 of the appendix.]
Chairman Gutierrez. Thank you.
Mr. Rukavina. Thank you.
Chairman Gutierrez. Mr. Pratt, you are recognized for 5
minutes.
STATEMENT OF STUART K. PRATT, PRESIDENT AND CEO, CONSUMER DATA
INDUSTRY ASSOCIATION
Mr. Pratt. Chairman Gutierrez, Ranking Member Hensarling,
and members of the subcommittee, thank you for this opportunity
to testify. I will highlight just a few points in my oral
remarks.
First, preserving a full and complete credit history is
imperative. A central pillar of the credit reporting system is
that it is full-file. And this means the database contains both
positive and negative information about a consumer's management
of his or her debts. The FCRA balances this fundamental idea
that all accurate and predictive data is available for risk
management, with the requirement that data that is considered
adverse be deleted, generally, within 7 years.
Congress recognized that a system that allows for the
accumulation of payment history spanning decades is inherently
fair for consumers. Because there is a positive payment
history, any adverse data resulting from hardship or even
mismanagement is set into this context. Credit reports are the
bridge of data for us, as consumers, in an impersonal
marketplace. Credit reports tell our story, a story of hard
work, good values, and even times of trial.
Credit reports are the basis for building fair and unbiased
risk management tools, such as credit scores. Credit scores
remove the risk of bias and mere opinion. Race and gender, for
example, are no longer barriers to accessing loans and other
services.
It is for these reasons that we remain very concerned with
H.R. 3149's proposal that the 7-year period for reporting paid
medical debts reported by collection agencies be changed to a
30-day period.
Consider the following: Maintaining stability of the system
of data is essential. We all understand, better than ever, the
importance of safe and sound underwriting. Removing accurate
predictive data is not the right step. It's not the right
direction.
Some may misunderstand the nature of the 7-year period. It
does not begin on the date of the final payment or settlement.
This seven-year period is running throughout the period of time
that the account is on the file prior to payment.
Data is regularly evaluated for predictive qualities.
Prematurely removing even a paid debt which was delinquent
removes even the possibility of considering how these data help
ensure fair and also safe and sound decisions. We support the
FCRA's current approach to adverse data. We urge the committee
to consult with users of data about the consequences of
deleting any data, since it isn't merely an issue for the
consumer reporting agency, but ultimately it's an issue for
users who manage risk.
Let me now turn to the uses of credit reports for
employment. While credit scores are not provided by our members
for employment purposes, credit reports are used, and this
permissible purpose should be maintained. H.R. 3149 proposes to
place a significant limitation on the use of credit reports. We
understand the desire to ensure consumers are getting jobs they
need during this period of high unemployment. But it is our
view that credit histories do not serve as an impediment.
Following are some important points to consider: First,
employers' use of any criterion for employment is highly
regulated. Employers must determine whether or not the use of a
credit history is appropriate for a given position. The FCRA,
in fact, requires the employer to certify that it will not use
data in violation of any applicable Federal or State equal
employment opportunity law or regulation.
The Society for Human Resources Management surveyed its
members. They found, for example, that their members use credit
checks for positions that have fiduciary or financial
responsibilities, for executive positions, CFOs, or for
positions where employees have access to a customer's assets,
corporate secrets, and technology platforms, including access
to sensitive personal information. And I think these uses make
sense.
While media counts might lead readers to think differently,
background screening products only include a credit check in
about 15 percent of the cases. In other words, 85 percent of
the time, a credit report is not used in the employment
decision.
The Association of Certified Fraud Examiners, however, has
reviewed occupational fraud, and it found two top red flags
exhibited by perpetrators of fraud were: living beyond one's
means; and experiencing financial difficulties.
Finally, there seems to be a view that credit checks serve
as a final yes or no for an employer. This is not the case.
Employers use applications, testing, interviews, resume data,
and many other data points. The credit check is used where it
makes sense. Preserving this appropriate use under the current
law is the right policy outcome.
Thank you for this opportunity to testify, and we look
forward to your questions.
[The prepared statement of Mr. Pratt can be found on page
115 of the appendix.]
Chairman Gutierrez. Ms. Fortney?
STATEMENT OF ANNE P. FORTNEY, PARTNER, HUDSON COOK, LLP
Ms. Fortney. Thank you. I am Anne Fortney, a partner in the
Washington, D.C., office of the Hudson Cook law firm. I
appreciate the opportunity to appear before you again today.
