[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                  THE IMPACT OF CREDIT-BASED INSURANCE 
                      SCORING ON THE AVAILABILITY 
                     AND AFFORDABILITY OF INSURANCE

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 21, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-113

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

43-699 PDF                      WASHINGTON : 2008 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 





                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma                  KEVIN McCARTHY, California
BILL FOSTER, Illinois                DEAN HELLER, Nevada
ANDRE CARSON, Indiana

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
              Subcommittee on Oversight and Investigations

                MELVIN L. WATT, North Carolina, Chairman

LUIS V. GUTIERREZ, Illinois          GARY G. MILLER, California
MAXINE WATERS, California            PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         RON PAUL, Texas
MICHAEL E. CAPUANO, Massachusetts    STEVEN C. LaTOURETTE, Ohio
CAROLYN McCARTHY, New York           J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida                   MICHELE BACHMANN, Minnesota
TIM MAHONEY, Florida                 PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KEVIN McCARTHY, California












































                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 21, 2008.................................................     1
Appendix:
    May 21, 2008.................................................    57

                               WITNESSES
                        Wednesday, May 21, 2008

Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America........................................................    32
Keiser, Hon. George J., Representative, State of North Dakota, on 
  behalf of the National Conference of Insurance Legislators 
  (NCOIL)........................................................    17
McCarty, Hon. Kevin, Insurance Commissioner, State of Florida, on 
  behalf of the National Association of Insurance Commissioners 
  (NAIC).........................................................    15
Neeson, Charles, Senior Executive, Personal Lines Products, 
  Westfield Group, on behalf of Property Casualty Insurers 
  Association of America.........................................    38
Parnes, Lydia B., Director, Bureau of Consumer Protection, 
  Federal Trade Commission.......................................    14
Poe, Eric, Chief Operating Officer, Cure Automobile Insurance....    36
Powell, Lawrence S., Ph.D., Professor, University of Arkansas at 
  Little Rock....................................................    42
Pratt, Stuart K., President, Consumer Data Industry Association..    40
Rice, Lisa, Vice President, National Fair Housing Alliance.......    34

                                APPENDIX

Prepared statements:
    Carson, Hon. Andre...........................................    58
    Hunter, J. Robert............................................    59
    Keiser, Hon. George J........................................   101
    McCarty, Hon. Kevin..........................................   112
    Neeson, Charles..............................................   168
    Parnes, Lydia B..............................................   173
    Poe, Eric....................................................   181
    Powell, Lawrence S...........................................   193
    Pratt, Stuart K..............................................   214
    Rice, Lisa...................................................   233

              Additional Material Submitted for the Record

Watt, Hon. Melvin:
    Information from the Web sites of AllState, State Farm, and 
      Travelers Insurance Companies on what factors they consider 
      in determining rates.......................................   245
    USA Today article entitled, ``Credit scores' link to 
      insurance rates tested''...................................   251
    Responses to questions submitted to J. Robert Hunter.........   252
    Responses to questions submitted to Lydia Parnes.............   254
    Responses to questions submitted to Eric Poe.................   257
    Responses to questions submitted to Lawrence S. Powell.......   272
Miller, Hon. Gary:
    Letter from the American Insurance Association, the Financial 
      Services Roundtable, the Independent Insurance Agents and 
      Brokers of America, the National Association of Mutual 
      Insurance Companies, and the U.S. Chamber of Commerce......   279
    Statement of the National Association of Mutual Insurance 
      Companies..................................................   280
    Statement of Michael J. Miller and EPIC Consulting...........   289
    Statement of the Property Casualty Insurers Association of 
      America....................................................   294
    ``The Use of Occupation and Education Factors in Automobile 
      Insurance,'' State of New Jersey, Department of Banking and 
      Insurance, dated April 2008................................   296


                  THE IMPACT OF CREDIT-BASED INSURANCE
                      SCORING ON THE AVAILABILITY
                     AND AFFORDABILITY OF INSURANCE

