Common Sense On Credit Scoring?

Rep. Mel Watt posed what he called “common sense questions” this week about the use of credit scoring by insurers to underwrite and price auto policies. Since good credit scores can help drivers get a cheaper quote on their auto insurance, he wondered: If I get my credit score up, would it make me a better driver? He also turned the query on its head by asking whether those with poor credit scores are necessarily worse drivers. Let me know how you would respond, and read on for other interesting issues raised this week.

Beyond the vexing questions posed by Rep. Watt–the North Carolina Democrat who chairs the Financial Services Subcommittee on Oversight and Investigations, which had a hearing on credit scoring in insurance this week–Rep. Maxine Waters, D-Calif., threw down her own gauntlet.

As reported by our own Matt Brady, Rep. Waters said that recent material crafted by the FTC aimed at helping minorities raise their credit scores to obtain better insurance rates was a tacit acceptance of inherent discrimination. You do take a position, in the way that you decided to handle your so-called consumer education, she said to an FTC commissioner testifying at the hearing, J. Thomas Rosch.

Mr. Roach tossed that hot potato right back at her. We are not in a position to say whether that is right or wrong, because that is a policy decision to be made by the states.

One subcommittee member who defended the use of credit scores prefers to remain agnostic (that is, blissfully ignorant) on the subject.

Ranking minority member Gary Miller, R-Calif., said the fact that several reports have found credit scores to be a significantly useful tool for helping insurers assess risk is good enough for him. He added that he didnt see the need to determine why credit scores are an effective predictor of insurance risk, even if there might be a disparate impact of some sort.

I dont know why gravitys there, either, but it is, he said. (In other words, don't confuse me with a lot of facts.)

The FTC is going to be studying the use of credit scores by homeowners insurers next, although there is some debate about the value of requiring carriers to provide data on demand this time around–as opposed to the auto study, where industry participation was voluntary. By mandating data submissions, you might get a more valid read–but then again, you may not, and that complication could delay the ultimate report by two or three years.

So while insurers likely don't want to be compelled to do anything by Congress, in this case, they might welcome Uncle Sam's demands to stall for more time on this heated issue.