My testimony draws on many years of consumer protection
practice in both the private and the public sectors, including
service at the Federal Trade Commission. I believe my depth of
experience enables me to comment upon legislation from the
perspective of consumers, as well as the consumer financial
services industry.
I am aware that credit information is used as a factor in
predicting risk other than consumers' default on credit
obligations, such as when it is used in insurance and
employment purposes. Credit information is used in conjunction
with other empirical information for these purposes, because it
has been proven to be a reliable tool in predicting risk.
While some may question the use of credit histories in
employment situations, there are times when that information is
essential to a prospective employer or licensor. In fact, to
protect consumers, many States require credit information in
evaluating applicants for mortgage loan originator licenses.
As the Fair Credit Reporting Act recognizes, it is critical
that consumer reports used for employment decisions be
accurate. To that end, the law requires notice to a consumer
before any adverse action based on a consumer report is taken.
As a result, an employment decision is not made until the
consumer is alerted to negative information in the report, and
has the opportunity to correct any inaccurate information.
A consumer will also receive notice if the consumer report
information formed a basis for the denial of employment, or for
another decision that affects the consumer, once employed.
My previous testimony before this subcommittee addressed
the use of medical debt collection information in credit
histories. As others have testified, this information is a
predictive characteristic in credit scoring systems. For that
reason, its use benefits consumers, as well as creditors and
others that rely upon that information.
In 2003, Congress enacted FCRA subsection 615(h)(8), which
eliminated a consumer's private right of action for all
violations occurring under section 615. Since then, litigants
across the country have argued about whether Congress intended
to eliminate this private right of action, or whether there was
a so-called scrivener's error that led to this result.
Some critics complain that there was no legislative history
evidencing the congressional intent to achieve this result.
However, the lack of legislative history is irrelevant. Because
of the haste with which Congress deliberated and enacted the
amendments to the FCRA at the end of 2003, there is a dearth of
legislative history on any of the provisions.
Moreover, some claim that the placement of the private
right of action exclusion within this subsection is indicative
of the congressional intent to limit its application to that
particular subsection. However, that claim is not supported by
anything in the legislative record.
At this point in time, rather than trying to discern what
Congress may or may not have intended more than 6 years ago, I
believe the appropriate inquiry is whether Congress should now
reinstate a private right of action.
Based upon my experience with the FCRA, and my
participation as an expert witness in class action litigation
arising under this subsection, I do not believe that there is
any measurable benefit for consumers in reinstating a private
right of action for its violations. There is no indication that
consumer report users routinely fail to comply with the section
615 adverse action notice requirements since the elimination of
the private right of action.
The National Consumer Law Center's written testimony
mentions 44 cases in which it claims to have alleged consumer
reports users' failure to give an adverse action notice. In
fact, virtually all those cases involved a different
allegation, usually that creditors gave consumers a notice, as
required, but the notice was not clear and conspicuous.
In other words, the section 615 claim in those cases was
that, although consumers received the proper notice, it was not
in the proper type size. The courts rightly saw those claims as
blatant attempts to extract huge statutory damages in class
action suits where there was no consumer harm.
There is no indication that the Federal agency or State
attorneys general administrative enforcement of section 615 is
inadequate. At the same time, as described in my written
statement, history shows that the only persons who stand to
benefit from the reinstatement of a private right of action
under section 615 are those lawyers who can pursue class action
litigation, unless Congress also implements appropriate limits
on class action liability. Otherwise, consumers will ultimately
be the ones who bear the cost of litigation in the form of
increased credit and insurance rates.
Thank you for the opportunity to testify. I will be glad to
answer your questions.
[The prepared statement of Ms. Fortney can be found on page
67 of the appendix.]
Chairman Gutierrez. I thank the gentlelady for being with
us once again here. We are going to go right into the
questions.
First, I would like to ask unanimous consent that Mr. Cohen
of Tennessee be allowed to sit in at this hearing, and when his
turn comes, be allowed to ask questions. Hearing no objection,
it is so ordered. And we welcome Mr. Cohen here, to this
hearing.
So, Mr. Pratt, large amounts of debt and living beyond your
means, huh? So I guess Madoff would have done really well. He
would be like your stellar candidate, right? Multi-millionaires
like Mr. Skilling at Enron, all of--I mean I can go through--
Bolski? I guess they would all be just fine. But someone who is
poor--in other words, if you're poor, you're likely to live
beyond your means, right?
Mr. Pratt. [No response.]
