Legislature(2003 - 2004)
03/06/2003 08:01 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 5-INSURANCE DISCRIMINATION BY CREDIT RATING Number 0040 CHAIR WEYHRAUCH announced that the first order of business was HOUSE BILL NO. 5, "An Act prohibiting discrimination by credit rating or credit scoring in insurance rates; and providing for an effective date." [Chair Weyhrauch asked potential testifiers to be available to testify at the next planned hearing, March 29, 2003.] Number 0264 REPRESENTATIVE HARRY CRAWFORD, Alaska State Legislature, sponsor of HB 5, told the committee the process of working on the proposed legislation began about a year ago after receiving complaints from constituents about increased home and auto insurance rates because of bad credit scores; most people want to know what their credit has to do with setting their insurance rates. He said that as he has gone through the process [of working on HB 5], he has decided that credit scoring really has no place in setting insurance rates. CHAIR WEYHRAUCH observed that [HB 5] is broader than HB 47 because it would prohibit scoring for business and personal lines of credit. REPRESENTATIVE CRAWFORD affirmed that. He explained that he wanted to coordinate with members of the Senate and is open to suggestion and modification, if he can be shown a justification for using credit scoring. He noted that Mr. Lessmeier [lobbyist for] State Farm Insurance Company, spent a lot of time the previous year working with him to illustrate what he felt was worthwhile regarding credit scoring. Number 0476 CHAIR WEYHRAUCH requested empirical facts showing that [a consumer's] credit was used to set an insurance rate, the consumer's complaint to the Division of Insurance, and how the Division of Insurance addressed the complaint. REPRESENTATIVE CRAWFORD responded that he could provide lots of anecdotes, but doesn't know how the Division of Insurance has dealt with [incidents] or whether those have been corrected at all. He noted that over the past couple of years there have been no bans or limitations on the use of credit scoring. He told the committee about a phone call [received by his staff] within the past week from a 70-year-old man with human immunodeficiency virus (HIV) who is no longer able to pay his medical bills; because of that, his credit score is almost nonexistent now, and although the man has never had an accident, his insurance rates have almost tripled. REPRESENTATIVE CRAWFORD said the insurance industry was banned from using "red lining" in disadvantaged economic districts. He mentioned studies, including one by the Division of Insurance, which show that credit scoring hurts people in disadvantaged neighborhoods more than in wealthy neighborhoods. For example, a man with two [convictions for driving while intoxicated (DWI)] was given a lower insurance rate because of stellar credit, while some people with great driving records have a change of economic situation - because of divorce, for example - and find their insurance rates skyrocketing. He cited an example of a man who was laid off from a company that didn't allow people with low credit scores to work there because "somebody's selling this as a predictor of theft." He also recalled hearing that Delta Airlines will start color-coding passengers as posing a terroristic threat based in part on their credit scores; he said he can't imagine what use that has as a predictor of a terrorist. Number 0876 CHAIR WEYHRAUCH noted that the bill only addresses credit scores as a function of insurance. REPRESENTATIVE CRAWFORD agreed but said, "It's a slippery slope that's being sold as a predictor for all sorts of things." He explained that elements which go into a credit score are proprietary - secret - and not revealed to the Division of Insurance, which would be required to disclose some of that information if it were in the public realm. He listed what he'd been told are the five components [of a credit score], which are kept secret: 35 percent payment history, 30 percent outstanding debt, 15 percent length of credit history, 10 percent recent new applications or opened accounts, and 10 percent a mix of credit and types of accounts and loans. Number 1022 CHAIR WEYHRAUCH announced his intention to carefully review the report from the Division of Insurance before the next hearing. REPRESENTATIVE CRAWFORD offered his belief that the basic premise of that report is that "they say we can't prove that credit scores don't have correlation with the setting of insurance rates." He added, however, that it can't be proven that they do [correlate]. Referring to examples of past studies showing that people with a certain color of hair or certain zodiac sign were better or worse drivers, for example, he said, "We never would use those things as a basis to set insurance rates, and I think that credit scores have just about as much efficacy as what sign you were born under." Number 1147 REPRESENTATIVE CRAWFORD told the committee about a letter received from Washington, D.C. He said proponents of credit scoring claim that if passed, HB 5 [may] be preempted by the federal Fair Credit Reporting Act (FCRA). Addressing the purpose and intent of FCRA and why he believes the preemption argument is invalid, he told members: First, it's important to keep our terms straight. Proponents of credit scores, particularly those who are claiming preemption of the FCRA, frequently use "consumer reports" and "consumer information" because those are the terms used in the FCRA. The appropriate term, however, in the context of this argument, is "credit score." Credit scores are not consumer information, as contemplated under the FCRA. They are a computation based on consumer information. ... In short, the purpose of the FCRA was to level the playing field between consumers and lenders. Consumers were to be allowed to see the same information used by lenders and underwriters, in a clear and understandable fashion. ... And the use of credit history was regulated to ensure it was accurate and fair to the consumer. The most basic problem with credit scores, in terms of the FCRA, is that they are the result of a secret methodology. The information used is secret, the weight given to that information is secret, and the formulas used to compute those scores from the information [are] secret. As a result, the playing field is no longer level, and the consumer protection afforded under the FCRA has been corrupted. The FCRA was basically a federal floor on legislation. CHAIR WEYHRAUCH asked about any judicial cases on [possible preemption in other states]. REPRESENTATIVE CRAWFORD answered that he doesn't think there have been any challenges so far. In response to a follow-up question, he said he believed the original Act was passed in 1970 and has been modified a few times. He said he thinks the last time it was updated was in either 1996 or 1998, and the credit score was never contemplated and never mentioned until the very last modification, which he thought was in 1998. He added, "But it doesn't say that the use of credit scores is either prohibited or that it should be used." Number 1525 REPRESENTATIVE GRUENBERG said he would appreciate Representative Crawford's presence at the March 29 meeting. He also asked someone from the Division of Insurance to address at the next hearing the question of whether a simpler way to deal with this might be to enact a fair credit reporting Act in Alaska and extend it to insurance, as "insurance consumers' right-to-know legislation." He opined that the real question is a matter of disclosure. [HB 5 was held over.]
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