                              ----------                              


                        Wednesday, May 21, 2008

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128 Rayburn House Office Building, Hon. Melvin L. Watt 
[chairman of the subcommittee] presiding.
    Members present: Representatives Watt, Gutierrez, Waters, 
Green, Klein, Boren; Miller, McHenry, Royce, Barrett, Roskam, 
and McCarthy.
    Ex officio present: Representative Bachus.
    Also present: Representative Lynch.
    Chairman Watt. This hearing of the Subcommittee on 
Oversight and Investigations of the Financial Services 
Committee will come to order.
    I will recognize myself for 5 minutes or less for an 
opening statement.
    This is the second in a series of hearings held by the 
Oversight Subcommittee to gain more information about the use 
of consumer credit information in the underwriting and rating 
of personal lines of insurance, including automobile and 
homeowners' insurance.
    These hearings are warranted because this practice, known 
as ``insurance scoring,'' and its derivative products referred 
to as ``credit-based insurance scores,'' or simply ``insurance 
scores,'' cries out for careful evaluation to determine whether 
it is consistent with good public policy.
    We learned at the Oversight and Investigation 
Subcommittee's first hearing in October of 2007 that almost all 
major insurance companies use credit-based insurance scores in 
some way. Consequently, nearly all Americans who drive cars or 
own homes must also have good credit if they are to avoid 
paying high insurance premiums, regardless of their individual 
claims history or driving record.
    We also learned through a report by the FTC that while 
credit-based insurance scores are predictive of claims risk, or 
claims, no one can explain why this is the case. We also 
learned from the last hearing that in three out of four lines 
of automobile insurance, credit-based insurance scores serve in 
some measure as a proxy for race. However, given the data 
concerns with the automobile study that witnesses discussed 
extensively at the last hearing, the full extent of the proxy 
effect still may not be known.
    Despite perceived shortcomings of the data, the FTC report 
concluded that there was some ``proxy effect'' from the use of 
credit-based insurance scores, and as noted by a dissenting 
Commissioner, ``Given the incompleteness of the data, it is 
unclear whether the actual proxy effect might be greater.''
    Even a minor proxy effect for race gives rise to the most 
serious public policy concerns. I don't think anyone should 
favor a system in which either directly or indirectly, racial 
classifications are allowed to hinder a person in their daily 
lives, whether in being considered for employment, getting an 
education, buying a home, getting credit, or purchasing 
financial products like automobile and homeowners' insurance.
    Because of these major public policy concerns, two bills 
have been introduced. One, H.R. 5633, introduced by 
Representative Luis Gutierrez, the chairman of the Domestic and 
International Monetary Policy Subcommittee of the Financial 
Services Committee, would reign in the use of credit-based 
insurance scoring by prohibiting the use of credit-based 
insurance scores where the Federal Trade Commission finds 
evidence of racial discrimination, or that credit-based 
insurance scores serve as a proxy for race.
    The second bill, H.R. 6062, introduced by Representative 
Maxine Waters, chairwoman of the Housing and Community 
Opportunity Subcommittee of the Financial Services Committee, 
would prohibit the use of credit-based insurance scores 
altogether in underwriting or pricing personal lines of 
insurance.
    I am going to digress just long enough to say that I am a 
cosponsor of both of these bills. I actually think I start with 
the assumption that there really shouldn't be a connection 
between somebody's credit score and their insurance premium any 
more than there should be a connection between somebody's 
driving record and whether they get credit.
    But I guess I am willing to be convinced that perhaps there 
is some utility in the use of these scores, but I am not sure 
that I can be convinced that if they are a proxy for race, we 
can justify their use as a matter of public policy, even if 
there is a correlation between credit scores and insurance 
premiums, or underwriting of insurance.
    So, I am on both bills. I am trying to keep somewhat of an 
open mind on this issue, but we don't legislate in this 
committee anyway. We just have hearings and build a record, so 
my presence on either one bill or the other probably has no 
significance to my role as chairman of the subcommittee. That 
is just to put everything on the record.
    We hope to shed more light on the pros and cons of each of 
these two proposals, H.R. 5633 and H.R. 6062, as well as 
consider changes or other options that might be appropriate at 
today's hearing.
    We look forward to hearing from the witnesses about the 
potential impact of H.R. 5633 and H.R. 6062 on consumers and 
the insurance industry. And with that, I will recognize my 
colleague, the ranking member of the full Financial Services 
Committee, Mr. Bachus, for 5 minutes.
    Mr. Bachus. Thank you, Chairman Watt, for holding this 
second hearing before your subcommittee on the impact of 
credit-based insurance scoring on insurance availability and 
affordability. Let me say at the onset that I acknowledge your 
concerns and those of Mr. Gutierrez. I know that Congressman 
Green has what I think are good-faith concerns, as has 
Chairwoman Waters. So certainly I enter this hearing with an 
open mind.
    Credit scores, as we all know, are widely used for a number 
of purposes other than lending, including employment 
interviews, apartment rental applications, government licenses, 
mobile phone services, as well as insurance, which brings us 
here today. Credit scoring actually can help individuals who 
manage their financial affairs responsibly, I believe, to get a 
number of benefits that they might not otherwise receive, based 
on traditional underscoring criteria such as age, gender, zip 
code, or income.
    So actually I believe in certain cases--and studies have 
validated this--people have actually benefitted from their 
credit scores through cheaper insurance or availability of 
insurance. In fact, I think the FTC confirmed this in a recent 
study that found the use of credit scores greatly increases 
fairness and affordability for consumers of insurance products.
    They found that more responsible and thus lower-risk 
drivers get cheaper coverage, but they also found that higher-