Chairman Gutierrez. It's tough. So you're likely to have a
propensity to be a criminal, right? No? What did you say? You
said that you were going to judge people's character, right?
You judge people's character, given your credit scores, right?
It's a judgement of people's character and their integrity.
Do you really think you can judge people's character and
integrity, that you have the right to do that, or the ability
to do that, to judge people's character? Do you feel
comfortable doing that?
Mr. Pratt. If I could respond--
Chairman Gutierrez. Yes, I'm waiting.
Mr. Pratt. Thank you, sir. Two things. No, somebody who is
poor is not inherently somebody with bad character. As a big
brother with Big Brothers and Sisters, I worked with a mother
who--
Chairman Gutierrez. One of your--
Mr. Pratt. --had three jobs, Congressman, and who worked
very hard and paid her bills, and--
Chairman Gutierrez. Excuse me. One of your members is
Experian, one of the big three credit bureaus. And it touts
``employment insight'' reports as providing insight into ``an
applicant's integrity and responsibility towards his or her
financial obligation.'' An applicant's integrity. It's easy to
see a potential employer rejecting an applicant with negative
credit information in his or her credit report, particularly
when it is sold as providing insight into an applicant's
integrity. So--
Mr. Pratt. This--
Chairman Gutierrez. --one of your members is actually
judging people's integrity based on credit information?
Mr. Pratt. No, to the contrary. An employer uses lots of
different data to make a final hiring decision.
Chairman Gutierrez. No, but they--
Mr. Pratt. And it's possible--
Chairman Gutierrez. They will use one of your clients in
order--
Mr. Pratt. They could--
Chairman Gutierrez. --to get that information.
Mr. Pratt. They could use--
Chairman Gutierrez. Okay. Is it or is it not true that
Experian touts, ``employment insight,'' and they are one of the
members of your group?
Mr. Pratt. Yes, they are. Yes, sir.
Chairman Gutierrez. And I picked it right out of their
information. It says, ``into an applicant's integrity and
responsibility towards his or her financial obligation.''
Integrity and responsibility in character.
You know, I find it astonishing that someone could predict
or claim to predict, especially working men and women, their
integrity and their responsibility is based on that.
Ms. Chi Chi Wu, let me just ask you a question. You talked
about a spiral. Could you talk about, ``I have bad credit,
therefore I am denied a job?'' Tell me how that works.
Ms. Wu. Well, it's very simple, and it's actually exactly
as you described it in your opening statement. If you lose your
job, you're not going to be able to pay your bills. You're
going to fall behind on your credit card bills, maybe your
mortgage, maybe your auto loan. Then you try to get a job. A
potential employer runs a credit check and denies you a job. If
you have bad credit, you can't get the job. And without income,
you can't fix or improve your credit. So, it's just a vicious
Catch-22.
And it's societal, as well. That affects your ability to
both build assets, your children's--what you could pass down to
your children, and there are racial disparities. You know, the
evidence cited that certain minority groups have lower credit
scores, as a group. That--if credit scores are supposed to be
an accurate translation of credit reports, what the industry
claims it does, then you're talking about a huge disparate
impact on these groups.
And, you know, people don't start off at the same places.
So a poor person who loses their job is less likely to have the
assets to repay those bills than someone with more means and
maybe a little savings when they lose their job. So it just
makes things worse.
Chairman Gutierrez. Thank you. I just want to make sure
that we have from Mr. Pratt's testimony--I have it here, you
introduced it to us--``The Association of Certified Fraud
Examiners reviewed occupational fraud between early 2006 and
early 2008, and found that the top 2 red flag warnings
exhibited by perpetrators leading up to the fraud were
instances where the fraudster was living beyond his or her
financial means--present in 39 percent of all cases with the
median loss of $250,000--or experienced financial
difficulties--present in 35 percent.''
So, if you have a financial difficulty, and if you get
sick, as has already been testified, most of the financial
difficulties, the majority of financial difficulties, can be
related to illness and lack of health care insurance, then you
are probably going to be a thief. And your integrity is going
to be questioned, and you get to do that. And I just think--
Mr. Pratt. To the--
Chairman Gutierrez. I don't have any more time. My time has
expired. Mr. Hensarling, you are recognized for 5 minutes, sir.
Mr. Hensarling. Thank you, Mr. Chairman. Mr. Pratt, if you
would like to respond to the chairman's comments, I will give
you that opportunity.
