Backers, Opponents Clash Over Whether Credit Scores Hurt Poor, Minority Buyers

But the study also supports the industry's assertions that insurance scores are "race-blind" by reporting that "credit-based insurance scores appear to have little effect as a 'proxy' for membership in racial and ethnic groups in decisions related to insurance."

Attempting to explain the FTC study's findings, Alex Hageli, manager of personal lines for the Property Casualty Insurers Association of America, said the report "concludes that there's an impact, but it's very minor. That is to say that the stratification of scores that you see on the population in general–the same highs and lows that you see in general–carry over into the individual subgroups."

In other words, while Hispanics, for example, are overrepresented in general among people who have lower scores, when looking at only Hispanics, those with lower scores have a higher estimated risk than those with higher scores–the same correlation as any other group.

"This within-group effect of scores is inconsistent with the theory that scores are solely a proxy for race and ethnicity," the FTC study states.

Consumer groups remain unconvinced. Birny Birnbaum, executive director for the Center of Economic Justice, said that "first of all, the industry mischaracterizes the FTC study, because the FTC did, in fact, find a disproportionate impact on minority consumers. Now the FTC said, 'Oh, it's not that big a deal,' but they made that finding."

Mr. Birnbaum also questioned the study's methodology–particularly the data provided by insurers. He said he believes the report "dramatically understated" the impact of insurance scoring on minorities, but the FTC has issued statements defending its methodology and conclusions.

Mr. Birnbaum also contended that the models used to evaluate credit for insurance purposes focus on socio-economic factors that are stacked against minorities and the poor.

"When you look at the models, you see that they don't focus on whether you pay your bills on time. They focus on a whole host of socio-economic characteristics–the type of credit that you use, the amount of credit that you use; inquiries," he said.

"For example, if you have a department store credit card, whether you pay it on time or not, you get a lower score. If you have a loan from a consumer finance company, whether you pay it on time or not, you get a lower score," he added.

"So think about what the implication of all of that is. Who are the people who use payday lenders and check-cashing operations that don't report to credit bureaus? Who are the people who use consumer finance companies that take 35 percent interest? …[W]hen you look at the [factors] that are actually in the credit-scoring models, what you find is there's a systematic bias against low-income and minority consumers," he concluded.

Industry representatives disagree. David Snyder, vice president and assistant general counsel for the American Insurance Association, declared that "there's no discrimination going on at all," characterizing insurance scoring as "an objective tool that measures responsibility–and it's absolutely race-blind."

He maintained that good and bad credit scores go across all lines of income and race. Furthermore, he said that any information on income or race is not collected or captured when determining insurance scores. "And all the recent, credible studies are showing that it is risk-related and that there is nothing untoward going on," Mr. Snyder concluded.

But while insurers often point to statistics that show the vast majority of consumers either benefit from, or are unaffected by the use of insurance scores, Mr. Birnbaum contends that "if it's an unfair practice, than you ban it. You don't say, 'Well, some people benefit from an unfair practice, therefore we're going to let it go.' We don't care if the majority of consumers benefit from race-based pricing."