Credit scoring will be fair -- or it will be eliminated

Opinion-Editorial
Austin American Statesman
By Jose Montemayor, Texas Insurance Commissioner
Nov. 19, 2003

Texas consumers want and deserve straight talk about credit scoring. Opponents of the practice claim it is arbitrary and prejudiced while the industry claims it is a valid measurement of risk. For these reasons, the use of credit scoring has become an emotional issue in Texas.

Senate Bill 14, passed during the 2003 legislative session, said credit scoring is permissible in Texas. The department's role is to regulate its use and ensure that consumers are not subjected to abusive credit scoring practices.

The department recently adopted rules that will end abusive credit scoring practices in Texas. These rules are the toughest in the country and are the first steps in examining and regulating credit scoring. Texas insurers have filed their credit models with the state and we are examining those models, along with the data that go into them, to determine how accurately they reflect risk.

While the initial rules did not set a cap on price variations due solely to credit scoring, consumers and industry alike must realize that the insurance department will not concede a single percentage point of rate variance based on credit scores to any company that cannot justify it. I am prepared to ban a company's use of credit scoring unless it can prove every point of variance it seeks.

One myth circulating in the current debate suggests consumers who are good risks could see rate relief under an arbitrary rate cap. This is simply untrue and, in fact, the opposite would most likely happen.

The outcome of a one-size-fits-all cap is that good risks -- people with average credit or better -- would probably see substantial rate increases. Even worse, over the long term those with the highest risk would see their already limited choices in the marketplace evaporate because competition for that market segment would disappear. In the end, we would do the worst of harm under the best of intentions. This is not good regulation.

What's worse, many self-described consumer groups advocate such a cap. I am baffled as to why they would want to raise rates for any group of policyholders. This seesaw effect is not what Texans want me doing with their hard-earned paychecks, and it's not what the Legislature intended.
Several of the "consumer groups" are perpetuating another myth that credit scoring is a "rich versus poor" issue. Studies have demonstrated that poor credit is spread consistently through all income groups, as is good credit. People with higher incomes are just as likely to have faulty credit as those with more modest incomes.

The same holds true for claims that credit scoring discriminates against minorities. However, the department will conduct an exhaustive study to determine if credit scoring has a disparate impact on any class of policyholders. If it is proven that credit discriminates based on race or any other protected class, it will be banned.

Before these initial rules were adopted, we had nothing. The department's new rules require insurers using credit scoring to immediately disclose this fact to a consumer once an application is submitted. The disclosure also describes the consumer's rights and protections.

Examples that the disclosure must provide include:

• Notification to a consumer on a cash economy who has little credit history that the absence of credit history must be treated as a neutral factor.
• Identification of each of the statutory prohibitions contained in SB 14.
• Notification for people with past-due medical collection accounts and extraordinary life events as to how credit scoring may and may not affect rate setting.

It is time for all Texans to step beyond the hysteria surrounding credit scoring and work together for real reform. The rules adopted by the Texas Department of Insurance are a strong first step in regulating credit scoring. More steps will follow. However, regulation should not be about setting arbitrary price caps on a product that will punish a particular segment of consumers for no reason. Regulation should be about making sure a product is priced fairly, companies are acting in good faith and consumers have choices in a competitive marketplace. Anything short of that is not good regulation.