Mr. Pratt. Thank you. A couple of things. First of all,
credit scores are not used--I just want to make that clear--I
understand the credit history is used, but not credit scores.
So that's an irrelevant discussion. Credit scores are not used
in employment.
An employer wants to know, when they look at a credit
report, what caused the problem in the credit report. Employers
are smart, and they want to hire good people. That's why they
use resumes, and that's why they use other types of tests of
your qualifications. And that's why a credit report is not a
single determining factor in whether or not you get the job.
And if you show some financial distress over the last
couple of years, employers are smart enough, because it's a
credit history, which shows the full history of your hard work.
It shows, by that band of difficulty is correlating very
closely with the circumstances we have had in this country,
with unemployment. So, an employer is not going to simply flip
that application aside, particularly when they have a qualified
person.
The other very important point--and I keep coming back to
this--is credit reports are not being used across the whole
spectrum for every kind of job. If you're stocking a shelf, a
credit report is probably not being used. If you're entering
the construction trades, a credit report is probably not being
used. It's being used, based on the surveys from the Society
for Human Resources Management, as you would expect, if you are
a CFO, and you have fiduciary responsibilities, if you have
access to cash, a small business owner may want to know that.
And, by the way, small business owners are some of the ones
who do want to use a credit history as part of the review
process. But that's why they have interviews, Mr. Hensarling.
They have interviews to learn more about why you are qualified
for the job, and why you should be the one hired for the job.
Mr. Hensarling. But, Mr. Pratt, ultimately it is your
clients who decide how they wish to use this information. You
are simply observing in the marketplace that most will use it
as a part of an interview process.
I have to admit I have had a number of different jobs,
everything from bussing tables to serving in Congress. And
every job I had to go through a job interview. The one for
Congress was particularly grueling and took a year.
Mr. Pratt. Right.
Mr. Hensarling. So, what you're saying is, this may be part
of a hiring decision. I must admit, as I listen to this
debate--and it is a little bit like Groundhog Day--I suppose a
lot of these issues get recycled--but I continue to be struck
by the mindset that Americans need congressional approval in
deciding what the criteria is they're going to use to make a
hiring decision.
I continue to be struck at this current that is anti-
freedom that says that you have to have congressional approval
in your decision to offer credit. You know, I have read the
Constitution, and I don't see where there is a constitutional
right to force my neighbor to lend me money. I do not see that
in the Constitution.
Again, and so what I see here, in my opinion--and I know
the proponents--I don't question anybody's motives or
intentions, I know their intentions are good. But at the end of
the day, what I see, frankly, are efforts to censor credit
files. This is a form of government censorship, to tell
Americans that there is information that their Congress will
disallow them to have because they're not trusted with that
information, and that somehow it is the responsibility and the
burden of the small business person or the guy who is trying to
do a little store credit in the furniture store in Mineola,
Texas, that somehow they have to justify to the government
their exercise of freedom, as opposed to their government
justifying restricting their freedom. You know, the default
position ought to be freedom. And so I simply don't understand
this current of thought.
Ms. Wu, you talk about having a discriminatory impact in
hiring decisions. But if there are two people who are applying
for a job, and if the employer wishes to use a credit score as
the decision-making factor and you deny him that, and the
person who had the bad credit score, be it his fault, somebody
else's fault, nobody's fault, but if you deny that opportunity,
why aren't you discriminating against the person who had the
good credit record?
And he is denied the job, and yet you would somehow deny
that information from going into the file and essentially de
facto discriminating against the person with the good credit
record. How do you justify that?
Ms. Wu. I mean, employers don't have unfettered discretion
to have all the criteria they want. We do have equal employment
opportunity laws. And one of those is that--
Mr. Hensarling. And is the Obama Administration not
enforcing those?
Ms. Wu. And the practices that have a disparate impact are
prohibited. And we think that the use of credit histories--
Mr. Hensarling. Is the Obama Administration enforcing those
laws or not?
Ms. Wu. The Equal Opportunity--
Chairman Gutierrez. The time of the gentleman has expired.
Ms. Wu. --Commission is looking into this.
Chairman Gutierrez. Thank you. Mr. Green, you are
recognized.
Mr. Green. Thank you, Mr. Chairman. I would like to
associate myself with the comments of the Chair. And I would
also like to ask this panel the same question that I asked a
previous panel, with reference to whether or not one's credit
score is predictive of one's likelihood to have an accident. We
will start with Ms. Wu.