risk drivers enjoy greater access to insurance because insurers 
can more accurately price their risk.
    They further found that ``Credit-based insurance scores 
appear to have little effect as a proxy for race, although 
every predictive factor the FTC analyzed had a slight disparate 
impact on certain ethnic groups.'' And I think that, obviously, 
is the subject matter of Mr. Gutierrez' legislation.
    For example, they found that prior claims history had a 
disparate impact on various ethnic groups, with nearly the same 
percentage of proxy effect to predictive value as credit-based 
insurance scores. So the use of credit scores for various 
purposes--not only has the FTC studied it, but it has been 
extensively scrutinized by State regulators. I will just 
mention two.
    The Texas Insurance Department recently analyzed 2 million 
insurance policies and found a direct and non-discriminatory 
correlation between insurance scores and expected losses. It 
found that the average automobile insurance losses for people 
with the worst credit scores are double those for people with 
the best credit scores, while losses on homeowners' policies 
for people with the worst credit scores are triple those of 
people with the best scores. The Texas Department further found 
that these scores were not unfairly discriminatory or based on 
race or income.
    A second study, this one by the Arkansas Insurance 
Department, yielded similar results, including a finding that 3 
times as many consumers received lower insurance rates because 
of credit score use than received higher rates. In short, the 
evidence from these studies appears pretty clear that credit 
scores are one of the most accurate non-discriminatory 
predictors of insurance risk available.
    However--and I think maybe this would be a good starting 
point for us to make some agreement--most States, after lengthy 
deliberation, have chosen to adopt a model law developed by the 
National Conference of Insurance Legislators, and that model 
recognizes the benefits to consumers of using credit-based 
insurance scores, but prohibits using credit information as the 
sole basis for increasing rates or denying canceling or failing 
to renew coverage.
    The model act also includes a number of safeguards, 
including prohibiting insurers from taking an adverse action 
against an insured with no credit history. In other words, 
recent immigrants with no credit history would have to be 
treated as having a neutral credit score.
    In closing, Mr. Chairman, as used in the insurance 
underwriting process, credit scores appear to be highly 
predictive of, and many times lower the cost of insurance for 
consumers. I think they encourage responsible behavior, and 
they are closely regulated by the States. And I think any 
legislative attempt to limit or prohibit their use in 
evaluating risk should be done so very carefully.
    I thank you.
    Chairman Watt. I thank the gentleman for his opening 
statement. I now recognize Representative Gutierrez for 5 
minutes.
    Mr. Gutierrez. Thank you very much. I ask that my complete 
statement be entered into the record.
    Chairman Watt. Without objection, it is so ordered.
    Mr. Gutierrez. Thank you very much. I thank Chairman Watt 
for calling this hearing, and I appreciate the comments of 
Ranking Member Bachus, and I thank everybody for joining us 
here.
    I just think that if you have a good driving record, if you 
stop at stop signs, you don't go through red lights, you don't 
speed, you don't crash into people's cars, and you don't let 
your daughter use the car so she can let her boyfriend crash it 
as they go out dating, if you act in all these responsible 
manners, you should get a good insurance rate, regardless of 
what your credit score might be.
    Now I remember when I wasn't a Member of Congress, and I 
remember going to get my first--I couldn't get a credit card, 
so I had to get a store card--I remember, Montgomery Ward is 
now defunct, I think. But that was the only place. And you got 
$200 worth of credit there, and then you moved up to J.C. 
Penney, and you got another $200 there, and you paid that 
faithfully, because that was the only way to get credit. I was 
a college graduate, I had a good job, I just couldn't get 
credit--couldn't get a mortgage, couldn't buy a house.
    But I got those two store cards. Finally, they gave me a 
credit card, my first VISA credit card. And I remember that 
they suspended it after 2 years just because arbitrarily they 
decided one day that I had paid the bills on time, but they 
just suspended it. I don't know why. I was pretty angry. I 
remember calling the 1-800 number like 100 times, thinking 
about how much damage I could cause, inflict some kind of 
financial pain on them, because they did it for no reason.
    I'm sure they wouldn't have done that if they thought I was 
going to be, you know, a subcommittee chairman on the Financial 
Services Committee one day. Because I still remember the credit 
card company that--they didn't cancel my card, they said, 
``Thank you for the $35 annual fee. Keep paying, but you can't 
charge anything more on that credit card.''
    Now look, we should all understand our personal experiences 
and the experiences of consumers in America. I just want to 
reiterate: If you drive safely, if you stop at stop signs, if 
you don't speed, you don't have accidents, you maintain your 
car, and you're a safe driver, that should be primarily how it 
is you get scored in terms of how much insurance you pay. And I 
think that should be the ultimate goal.
    If there are other criterion, maybe we should try to 
balance and blend them.
    Thank you very much, Mr. Chairman.
    Chairman Watt. Thank you for your statement.
    I recognize the ranking member of the subcommittee, my good 
friend, Mr. Miller, for 5 minutes.
    Mr. Miller. Thank you, Chairman Watt, for holding this 
hearing today. This is the second hearing we have had on the 
impact of credit-based insurance scores on the availability and 
affordability of insurance.
    As numerous States, Federal agencies, and private experts 
have concluded in studies on this topic, credit-based insurance 
scores do indeed make insurance more available and affordable 
for consumers.
    Over 30 years ago, Congress passed the Fair Credit 
Reporting Act, permitting insurers to use credit information to 
underwrite insurance. Since the law's enactment, several 
studies have been conducted on credit-based insurance scores, 
showing a strong correlation between credit history and the 
likelihood of filing insurance claims.
    The credit information enables most consumers to qualify 
for lower insurance rates, since most consumers have good 
