A bill has been filed to amend the federal Fair Credit Act to ban the use of credit information in rating and underwriting decisions in some circumstances. H.R. 5633, would bar credit-based insurance scoring, a common practice in personal lines property/casualty insurance, in cases where there is a government finding of discrimination or when credit information could be used as a “proxy” for race or ethnicity.
The bill has been referred to the House Financial Services Committee, and is co-sponsored by both the panel’s chairman, Rep. Barney Frank (D-Mass.) and the chairman of its Subcommittee on Oversight and Investigations, Rep. Melvin L. Watt (D-N.C.). Introduction of the bill drew a sharp response from property/casualty insurer trade groups, with the National Association of Mutual Insurance Companies, American Insurance Association and the Property Casualty Insurers Association of America all decrying the legislation.
Background: Several years ago, the issue of credit-based insurance scoring rose to the federal level in part because of the concerns raised by the real estate and lending communities. Pressure had been brought to bear on them for still not meeting the “equity” ratio required by their community fair credit requirements as lenders must evidence to the federal government. As a result, lenders liberalized their credit scoring assessments in terms of granting loans. When their data still showed poor performance, lenders advised that it was because insurance scoring prevented too many of their newly approved loans to secure the required insurance. A federal bill that began to develop in the House was side tracked by Congress asking for a GAO report.
At the same time, litigation was moving through the courts involving direct state insurance law/regulation/oversight on what constituted permitted insurance scoring practices versus the federal government’s (i.e. FTC) view that they had direct rule/oversight of this issue that pre-empted states in these matters. PIA was an amicus on this case through the 9th circuit decision. The outcome was, as usual, not clear in terms of state versus federal authority, but the FTC boldly issued new FTC insurance credit scoring discussions and rules (July 2007).
Last, again at the same time, FTC had advised Congress in December 2005 that it did not have oversight of the insurance business for purposes of Do-Not-Call, which dragged FCC into that fray. Many Members of Congress were astonished and wanted FTC to have such oversight.
Now with the economy under pressure, people are being squeezed and, in their fight to save their economic position, claiming it is the insurance scoring that is putting them out of business because they can’t get the insurance they need to meet all the other obligations of their business operations.
What It Means to Agents: This bill is of deep concern to PIA for two reasons. First, there is a “hot trail” on insurance credit scoring on Capitol Hill that could easily ignite, enabling this bill to be picked up and rushed through.
Second, and more importantly, the bill violates state-federal authorities with regard to the business of insurance, ignores the McCarran Ferguson Act and, even absent those reasons, on its own merits is arbitrary and confusing in its lack of precise definition. The triggers outlined in the bill that would engage FTC decisions and pre-emption are too vague.
What It Means to Industry: For those Optional Federal Charter (OFC) supporters, think long and hard as insurance people about all this and consider. OFC is the formal federal opening to have the FTC and other federal pre-emption actions explode throughout the business of insurance. Having an OFC-type structure in banking hasn’t caused banks to avoid FTC oversight and/or conflicts about FTC vs. OCC vs. Fed vs. state oversight of their credit scoring activities, as well as other matters.
March 27, 2008