Ms. Wu. I don't think one's credit score has anything to do
with whether one is likely to have--
Mr. Green. Do you know of any study based on empirical
evidence that supports this claim?
Ms. Wu. Not that I am aware of. I am not an insurance
expert, but not--
Mr. Green. All right. Well, let's go to the next person,
please.
Mr. Rukavina. I am not an expert in this area. I am not
aware of any studies that indicate that there is a correlation.
Mr. Green. The next, please?
Mr. Pratt. I would be happy to provide you an answer in
writing.
Mr. Green. Thank you very much. I look forward to your
answer in writing. But as for now, do you know of any studies
that indicate that one's credit score is predictive of one's
likelihood to have an accident?
Mr. Pratt. I have staff who have read those studies. I
personally have not. So I really truly need to--
Mr. Green. I appreciate--
Mr. Pratt. --at least do the right thing and consult with
them first. That's all.
Mr. Green. Thank you. Ma'am?
Ms. Fortney. I am not an expert in this area, but I have
worked with insurance companies. I know that an insurance
score, which often includes a credit score component--is likely
to predict the likelihood that somebody will file a claim,
which means it's likely to predict they will have an accident.
Mr. Green. Well, let's examine that statement. The
likelihood that you will file a claim is indicative of the
likelihood that you will have an accident?
Ms. Fortney. Well, yes.
Mr. Green. How is that?
Ms. Fortney. Well--
Mr. Green. An accident.
Ms. Fortney. I am talking about an accident. And the
question is, when there is an accident, the insurance company
learns about it because a claim is filed. What the insurance
company is trying to predict is the likelihood that a claim
will be filed. That's what they're insuring against.
Mr. Green. I understand. But your indication is that the
likelihood of filing a claim is indicative of how I drive,
whether I am going to have good driving habits, whether I am
going to stop at stop signs, whether I am going to speed,
whether I am going to drive recklessly. The likelihood that I
will file a claim is indicative of how I will drive?
Ms. Fortney. What I said is that if you don't have an
accident, you won't file a claim.
Mr. Green. Oh. Well, I understand. But see, what I can
extrapolate from what you are saying is this: The likelihood of
filing a claim is based upon the likelihood of your having had
an accident, that there is some correlation between the
accident and the claim.
But my question goes to the likely--being--predicting
whether or not you will have the accident itself. That's the
question. Can one's credit score predict whether one will have
an accident?
Ms. Fortney. I think we disagree. I think it's the same
thing.
Mr. Green. Well, okay. I don't see the logic in what you
say. I will accept what you say, but I am hoping that you can
help me with some logic, as opposed to just a statement.
Because it's easy to say things, but where it the logic to
support the notion that one's credit score is predictive of
whether one will have an accident? I don't see it.
And I am asking for empirical evidence. Do you have
empirical evidence to support this premise? Let's not go to the
claims, because if your bills are behind, if you have poor
credit and your bills are behind, you haven't managed your
affairs well, you have an accident. There is a good likelihood
you will use your insurance. So that means there is a good
likelihood that you will file a claim. But does it predict that
you will have the accident that causes you to file the claim?
That's the question.
Ms. Fortney. Well, again, I don't know of any studies on
that point. What I said, however, is that the insurance
companies are pricing according to the likelihood you will file
a claim after having had an accident. That is how credit--
Mr. Green. Well, let's examine that. These will be my last
seconds.
The likelihood that you are going to file a claim. So, do
the insurance companies want people who have accidents to--do
they want to do business with them? Simply because you will now
file a claim, you had an accident--that's what insurance is
for, to be there when you have the accident--so if you--there
is a likelihood that you're going to file a claim, even though
you may not be at fault, then there is some means by which you
are viewed as negative, and therefore, you will pay more?
Ms. Fortney. The nature of insurance is that people who
pose a higher risk of whatever they're insuring against--in
this case, claims--will pay more.
Mr. Green. But they are insuring against now the filing of
claims. You see, it's not the accident. We have escaped the
accident. You have--thin lines of distinction have to be made.
So now we are saying that they don't want to insure you simply
because you filed the claim. Not because you had the accident,
because you're likely to file a claim.
I see that my time has expired, Mr. Chairman. I yield back.
Chairman Gutierrez. The gentleman yields back. The
gentlelady from California.
Ms. Waters. Thank you very much, Mr. Chairman. I have no
questions. I simply want to thank this panel for being here,
and to say that I am focused on working with you and your
legislation.