credit. Insurance companies have even reported that credit 
scoring may in some cases counter-balance the imperfect driving 
record of individuals.
    After questioning the legitimacy of using credit scores to 
underwrite risk, and expressing concerns that the scoring 
method was discriminating against minorities, Congress directed 
the Federal Reserve Board and the Federal Trade Commission, 
FTC, to study the effects of this practice on credit and 
insurance markets, and report their findings to Congress in the 
2007 FTC study on the use of credit reports and automobile 
insurance, and the Commissioners confirmed that credit scores 
are accurate and objective predictors of risk.
    That conclusion drawn by the FTC showed that for 
financially responsible consumers, credit scores decreased 
insurance rates. The FTC also confirmed that credit scores make 
insurance more available for many riskier consumers, for which 
insurance would not otherwise be able to be determined an 
appropriate premium.
    The FTC disproved concerns that insurance scores somehow 
serves as a proxy for race, finding 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.'' Further, the Commission found that insurers do not 
use risk models that contain information about race, ethnicity, 
or household income.
    The Federal Reserve Board reported similar findings in 
their study last year on credit. The Board concluded that 
credit scoring likely increases the consistency and objectivity 
of risk evaluation, thus helping diminish the possibility that 
credit decisions would be influenced by personal 
characteristics or other factors prohibited by law, such as 
race or ethnicity.
    The favorable study by the FTC and the Federal Reserve 
Board regarding the beneficial use of credit scores have been 
echoed by similar findings in the States. For example, the 
Texas Department of Insurance conducted extensive research on 
credit scores and reported that there is no way to determine 
race, ethnicity, gender, age, or economic status by checking a 
person's credit information.
    The Texas study also found that drivers with good credit 
are involved in 40 percent fewer accidents than those with poor 
credit. In addition, homeowners' insurance claims for people 
with bad credit are triple that of people with a better credit 
history. In fact, the vast majority of States have thoroughly 
examined the use of credit risk insurance scores and approved 
their use for pricing risk.
    After years of deliberation and study, the National 
Conference for Insurance Legislatures, NCOIL, established a 
model allowing the use of credit information in personal 
insurance as long as it is not the sole factor used in 
underwriting. The NCOIL model has been adopted by 26 of the 
States and prohibits insurers from denying, canceling, or non-
renewing coverage due only to credit history.
    According to the NCOIL in most of these States, insurers 
are unable to deny consumer's insurance based on a thin credit 
history or no credit at all. The FTC's conclusion, studies on 
auto insurance involved a research team of career Ph.D.'s, 
economists, and consultations with communities, civil rights, 
consumers, and housing groups, government agencies, and private 
companies, examination of records, and assurances of 
reliability and independently tested data. Facts and facts and 
conclusions are comprehensive and incontrovertible.
    Yet after the study was concluded, several of my colleagues 
were unsatisfied with the result and challenged the 
Commission's data gathering, insisting that the FTC subpoena 
further information from insurers. The purpose of this action 
is unclear to me, considering the fact the Commission testified 
in October that ``The insurance industry was cooperative and 
forthright with the FTC throughout the process of gathering 
data and analysis.''
    They further testified of the extensive cost and drain on 
resources to the Commission. In more recent discussions with 
the FTC, I have learned that extensive automobile studies have 
already cost millions of dollars--that is millions of taxpayer 
dollars--and that the compulsory request for data from insurers 
for the homeownership study would cost taxpayers as much as 
double or triple the amount we have already paid.
    I am glad we are going to have the hearing again. I hope 
that maybe some new information has been gathered. I don't know 
if that is going to be the case; but I just have a concern when 
we are using subpoena powers on an industry that the testimony 
to-date has said has been cooperative. And I also have a 
concern about the privacy of the information we might gather in 
the future. The Freedom of Information Act is very broad, and I 
am concerned that might apply here.
    I yield back. Thank you.
    Chairman Watt. I thank the gentleman for his comments. And 
while that is not the issue directly today, we had an extensive 
discussion about that at the last hearing. That is the FTC's 
decision. We have not directed them to do anything; we just 
asked them to get us good information. And if they decide that 
they need subpoenas, fine; if they decide that they do not need 
subpoenas, if they can get us a good report that tells us what 
the impact of credit-based scoring is, then that is for the FTC 
to decide. But we are not trying to micromanage that; I want to 
assure the ranking member of that.
    Are there any other members who wish to make opening 
statements? I am just trying to get a gauge, so I know how much 
time to divide--one, two, three on this side; and one on the 
other side. Okay.
    I recognize Mr. Green for up to 5 minutes, if he chooses, 
and then we will go to the other side.
    Mr. Green. Thank you, Mr. Chairman. And if I may, let me 
start by thanking you for allowing me to become a part of the 
committee. I thank you and the ranking member for accepting me 
as a member. This is my first hearing. And to you and the 
ranking member, I greatly appreciate your having this hearing, 
because it is something that has been of concern to me for some 
time.
    I especially thank the ranking member for his comments. He 
and I have had many conversations, and I have found him to be a 
person who is principled and who moves forward based upon what 
he sincerely believes to be the case. Notwithstanding the fact 
that he and I may have differences, we do have one thing in 
common, and that is we enjoy our conversations with each other 
about our differences.
    My concern with this is as was indicated previously: The 
connectivity between one's credit score and one's driving 
habits. I am hoping to hear information that can help me to 
better understand that relationship between one's credit score 
and one's driving behavior.
