Group Says Study Backs Credit Scoring

Group Says Study Backs Credit Scoring

NU Online News Service, April 19, 4:08 p.m. EDT?Critics who contend insurers' use of credit records to rate applicants has a "disparate impact" on minority and lower economic groups are misreading discrimination law, according to a study written by an insurance industry lobbyist.[@@]

In a paper published by the Washington Legal Foundation, Robert Detlefsen asserted that group variations with respect to credit scoring do not justify restricting the use of the practice in personal lines underwriting.

Mr. Detlefsen serves as public policy director for the National Association of Mutual Insurance Companies.

"Disparate impact analysis was originally conceived as a legal theory for use in Title VII employment discrimination lawsuits," he said.

But he noted that in examining recent case law, "courts have increasingly come to recognize that serious economic problems would result if the Title VII version of the disparate impact doctrine became the template from which courts, legislatures and administrative agencies reflexively construct disparate impact standards for other areas of commerce such as financial services."

A recent Texas Department of Insurance study asserted that credit-based insurance scoring allows for more accurate underwriting. But critics of the practice point out the study's finding that average credit scores vary among different racial and ethnic subgroups within the population.

The WLF study maintains that if credit card issuers and other businesses can cite legitimate uses for race-neutral evaluation criteria that produce disparate impacts, there is no reason the insurance industry should not be able to.

Birny Birnbaum, director of the Austin-based Center for Economic Justice, said that the premise behind disparate impact theory is that you can't use a proxy to create discrimination that is otherwise prohibited. "Since all states prohibit rate discrimination on the basis of race, why should states allow insurers to use a proxy for race to create the same discriminatory results?" he asked.

Mr. Birnbaum said that initially the insurance industry "stonewalled" regulators when they attempted to look at credit scoring. That only ended when states started to threaten to ban the practice around 2002.

"At that point, the insurance industry stopped issuing denials of disparate impact and started the new phase of credit scoring defense?an attack on disparate impact," Mr. Birnbaum asserted. "The history of insurers' use of credit scoring shows that insurers will say and do anything to defend this practice."

Today credit scoring is used in an estimated 45 states with about half that number regulating it under the National Conference of Insurance Legislators model law backed by the industry.