We know who the insurance companies are. We know what they
do. And for the commissioners who are in bed with them, we just
need some laws that are going to deal with this issue.
I yield my time back to you. Thank you.
Chairman Gutierrez. I thank the gentlelady. I guess the
claim--because I think when we go back through the record, we
are going to find that even the insurance representatives keep
going back to the likelihood of filing a claim.
I have a feeling that I think I know the answer to that,
and that is if you make more money, you are probably less
likely to file a claim. That is to say, let's say you have
insurance on your house. You burn something, right? Cause some
damage. You are probably more likely to just take care of it
yourself, given your extra income and your income status than
filing a claim, because you do not want your insurance premiums
to increase.
Somebody bangs into your car. You are likely to take care
of it.
You are less likely to take care of it and file a claim if
you make less money. It is really about the likelihood of a
claim, I think, more. We are going to delve into this.
Given the fact--I think Mr. Green--they keep using the
words ``likelihood of claim.'' Not likelihood of having an
accident, the likelihood of filing a claim.
I think we have to look at that. I would like to say our
purpose here is not to deny people access to information, but
correct information, accurate information, information that
truly reflects who they are.
I want people to get good information but I do not want
people to get bad information. I think we do have a
responsibility. As a matter of fact, the Equal Opportunity
Commission has gone and said that using information from credit
reports for employment is discriminatory. They are leading
actions against that. People are doing that.
It is interesting that Mr. Pratt represents three of the
people who do the credit industry, and here are the credit
bureaus. Equifax decided last year to stop selling it. They
said no, we are not going to do that any more.
Do you know why, Mr. Pratt, they decided to stop selling it
for employment purposes?
Mr. Pratt. I am not aware they have.
Chairman Gutierrez. You should ask them and come back and
let us know. Again, I do not know. We are going to ask them
because it says, ``Equifax is no longer selling credit reports
for employment screening.'' It says, ``used to determine
eligibility, and while it is perfectly legal under the Fair
Credit Reporting, the company seems to have proactively decided
that selling reports to employers was not worth the trouble.''
In other words, they see trouble on the horizon with this,
probably due to discriminatory actions that might or might not
take place.
We are going to ask them as part of our process. We are
going to ask them to come here. I think it is an interesting
question. If there are three credit bureaus and one of them
does not want to go through the trouble, I would like to know
what the ``trouble'' is.
It is not about denying people information. It is just
correct information. I would encourage everyone here on this
panel and anyone listening, since through Congress and a law
which we on this side of the aisle advocated, you now get your
credit report once a year. It does not give you your credit
score, only the credit report. The credit score is still a
little more murky, but you get your credit report.
Listen, go get one. When you see the mistakes that are in
your credit, that is what we want. It is almost as though we
depart from the premise that the credit bureaus are somehow, I
do not know, omnipotent, they do not create any errors or
mistakes.
I would like to just ask one last question and that is I
want to go back very, very quickly to Mr. Rukavina. They told
us earlier that if I am sick, that it is put in my credit
report but does not have an impact on my credit score. Just
elaborate very quickly on that.
Mr. Rukavina. It is my understanding that collection
accounts go into the credit history portion of a credit score
and that following a hearing before this subcommittee, it was
clarified that medical accounts in collection are used as a
factor in determining credit scores.
What is confusing to me as a consumer and wearing my policy
hat is why medical accounts are treated differently based on
who furnishes the data to the consumer reporting agencies. I am
curious as to whether other data are treated in a similar
fashion, depending on who furnishes it.
Chairman Gutierrez. I thank you. Ms. Kilroy, you are
recognized for 5 minutes.
Ms. Kilroy. Thank you, Mr. Chairman. Thank you to the
panelists. Ms. Fortney, you stated that you believed that
medical debt is predictive in determining an individual's
credit worth?
Ms. Fortney. I believe I said medical debt collection
information. It is my understanding that is the information
that is used in credit scoring, as witnesses testified at the
last hearing.
Ms. Kilroy. Witnesses when they testified at the last
hearing--I ask unanimous consent to enter into the record a May
3rd letter from VantageScore to me.
You believe it is appropriate that we consider medical debt
differently depending on where the information is coming from?
Is that what you are telling us?
Ms. Fortney. No. What I am saying is in credit scoring
systems, as I recall, I think it was the witness from Fair
Isaac that testified, in a credit scoring system, the credit
scoring models they have developed, they used collection
information including medical debt collection information in
the development of those models because that information has
been found to be predictive in the models that are predicting
credit risk.
