The latest battle against structural racism has taken a bizarre turn, as progressives have declared that the use of credit scoring for determining certain financial decisions is inherently discriminatory and unfair. Such scores do not take into account anyone’s race, ethnicity, gender, sexual preference, or the like — but focus entirely on a person’s well-documented financial behavior, so go figure.
In Washington state, Insurance Commissioner Mike Kreidler is among those politicians who weren’t about to let the COVID-19 crisis go to waste. He imposed emergency orders banning insurance companies from using credit-based scoring for personal lines of insurance. He’s now attempting to extend that temporary order.
The Legislature also has proposed Senate Bill 5010, which declares, “The use of credit scoring to calculate rates for personal lines of insurance is unfair and has a disproportionate economic impact on the poor and communities of color.” Kreidler now opposes the bill after legislators amended it to freeze rather than ban the use of scores, but this movement is growing.
The commissioner’s latest regulatory proposal is a fait accompli, but it’s worth noting the absurdity of this campaign given that bad ideas have a habit of spreading. Five states have already banned the use of credit scores for determining insurance rates, and it won’t be long before blue states start taking the restrictions even further — perhaps beyond insurance and to limit credit scoring in general.
Progressive activists already have hatched plans to limit the public information that landlords and others can glean about a person’s criminal history. Most everyone supports anti-discrimination laws based on the usual inherent characteristics, but there’s nothing wrong with discriminating against irresponsible behavior. If a loan applicant has a history of foreclosures or financial fraud, shouldn’t a lender consider that information?
Despite his pronouncements about discrimination, Kreidler has inexplicably avoided that argument in his credit-ban rule-making. Instead, the agency argues that “the current protections to consumer credit history at the state and federal level have disrupted the credit reporting process” and that “[t]his disruption has caused credit-based insurance scoring models to be unreliable and therefore inaccurate.”
In other words, he argues that COVID-19 has rendered these scores unreliable because of state and federal loan-forbearance and other rules that allow people to delay paying their bills. Kreidler also said in a statement that because “the federal protections from plummeting credit scores could end soon, we need to take action now to protect the public.”
That’s nonsense. Americans are not taking a credit hit because of the pandemic or dealing with tighter credit ratings — not even close. “Even though millions of U.S. residents continue to feel the painful effects of the COVID-19 pandemic, the national average FICO score increased by seven points in 2020, the largest annual improvement in at least a decade,” according to the Consumer Data Industry Association’s comments rebutting the Washington proposal. CDIA also found that “credit-card debt has fallen by 14 percent and the number of people with subprime scores fell by 3 percent.”
That testimony also quoted a FICO spokesperson who noted that “Missed payments reported are down, consumer debt levels are decreasing and the significant steps taken by both the government [with] stimulus spending and private sector [with] lender payment accommodations … are all contributing to this trend in average score.” Where’s the crisis?
The effort to ban the use of credit scoring seems based on misguided consumer-protection advocacy and has nothing to do with the coronavirus or data. The commissioner’s rule requires the changes to be imposed in a revenue-neutral manner, which means that people with lousy credit scores will face declining insurance rates — and those with good scores will therefore see increased rates.
This proposal is just a means of income redistribution that punishes people who have acted responsibly and rewards those who haven’t been quite so responsible. KOMO-TV in Seattle noted the obvious result: “According to AAA Washington, people with low credit scores will celebrate a rate drop, and consumers with high credit scores should prepare for a rate increase. Senior citizens should expect to pay at least 20 percent more.”
How is that fair? There’s a clear and direct link between using credit scoring (which is slightly different in insurance than in other credit-scoring models) and the tendency of people to make insurance claims. Federal and private data confirm this reality.
“Credit-based insurance scores are effective predictors of risk under automobile policies,” according to a Federal Trade Commission report. “They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer.”
It makes perfect sense. If you had to know one thing about a person to determine their overall level of financial responsibility, you’d want their credit score. We’ve all known poor people who have good scores because they manage their resources carefully and wealthy people who run up credit-card debt and live on the edge. When it comes to insurance, people who live on the edge tend not to be the most responsible drivers or homeowners.
“Basing insurance rates on credit scores magnifies the negative impact of income disparities and systemic racism in our society,” argued Chuck Bell, the advocacy director for Consumer Reports. But if systemic racism is the reason that some people have lower credit scores, then isn’t it unfair to use them for lending and any other purposes? Just wait until this insanity spreads further.
Steven Greenhut is Western region director for the R Street Institute. Write to him at firstname.lastname@example.org.
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