Credit Scoring Ban Gets Its Hearing
GRAND RAPIDS — Michigan Office of Financial and Insurance Services Commissioner Linda Watters came to town Wednesday to hear what citizens had to say about Gov. Jennifer Granholm’s proposal to ban the use of credit scoring in determining rates for homeowner and auto insurance sold in Michigan.
Lenders look at credit history information to assess the risk of the person applying for insurance. A credit score is a number indicating the probability that a consumer will pay back money loaned to him.
The new rules banning credit-based insurance scoring would apply only to personal insurance and would become effective Jan. 1, 2005.
The OFIS sought public input on the matter from Grand Rapids residents last week at a scheduled public hearing Wednesday at City Hall. Hearings are set for Detroit and Flint this week, on July 26 and 28, respectively.
A hearing in Lansing last Monday drew 90 people, of whom 15 signed up to publicly comment on the issue, according to Marilyn Maloney, OFIS communication specialist.
Seven spoke in favor of the ban, five against it and three later declined the opportunity to speak, Maloney reported.
Eighty-four people showed up for the Grand Rapids hearing, and 24 chose to testify, Maloney said. Fourteen spoke in favor of the credit scoring ban, while nine speakers opposed it. One person who intended to testify didn’t testify after all, she said.
In addition to taking comments at the Detroit and Flint hearings this week, OFIS will accept written comments until 5 p.m. this Friday, July 30.
According to OFIS, insurance companies have increased their overall base rates to recoup the cost of offering a discount to consumers with good credit ratings. The new rule would eliminate the use of credit scoring for discounts, which OFIS estimates would result in a decrease in base rates of between 10 percent and 45 percent.
The OFIS Buyers Guide to Auto Insurance report indicates that since 1999, the average cost of automobile insurance has risen by anywhere from 45 percent to as much as 90 percent, depending on location. Homeowner rates increased between 86 and 152 percent over the same time period.
Proponents of the ban on credit-based insurance scoring claim the rise in rates has put homeowners and auto insurance out of reach for many Michigan residents. Consumer advocates say minorities and low-income people are being denied insurance or are being overcharged because of undisclosed scoring methods, some of which they say may be irrelevant.
OFIS Commissioner Watters has opined that credit reports are fraught with errors, and that consumer scores can vary from “high risk” to “low risk” depending on which credit reporting agency an insurer uses. Watters said there’s no industry-wide standard mathematical model for use in insurance credit scoring.
“The unreliability of the data in credit reports alone violates the intention of the insurance code,” Watters said upon announcing the proposal.
Opponents of the ban point to research that has shown consumers with better insurance scores generally file fewer claims and have lower insurance losses.
Some additionally question why OFIS decided to focus just on auto and homeowners insurance. They contend that if there are issues with credit scoring, OFIS should be focusing the same concern on all areas of financial services that use credit scoring, such as home mortgage lending, which could have greater financial impact on consumers.
There also is some fear that if credit scoring is banned, non-domicile companies in Michigan may feel Michigan is a bad state to do business in and markets might start drying up.
Many opponents appear to prefer that any new rules come out of the legislative process, via House Bill 5803 and Senate Bill 884, both bipartisan proposals that would codify consumer protections and bring standardization to insurance scoring among carriers.
The legislation would give individuals who feel their insurance score is adverse a remedy to address that issue with the carrier and would also require that insurance companies identify for consumers the four main “reason” codes that impact their credit scores.
The Insurance Institute of Michigan, which represents 44 of the state’s property and casualty insurance companies, contends the ban would hurt the majority of Michigan consumers.
A ban would mean many “responsible” policyholders would no longer receive a discount, said Dyck Van Koevering, IIM general counsel. “In fact, the majority of policyholders will experience an increase in insurance premiums as they begin subsidizing those with poor credit who statistically are the most likely to file an insurance claim.”
OFIS’s Maloney said after all the public hearings are held, OFIS will put together an agency report.
“We review all the comments and respond to all the objections in that report,” she explained. “We hope to get that done in August.”
From there, the agency report, along with any proposed changes to the rules OFIS might decide to recommend as a response to what it heard in the hearings, goes to the state Office of Regulatory Reform and then to the state Legislative Service Bureau for review and approval.
The next stop would be the Joint Committee on Legislative Rules, which OFIS hopes will take place in October, Maloney said.
Within 21 days of receiving all the information, the Joint Committee has to file a notice of objection if it plans to object.
“If they don’t like it, the Legislature acting as a whole can either do nothing, or decide to do nothing and let the rules be filed with the Secretary of State, or they can pass their own bill trying to prevent the rules from taking effect.”
Should the Legislature do the latter, the bill would go directly to the governor.
Should the rules survive the whole process, Maloney said, OFIS hopes to file the new rules with the Secretary of State no later than Nov. 1.
“That would give the insurance companies 60 days to make the adjustments they need to make to be in compliance with the new rules by Jan. 1 of 2005, which is our proposed effective date.”