Ms. Kilroy. You disagree with VantageScore which stated
categorically that, ``We do not believe medical debt will
contribute to predictive performance?''
Ms. Fortney. I have not seen that letter. I would like to
see it before I comment on it.
Ms. Kilroy. Would you agree or disagree with the statement?
Ms. Fortney. What is that statement again?
Ms. Kilroy. Do you agree or disagree that medical debt will
contribute to predictive performance?
Ms. Fortney. What I understand and what I have said is we
are talking about collection information. That statement refers
to medical debt alone without discussing whether that medical
debt information is limited to collection information.
Ms. Kilroy. Mr. Rukavina, you talked about the confusion
and inconsistency in medical debt reporting. You have taken a
look, as I understand, at some medical debt studies. Have you
seen when taking a look at or talking to either lenders or
others an impact that medical debt, including paid medical
debt, may have on a person's ability to obtain, say, a home
loan?
Mr. Rukavina. We have talked with people from the lending
industry who have been confused by the credit scores of
individuals, that they feel are quite good credit risks, and
when they look at the credit report, find there are oftentimes
several either zero balance medical accounts that are in
collection or medical accounts that have a very small balance
in collection.
This to us, based on our experience, indicates oftentimes
not a problem in terms of credit, but a problem regarding the
health care billing system and frankly, the insurance
adjudication process.
These bills are then sent to collection and we have been
told by some in the collection industry that a significant
number of people whom they contact pay off those bills
promptly.
We believe they are doing the right thing by paying their
bills, which is advised by those in the credit scoring
industry, that is something people should do. We believe they
are doing that.
In spite of those bills having a zero balance, they
continue to drag down people's credit scores. We have worked
with some in the industry who have run people's credit history
through a credit score simulator and have found that by
removing medical trade lines in collection, people's credit
scores have increased by 50 to 100 points. These are for
medical accounts that have a zero balance due.
Ms. Kilroy. Would you agree that hurting people's credit
scores with paid medical debt for the 7-year period could have
an adverse effect on America's economic recovery and people's
ability to get a loan, buy a car, buy a house?
Mr. Rukavina. I would absolutely agree.
Ms. Kilroy. Thank you. I yield back.
Chairman Gutierrez. The gentlelady yields back. We have an
unanimous consent request.
Mr. Hensarling. Thank you, Mr. Chairman. I ask unanimous
consent that a statement by the Independent Insurance Agents
and Brokers of America be entered into the record.
Chairman Gutierrez. Without objection, it is so ordered.
The insurance agents apparently got to both of us. Mr.
Cohen, you are recognized for 5 minutes.
Mr. Cohen. Thank you, Mr. Chairman. I appreciate you
allowing me to participate in this panel and for your co-
sponsorship of the bill that we have introduced on credit
reports, which I think is extremely important.
First, I would like to ask Mr. Pratt and Ms. Fortney if you
can help us. It has been reported that at a recent legislative
hearing in Oregon, TransUnion Director of State Government
Relations Eric Rosenberg said, ``At this point, we do not have
any research to show any statistical correlation between what
is in somebody's credit report and their job performance or
their likelihood to commit fraud.''
Are you all familiar with that statement?
Mr. Pratt. I am.
Mr. Cohen. Do you concur or not concur?
Mr. Pratt. I do not because--
Mr. Cohen. Do you have statistical or empirical evidence?
Mr. Pratt. I would be happy to keep going. I do not because
we really need the employers here. It is the employers who make
the decision as to when to make a decision based on--
Mr. Cohen. Thank you, sir. I got an answer and I have heard
it before. You do not have any data to discredit Mr. Rosenberg,
and Mr. Rosenberg does not have anything to support any reports
or any information to support the credit reports.
We are kind of going in a circle, kind of a Catch-22, just
like the persons--
Mr. Pratt. Not really, because it is similar to asking us
whether a creditor effectively uses a credit report for a
lending decision. You have to have the creditor here in order
to answer that question because they are the one that is going
to be able to explain how they use the data, whether they
include medical debts or do not include medical debts.
I think that is very important.
Mr. Cohen. Mr. Pratt, I have a limited amount of time, and
I am not going to go through this because the question was
statistical correlation and there is none.
Let me ask you this. Would you agree--Mr. Hensarling said
we should have freedom and this works against freedom. At one
time, that same argument was used about discrimination laws on
race and gender and other areas, disability.