    I especially concern myself with this because we have young 
drivers who have no credit scores. It is not unusual for 
parents to add their children to their insurance, and these 
children, generally speaking, have little or no credit. How is 
it that they will inherit the credit of the parent and become a 
risk by virtue of having been born into a certain family? Is 
that the way it will work? Do they have a different standard 
for young drivers who have no credit score, who have not had a 
track record of driving at all, but perhaps they have been to a 
driving school and they have had all of the safety courses, 
such that one might conclude they understand the rules of the 
road? They don't have a track record of poor behavior. I don't 
see the connectivity between such a person and a credit score.
    It seems to me that if we are not careful, we are going to 
make it almost impossible to be poor in the richest country in 
the world. The richest country in the world; 1 out of every 110 
persons is a millionaire. But it costs to be poor in America. 
You pay more for your insurance; you ride on roads that will do 
more to your vehicle because of where you live if you are poor, 
generally speaking. You will probably have to get more wheel 
alignments. You probably go a store that has prices that are 
higher than in some other neighborhoods.
    And I think that at some point, we have to examine the 
notion of whether we ought to do things just because we can. 
Maybe you do have the right to do it, but the question is: Is 
it the right thing to do?
    I am looking for the cause of connection between a credit 
score and one's driving behavior.
    Mr. Chairman, I thank you for the time, and I yield back.
    Chairman Watt. I thank the gentleman for his statement. The 
gentleman from California is recognized for 3 minutes.
    Mr. Royce. Four minutes, Mr. Chairman?
    Chairman Watt. Four minutes. Okay.
    Mr. Royce. Thank you, Mr. Chairman. I appreciate you 
holding this hearing.
    I would also just like to express my opposition to the 
concept here of banning the use of credit-based insurance 
scores, because from the studies I have seen, this is a very 
effective predictor of the actual risk. It is a predictor of 
the number of claims that the consumers file; it matches the 
total cost of those claims. Credit scoring is not based on 
race. And I think the FTC's report, which came out in July, 
explained this benefit as have other studies. We have seen a 
number of studies on this subject.
    In the competitive marketplace which exists throughout most 
of the auto insurance sector, companies have an incentive to 
provide the lowest actuarially sound rates for the customers. 
In most instances, a potential customer can get several quotes 
on auto coverage in a matter of minutes over the Internet or by 
picking up the phone.
    Companies have even began to offer their prices along with 
the prices of their competitors in the names of attracting 
additional business. If there are inefficiencies, if there are 
gaps in coverage, I think a logical place to look would be the 
current State-based insurance regulatory system. With the 
exception of Illinois, every State subjects property and 
casualty insurance products to varying degrees of government 
price controls. And of course, that discourages companies from 
operating effectively and efficiently in those States.
    Additionally, the bureaucratic delays weigh heavily on the 
rates paid by consumers. The American Consumer Institute 
recently found that the cost of excessive regulation at the 
State level is $13.7 billion annually, paid for by insurance 
buyers through higher premiums. If Congress really wants to 
improve the ability of consumers with weaker credit histories 
to obtain more economical quotes on insurance coverage, we 
should be looking at ways to bring more competition to those 
markets.
    In the Wall Street Journal, on May 6th, there was an 
editorial on the Massachusetts Miracle, and that highlighted 
the recent move by Massachusetts to remove its government-set 
rates on auto coverage, and as the editorial noted, Progressive 
Insurance, the third largest insurer in the country, entered 
the market May 5th with rates 18 percent below the old price-
controlled rates. Overall, premiums in the State are going to 
fall 8 percent this year as insurers adjust to a world in which 
they need to compete to attract customers instead of bargaining 
with their regulator for price hikes.
    If more States saw the economic implications of price 
controls, or if Congress would consider our legislation to 
create an optional Federal charter, a greater number of 
consumers, including those this legislation was intended to 
help, would be on the receiving end of more products, and 
certainly with much lower premiums.
    So in closing, I would caution my colleagues against 
enacting legislation which leads to banning the use of credit 
scores by insurance providers as one of the many factors 
included when setting premiums. I believe the majority of 
consumers would see higher costs for insurance products if that 
happened, because their provider would not be able to set 
actuarially sound premiums.
    And again, Mr. Chairman, I offer this other alternative, 
and I would like to thank you for holding this hearing. I look 
forward to the testimony, and I appreciate the witnesses coming 
out to speak to us today.
    Thank you, Mr. Chairman
    Chairman Watt. I thank the gentleman for his presence and 
for his opening statement. I recognize my colleague from North 
Carolina, Mr. McHenry, for 3 minutes.
    Mr. McHenry. I appreciate the chairman's recognizing me. 
And I do appreciate him holding this hearing as well.
    I think we should have a discussion about how to improve 
and how to accurately assess credit risk in all financial 
service products. But it is interesting here that the 
discussion is about whether or not a credit score should be 
used, and it is but one of the tools in the tool chest to 
assess risk.
    From what I have read in some studies, it is one of the 
most effective ways of assessing risk. Insurance is not simply 
an individual's right, but it should be the ability of the 
company to accurately assess risk, so that they can more 
accurately seek payment for that. And I think as such, credit 
scores are a worthy example of the way an insurance company can 
assess risk.
    I don't think it should be the be-all end-all, and from 
what I understand from the industry, it is not.
    But I would just go back to my experience in college with 
credit cards. My experience is pretty simple. You know, you go 
and rack up the credit card debt, which I did, buying 
