Texas Legislator Calls Credit Scoring Immoral

In a statement last night, he said he was rebuking Insurance Commissioner Jose Montemayor, who, in a letter with the report, said that the credit rating process was an accurate predictor of claim volume, and that he could not legally ban it by regulation.

Credit scoring, he said, "significantly improves pricing accuracy when combined with other rating variables in predicting risk."

Outlawing the practice for home and auto insurance would dislocate the market and raise prices, Mr. Montemayor said.

"I am deeply disappointed by my good friend, Commissioner Montemayor's flawed decision on credit scoring," said Sen. Ellis.

The senator said that Texas Department of Insurance studies have "flatly shown that credit scoring discriminates against African-Americans, Hispanics and people with moderate incomes. With this decision, Commissioner Montemayor has turned his back on the Texans who most need his help."

Sen. Ellis, who is an African-American, referred to the first part of the department's study released last December, which found that younger, poorer and minority group members tended to have the worst credit scores.

Mr. Ellis said these findings "clearly demonstrated that credit scoring discriminates against and has a disproportionately negative impact on African-Americans, Latinos, and people with moderate incomes."

He noted study findings that African-American Texans have a credit score that is, on average, 10 percent to 35 percent lower than a credit score of Anglo-Texans, while Hispanics have a 5 percent to 25 percent lower credit score than do Anglos.

"Do tornadoes avoid people with good credit scores?" said Sen. Ellis. "Are African-Americans and Hispanics–who are far more likely to have negative credit scores–far more likely to be bad drivers? If the answer is no, then why is credit scoring legal?"

In 2003, the Texas Legislature voted to approve credit scoring with limitations, as well as to require an impact study, and give the insurance commissioner the authority to set the percentage amount by which the price of a home or auto policy can vary as a result of credit scoring.

"It doesn't matter if credit scoring is actuarially justifiable, it is morally unacceptable," said Sen. Ellis. "Commissioner Montemayor needs to stand up for what is right and protect Texas consumers."

The report was welcomed yesterday by the Property Casualty Insurers Association of America as proving the validity of the credit scoring practice, and today by Neil Alldredge, state affairs director for the National Association of Mutual Insurance Companies in Indianapolis, who called it "the final nail in the coffin of opponents to credit-based insurance scoring."

"The data have convinced the Texas insurance commissioner, a self-admitted skeptic, that this legitimate underwriting tool is what the industry
and other studies have said–credit Scoring accurately predicts the likelihood that a person will file a claim for both auto and homeowners insurance," he said. "Moreover, credit scoring is not unfairly discriminatory because credit scoring is not based on race."

He noted that the department had performed a multivariate analysis that considered the relative impact
of other rating variables in addition to credit score.

Mr. Alldredge also mentioned Mr. Montemayor's comment that a ban on credit scoring "would be a setback to all Texans, of all races,
especially those of moderate-to-lower income whose risk remains low."