Would you agree that we should have laws that do not allow
for discrimination based on race and gender? Would you agree
with that?
Mr. Pratt. We have those laws.
Mr. Cohen. You agree they should be on the books; right?
Mr. Pratt. Those laws are on the books.
Mr. Cohen. Do you agree they are good things?
Mr. Pratt. And they work well.
Mr. Cohen. You agree they are good things?
Mr. Pratt. Sure.
Mr. Cohen. And if something operates in practice to make it
de facto or in its application a racial barrier and a racial
discrimination, then we should cure that as well, should we
not, sir?
Mr. Pratt. If that is proven.
Mr. Cohen. Yes, sir. Is it a fact that because of Jim Crow
laws and slavery and years and years of oppression against
African Americans, would you agree that it is more likely that
African Americans would have less opportunities to have
inherited wealth and accumulate inherited wealth from property
or previous jobs or stocks or other bonds and investments of
ancestors who might have owned land or had cotton companies or
shipping companies or whatever, that they would be less likely
to have accumulated wealth that could help them through hard
times?
Would you agree that is a fact? Do you think African
Americans have equal amounts of wealth stored up, even though
they were slaves for 400 years and suffered under Jim Crow for
100 years subsequent to that, Mr. Pratt, would you agree with
that or disagree?
Mr. Pratt. I just do not know.
Mr. Cohen. Obviously, you do not know. I will tell you it
is a fact. Anybody would know it is a fact. We had 400 years of
slavery and 100 years of Jim Crow as distinguished from another
group who had property, who owned slaves, who sold slaves, who
had discriminatory practices where they could have advantages
and they could get credit and they could get loans. They owned
the insurance companies and the banks and the credit bureaus,
so they had the wealth.
When they lose their job or they have a difficult financial
time, they have mama or daddy or grand-daddy's money to fall
back on. Their credit scores are good.
Yet when you look at the credit scores, you say that credit
score indicates whether they do good work and have hard values.
I submit to you good work and hard values is not a constant.
If you have money to fall back on, resources, because of
family wealth, you submit that shows because your credit report
is good that you have good work habits and hard values, that
credit history equals hard work.
That is not necessarily true. Credit history shows you have
family sometimes and you have support from years and years of
opportunity that was denied others, and the fact is the Equal
Employment Opportunity Commission has sued certain people over
the practice of using credit reports because they believe it
has an effect, it is a racial barrier, and there are racial
disparities, and it should be pursued.
I think it should be, too. I think what you are talking
about is a world where all is equal. If you do statistics, Ms.
Fortney, you are great on statistics, I think you were thinking
about fraud and not accidents.
Mr. Green was talking about accidents. There is no way to
predict accidents. Maybe a few people might not file claims
because they can afford it. You are submitting people who have
bad histories might commit fraud, have an accident, which
really is not an accident, so they can make a report and get
some money. I think that is what you are alluding to.
Mr. Hensarling talking about discriminating against the
person who does not have a good credit rating, you do not
discriminate against him, you let that person, he or she
operate against the other person on an equal basis, and the
employer can choose them on who can do the best job.
Mr. Pratt, you said a lot of jobs do not use credit
reports. If that is the case, would you agree that maybe we
should pass a bill to make sure that those jobs that you concur
where they do not use credit reports now, like skills, etc.,
that there should not be the permission to use credit reports?
Could you sit down with us and come up with those
particular industries?
Chairman Gutierrez. Answer the question and then we will
finish up.
Mr. Pratt. I think the laws today respond directly. We
cannot discriminate. We cannot unintentionally discriminate. I
think the way the FCRA works today, employers know they have
responsibilities to decide when it is appropriate to use a
credit report.
I do not think I have seen enough to know precisely when to
choose yes or no.
Chairman Gutierrez. The time of the gentleman has expired.
Thank you, Mr. Pratt.
Mr. Cohen. Thank you, Mr. Chairman.
Chairman Gutierrez. Congresswoman Kilroy, you have a couple
of documents for which you would like unanimous consent to be
entered into the record?
Ms. Kilroy. Yes. Letters of support.
Chairman Gutierrez. We have letters of support. Without
objection, it is so ordered.
I want to thank the witnesses and the members for their
participation in this hearing. The Chair notes that some
members may have additional questions for the witnesses 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 the witnesses and to place their
responses in the record.
This subcommittee meeting is now adjourned.
[Whereupon, at 12:58 p.m., the hearing was adjourned.]
A P P E N D I X
May 12, 2010
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