cheeseburgers, pizza, and many other things in college, but I 
had to pay the consequences for that.
    And my credit score reflected that, and as such, I was a 
greater credit risk because of how much fun I had in college, 
and how I paid for it. And I think that is a fair assessment of 
how this works.
    I think we should go to an additional step--and I would be 
happy to work with the chairman on this--I do think the issue 
is not about the insurance industry using credit scores; I 
think it should be about how these credit scores are derived.
    There are a number of different items that are not included 
in a credit score that could better assess risk for 
individuals. For instance, most of us have to pay a power bill 
every month. I think that would be a positive credit indicator. 
And I think if the insurance companies could see that they 
regularly pay their power bill every month, and have never 
missed a payment, maybe that would be a stronger indicator 
rather than their overall credit score on whether or not they 
will pay for their insurance, and be a greater risk.
    I think that's a fair assessment. I think we should look at 
credit scoring rather than really I think a symptom of the 
underlying disease, which is how these credit scores are 
derived. I think that's a positive thing; I think we could have 
some bipartisan support, and I look forward to working with the 
chairman on those items. Thank you so much for having the 
hearing today.
    Chairman Watt. I thank the gentleman for his opening 
statement, especially his confessions of his college years. I 
am glad he cut it off where he did.
    [Laughter]
    Chairman Watt. I recognize the gentleman from Illinois, Mr. 
Roskam, for 3 minutes.
    Mr. Roskam. Thank you, Mr. Chairman. And Mr. Chairman, 
thank you for holding this hearing today. I attended the last 
hearing, and I understand where the Majority is coming from in 
holding the first hearing. And that is, it's a pretty 
interesting narrative, that if you can thread the pearls to 
suggest that there is a racial component to a predominant 
American industry, manipulating a marketplace on the backs of 
minority groups, that is powerful. That would be outrageous, 
and all of us would be outraged, and we would be like-minded 
and say, ``That ought not to happen.''
    But as I listened to the testimony last time, and 
particularly the study from the Federal Trade Commission, what 
I heard was essentially that it wasn't happening that way. 
There were some consumer groups who were testifying, and the 
more I listened--it's kind of like talking on talk radio to the 
weird caller that calls in: The more you listen, the more 
disjointed it starts to sound. So I kind of discounted that in 
terms of testimony.
    And then, as I have been thinking about this, I have come 
to the conclusion that there are a lot of similarities between 
credit scoring and student grades and good student discounts. I 
mean, is there a relationship between someone's driving record 
and their performance on a history test? Is there a 
relationship between someone's driving record and their 
performance on their calculus final? Is there a relationship 
between someone's driving record and their performance on their 
English composition? Well, we can't really articulate what it 
is, but it just so happens to be that it always sort of seems 
to work out, and that it is a predictor.
    So as I was listening to the hearing last time, and I'm 
just doing research as to this other hearing that has been 
prompted, in Illinois, as it turns out, there is a carrier in 
Illinois that is using this, and they are actually increasing 
their book of business into South Chicago, which is a 
predominantly minority community.
    And so I think what we do today--if this sort of goes the 
direction that I think it might go--what we do is we risk 
taking away tools from carriers to offer more coverage to more 
people, regardless of race and ethnicity and the unintended 
consequence, I think, becomes a self-fulling prophecy, and it 
becomes more difficult for folks to get the type of coverage 
they need. They are pushed into more residual markets. They are 
forced to go with the substandard insurance carriers with the 
great names. What I have learned is the more glorious the name 
of the insurance company, generally the worse the coverage is, 
and that, I think, is where we ought not to go.
    So I come with an open mind as well. But I also come, 
having listened to the testimony of the last hearing and being 
completely underwhelmed, and hoping that this bodes better in 
terms of the things that we are able to conclude.
    I yield back.
    Chairman Watt. I thank the gentleman for his opening 
statement, and I hope he is not underwhelmed. I thank him for 
being at the earlier hearing, as well as today's hearing, and I 
think the audience and the witnesses recognize that there is a 
range of opinions on this issue, and a willingness and openness 
to understand how this system works, so that we can make good 
public policy. That is, after all, the reason we have these 
hearings, to try to get more information about what is 
happening and what the real life impacts are.
    So with that, are there any other members who seek to make 
an opening statement? We have probably gone a little beyond 
what we would ordinarily do in opening statements at a 
subcommittee level, but this is an issue that even the 
attendance suggests is an issue that people recognize as 
important. And so I apologize to all of those in attendance if 
they haven't wanted to hear these opinions, but it sets the 
basis for our moving forward.
    Without objection, all other members and members who have 
made opening statements, their full opening statements will be 
made a part of the record, if they wish to submit opening 
statements.
    We will now introduce the members of the first hearing 
panel, and without objection, the witnesses' written statements 
will be made a part of the record, and each witness will be 
recognized for a 5-minute summary of their testimony.
    I am going to recognize my good friend from Florida, Mr. 
Klein, to do his ``all-politics-is-local'' introduction of his 
State insurance commissioner. Mr. Klein?
    Mr. Klein. Thank you, Mr. Chairman.
    I appreciate that opportunity, having served in the Florida 
legislature for 14 years and having the privilege of serving 
with one of our panelists today, Kevin McCarty, who is the 
commissioner of the Office of Insurance Regulation in Florida. 
We have been faced with a number of complicated insurance 
issues in Florida, some of which have been taken up by this 
committee, and of course today's issue is just another one that 
