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Putting Teeth In Credit Scoring Use

March 27, 2002

Washington State Prohibits Specific Factors For Insurance

By Tom Kelly
Inman News Features

Four short years ago, Washington state was credited with putting some teeth into one of the country?s first anti-spam laws.

Now, the Evergreen State has stepped up to the plate and taken a huge swing against the practice of credit scoring, connecting on a law that outlines how companies can cancel or "non-renew" home or automobile insurance.

Twenty-three other states have legislation pending or have passed legislation that addresses the use of credit scoring in underwriting. However, the majority of the legislation only limits companies from canceling or non-renewing insurance. Washington state?s legislation goes further by prohibiting specific factors from being considered.

The bill now goes to Gov. Gary Locke who is expected to sign it into law.

"Consumers have seen their insurance rates rise or their coverage simply disappear because of an arbitrary factor called a credit score," said Mike Kreidler, Washington State Insurance Commissioner. "The passage of ESHB 2544 ensures that fairness will be the number one factor in determining whether you get insurance coverage and how much you will have to pay."

ESHB 2544 states that an insurer cannot use a consumer?s credit score to cancel or non-renew personal lines of insurance and that the following factors can no longer be used to deny insurance coverage or determine rates:

  • The number of credit inquiries.
  • Credit histories based on collection accounts identified with a medical industry code.
  • The initial purchase or finance of a vehicle or house that adds a new loan to the consumer?s existing credit history.
  • The use of a particular type of credit card, debit card or charge card.
  • The total available line of a consumer?s credit.
  • If an inaccurate credit history is used, the insurer must reissue or rerate the policy retroactive to the effective date of the current policy term.
  • The absence of a credit history must be evaluated based on demographics
"The prohibited factors outlined in this bill reflect the key complaints we heard from consumers," Kreidler said. "Time and again, we heard from consumers who demanded to know why, despite no claims or late payments, they were either non-renewed or saw their rates increase."

Insurance companies contend that FICO scores are accurate forecasters of the number of insurance claims a consumer will file. Opponents say credit scoring is unfair, discriminatory and merely a method used by insurance companies to increase their rates and bottom lines.

The FICO scoring system, developed by San Rafael, Calif.-based credit analysis firmFair, Isaac and Co. Inc., also has a controversial history in the home-loan game. FICO scores quickly became the most misunderstood element for borrowers attempting to qualify for a residential mortgage. In fact, you can ask professionals who have been in the business for more than a decade and they cannot even come close to explaining how FICO arrives at scores.

Fair, Isaac develops techniques to calculate consumer credit scores, known as FICO scores, which many lenders rely on to measure risk. Other industries, like insurance, also have jumped on board. The lower the score, the higher the risk.

Most lenders say FICO scoring is not the only thing they consider when evaluating a borrower. It?s simply one way of gauging the borrower's ability to repay. Traditional values -- such as job outlook and cash in the bank -- supposedly hold as much weight with mortgage lenders.

Some of the general categories that comprise the score include delinquencies, amounts owed, and length of time that credit has been established. The company lists an additional 16 specific indicators of credit-worthiness that checks.

While the new California bill forbids insurance companies from using credit scores to cancel or refuse to renew a policy, it does allow companies to use a credit score to shift consumers to a different, affiliated company with a more expensive program.

Talk about expensive . . . while the spam law enacted June 11, 1998 does not prohibit all unsolicited electronic mail, it does makes it illegal to send an e-mail to for from a computer in Washington state with false or misleading information in the subject line.

A single violation can generate damages of $500, or actual damages incurred by the recipient, whichever is greater. In addition, a violation of the law is also an unfair and deceptive practice under the Evergreen State?s Consumer Protection Act, which could tack on treble damages and automatic attorney fees for each violation.

Thus, a single illegal message sent to 100 people could, if trebled, generate damages of $150,000 plus attorneys fees.

If you push "send," watch your wallet.

Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk show host. He can be reached attom@inman.com .

Copyright: Inman News Service



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