Groups Blast NAIC For Credit Scoring Meddling

The NAIC credit-scoring working group's "best practices" list, which is still a work-in-progress, discusses issues and questions concerning language and definitions used in state credit scoring laws.

Among them are: what is meant by the prohibition on use of credit scoring as the "sole factor" in underwriting and rating, what constitutes "an adverse action" and how to grant exceptions in cases of "extraordinary life circumstances."

Also, under discussion is how to treat "neutral score/no hit," submission of credit scoring models, and periodic review procedures by insurers of credit information.

During the NAIC spring meeting, that concluded yesterday the credit-scoring working group amended some definitions in periodic review of insurance scores, extraordinary life circumstances and submission to regulator policy.

Joel Ario, Oregon insurance administrator and co-chair of the NAIC's credit-scoring working group, said his fellow regulators have been making good progress. But "we are going to have more discussions about the more difficult and controversial issues, which are ?adverse action' and ?sole use,'" Mr. Ario told National Underwriter.

"We are making progress and we are clarifying that what we are developing here are best practices, not directions to states to do these things."

He stressed that states would take these best-practices guidelines, compare them to their own laws and do their best to apply these best practices in a manner that is consistent with their own state legislative language. "We are hoping to finish the best-practices list by June," Mr. Ario said.

But a number of insurance industry trade organizations at the credit-scoring working group session argued that regulators are wasting their efforts, and that state public policymakers are more qualified and better suited to define the terms of legislation enacted in their own states.

"Over the past few years, more than 30 states passed legislation specifically on credit scoring, and many states have issued regulations," Mr. Snyder of the AIA told working group members.

"But these so-called best practices aren't really best practices; they are not really consensus. They are legislative policies in the guise of best practices," Mr. Snyder said.

Arguing that setting best practices would be setting legislative policy, he noted that many state credit scoring laws do not provide for extraordinary-life-circumstances exceptions.

What the working group is developing, he said, is legislative in nature because many states have looked at this and decided not to go that way. "Some people may agree with the concept of extraordinary life circumstances, but the reality is that you have procedures in your state to legislate on this and issue regulations. Best practices from NAIC are not the way to go about it." Mr. Snyder said.

"Some of us may agree with best practices but they are legislative and can be inconsistent with the language that exists in states that govern what regulators do," he said.

Robert Zeman, senior vice president of industry and regulatory affairs at the Des Plaines, Ill.-based Property Casualty Insurers Association of America, also noted that the issues and definitions discussed in the best-practices document have "already been decided in almost all of the states through statute or regulation."

Mr. Zeman said the working group should focus instead on ways to teach consumers how the use of credit affects their insurance score and how to take better control of their credit history.

Mr. Snyder later told National Underwriter that NAIC, by developing best practices, is being used by special-interest groups who have lost in state after state.

"These special-interest groups are now trying to circumvent the laws that have already been enacted by legislatures and circumvent regulations that have been issued in these states," Mr. Snyder said.

Furthermore, he said, these best practices depart dramatically from the credit-scoring model developed by the Albany, N.Y.-based National Conference of Insurance Legislators, which has been the framework for the credit-scoring legislation in various states.

"This is a truly bazaar procedure?here you have NAIC acting contrary to its sister organization NCOIL and gutting one of the NCOIL models," Mr. Snyder said. "Here, you have NAIC recommending things that are contrary to the laws and regulations put in most of the states according to the processes that are established in law."

For now, though, NCOIL isn't saying much about the credit-scoring working group's efforts.

Candace Frick, director of legislative affairs and education at NCOIL, who attending the working group's session, told National Underwriter that NCOIL model-based legislations have only recently been enacted in various states and that "it would be important to let the NCOIL model work."

"We are watching the working group very closely," said Ms. Frick, who also observed that some best practices the group has offered at the moment seem to complement the NCOIL model, while others appear to go against some provisions in the NCOIL model.

"NCOIL strongly feels that credit scoring is something that can be addressed legislatively," Ms. Frick noted. "But we are always interested in working with NAIC. We are just watching what's going on at the moment and ensure that what NCOIL has done is understood accurately."