requires some expertise of a broad variety. I think that Mr. 
McCarty, with his work in our Department of Labor and 
Employment Security, and his work on worker's compensation 
issues, will be very helpful.
    He has worked in our department for many, many years. He 
helped the investigation and response following the devastation 
of Hurricane Andrew. He became our first insurance 
commissioner, appointed in 2003, and has served in that 
capacity ever since, but particularly for today's purposes, he 
is very active with the National Association of Insurance 
Commissioners, which as we all know, is our 50-State member 
organization that gives us the State perspective, and it is 
very valuable when we are establishing Federal policy.
    So I just want to welcome Commissioner McCarty, and I look 
forward to his and our other panelists' comments.
    Chairman Watt. I thank Mr. McCarty for being here also. I 
will proceed with introducing the other two witnesses on the 
first panel, and then I would like to go back and take Ms. 
Waters' opening statement, if that is okay with the members.
    The first witness on this panel is Ms. Lydia Parnes, the 
Director of the Bureau of Consumer Protection at the Federal 
Trade Commission. All of the Commissioners were tied up in a 
meeting today, and asked us to allow Ms. Parnes to testify on 
behalf of the FTC, and we told them that we thought she would 
do a better job anyway.
    [Laughter]
    Chairman Watt. So we thank her for being here.
    The third witness on this first panel will be the Honorable 
George J. Keiser, State Representative of the State of North 
Dakota, who will be testifying on behalf of the National 
Conference of Insurance Legislators. We welcome all of the 
witnesses.
    Without objection, I would like to deviate and go back and 
take the opening statement of Ms. Waters, who was just able to 
get here. We thank her for being here; she is the lead sponsor 
of one of the two bills that we are having the hearing about 
today. I recognize the gentlelady for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. I certainly 
thank you for convening this second hearing on the impact of 
credit-based insurance scores on the availability and 
affordability of insurance.
    The first hearing you held on this topic last October was 
very enlightening, but also troubling. In fact, I was so 
disturbed by some of the testimony that I, along with Mr. 
Gutierrez, introduced H.R. 6062, the Personal Lines of 
Insurance Fairness Act of 2008, to ban the practice of using 
credit scores in the underwriting or rating of insurance 
premiums.
    I am looking forward to hearing our witnesses' testimony on 
this topic, but I must say that the findings from the first 
hearing deeply concerned me. The hearing covered a report 
released in July 2007 by the Federal Trade Commission. The 
report found that credit-based insurance scores, which are 
developed and used by the insurance industry, serve as a proxy 
for race in three out of four lines of automobile insurance.
    Specifically, the report found that when credit-based 
insurance scores are used to predict claims risk, the predicted 
risk of African Americans and Hispanics increases by 10 percent 
and 4.2 percent, respectively. Conversely, the predicted risk 
for whites decreases by 1.6 percent.
    To address the proxy issue, Mr. Gutierrez and Mr. Watt 
introduced, of course, as you have already said, legislation 
that would prohibit the use of credit scores for insurance 
underwriting when a proxy effect is found.
    However, I must disagree with this approach. While we must 
do something to address the disproportionate racial impact of 
this practice, I am also concerned about the overall fairness 
of this practice. Specifically, credit scores have little, if 
no bearing on how likely a person is to have a car accident, to 
break speed limits, or to otherwise engage in risky driving 
behavior that could result in an insurance claim.
    I know that the industry maintains that there is some 
correlation between low credit scores and increased claims 
risk; however, a correlation does not imply causation.
    I wonder if we would permit other possible correlations, no 
matter how unrelated to claims risk, to be used to set 
insurance premiums. For example, if research is found that 
there was a correlation between zodiac signs and increased 
claims risks, would it be appropriate to allow such a 
correlation to be used as a metric for setting insurance 
premiums?
    To make someone pay more for insurance because of a 
situation in their financial circumstances that has nothing to 
do with their risk as a poor driver or irresponsible homeowner 
is simply unfair. It is simply unfair. It is unfair to recent 
immigrants, to the elderly, and to low-income Americans, all of 
whom have little credit history.
    Furthermore, it is unfair to those Americans who have been 
hit by the foreclosure crisis, and are now struggling to 
rebuild or to re-establish their credit.
    I could go and on, talking about whom all it is unfair to, 
but recently, friends of mine were hit with an extraordinary 
health crisis. They had paid their bills all of their lives and 
done well, and because of the burden that were confronted with, 
they fell behind in their payments. And of course, their credit 
scores went down.
    They are good people. Should that credit score have any 
impact on their ability to purchase insurance? I don't think 
so. Traditional underwriting standards worked with little 
problems for several decades before insurance companies began 
using them for underwriting purposes.
    I am interested to hear our witnesses explain why these 
standards were abandoned, and how they continue to justify the 
use of credit scores for underwriting, given the concerns I 
have raised.
    Thank you, Mr. Chairman. I appreciate your accommodating my 
coming in a little bit late, and I will yield back the balance 
of my time.
    Chairman Watt. I thank the gentlelady for being here both 
for the first hearing and for this hearing and for her proposed 
legislation.
    We are now ready to recognize the witnesses, and each one 
of you will be recognized for 5 minutes to give a summary of 
your written testimony. The green light will come on at the 
beginning, at 4 minutes a yellow light will come on, and at 5 
minutes a red light will come on. We would ask you, at that 
point, to wrap up the thought that you are involved in. We do 
have a second panel and a number of members who wish to ask 
questions, so we want to try to keep this moving if we can.
    With that, I will recognize Ms. Lydia Parnes, Director of 
the Bureau of Consumer Protection at the Federal Trade 
Commission for a 5-minute opening statement.

  STATEMENT OF LYDIA B. PARNES, DIRECTOR, BUREAU OF CONSUMER 
              PROTECTION, FEDERAL TRADE COMMISSION

    Ms. Parnes. Thank you very much. Chairman Watt, Ranking 
Member Miller, and members of the subcommittee, I appreciate 
the opportunity to--
    Chairman Watt. Can you pull that microphone a little bit 
closer to you? And if somebody has an empty seat beside them, 
would they just kind of raise their hand, so that others who 
are standing might be able to take a seat? I think there are 
enough seats in here for everybody who is standing, unless you 
just want to stand. But if you do, I wish you wouldn't stand, 
blocking the door.
    Pull the microphone very close to you, because I was having 
a little trouble hearing you. And make sure it is on.
    Ms. Parnes. Is it working now?
    Chairman Watt. Yes.
    Ms. Parnes. Better?
    Chairman Watt. Thank you.
    Ms. Parnes. Okay. Thank you.
    I do appreciate the opportunity to appear before you today, 
as you consider the impact of credit-based insurance scoring on 
the availability and affordability of insurance. As members of 
this subcommittee are aware, insurance companies have 
increasingly used credit-based insurance scores to decide 
whether and at what price to offer automobile and homeowners' 
insurance to consumers.
    Industry representatives and other proponents contend that 
by using these scores, insurance companies charge consumers 
premiums that conform more closely to their individual risk of 
loss. However, consumer advocates, civil rights groups, and 
others believe that the use of these scores results in racial 
and ethnic minorities paying higher insurance premiums than 
other consumers.
    To provide insight on the effect of credit-based insurance 
scores, Congress, in FACTA, directed that the Commission study 
the effect of these scores on the availability and 
affordability of insurance, including the particular impact on 
racial and ethnic minorities.
    In 2007, the Commission released a report discussing the 
results of a study of the use and effect of credit-based 
insurance scores on consumers of automobile insurance. The FTC 
provided the subcommittee with views about this report during 
its testimony last October. Today, I am pleased to provide an 
update on the FTC's ongoing study on the use and effect of 
credit-based insurance scores on consumers of homeowners' 
insurance.
    Last week, the Commission approved a resolution authorizing 
the use of compulsory process to obtain data for this study. 
The FTC intends to issue orders to the nine largest homeowners' 
insurance companies, representing roughly 60 percent of the 
market of private homeowners' insurance in the United States in 
2006.
    The FTC has placed on its Web site a draft order setting 
forth in detail the information it intends to seek from 
homeowners' insurance companies. The Commission is seeking 
public comment for 30 days on this draft order consistent with 
FACTA's direction that the Agency consult with consumer groups, 
civil rights and housing groups, government officials, and the 
public at large on the design and methodology of these studies.
    After receiving public comments and making appropriate 
revisions, the Commission will serve orders on the nine largest 
homeowners' insurance firms in the United States. The FTC would 
be pleased to keep the subcommittee and its staff informed as 
the study progresses.
    I know, as you have mentioned, this subcommittee is 
considering two bills addressing the use of credit-based 
insurance scores. H.R. 5633, the Nondiscriminatory Use of 
Consumer Reports and Consumer Information Act of 2008, would 
amend the Fair Credit Reporting Act to prohibit the furnishing 
or use of a credit-based insurance score if the Commission 
determines that the use of scores results in racial or ethnic 
discrimination or represents a proxy or proxy effect, per race 
or ethnicity. H.R. 6062 would ban the use of credit scores in 
insurance underwriting.
    The FTC has a longstanding commitment to law enforcement 
and education efforts in fair lending, and believes that it is 
vitally important to protect consumers from illegal 
discrimination based on race or ethnicity.
    The Commission, however, has deferred to Congress as to 
what legislative measures, if any, are appropriate in this 
area. I would note, however, that from a purely drafting 
perspective, H.R. 5633 would impose liability based on the 
determinations of FTC econometric research studies. As 
discussed in greater detail in the Commission's testimony, the 
FTC has concerns about using its studies as a trigger for 
liability.
    Thank you for your attention, and I would be pleased to 
answer any questions that you may have.
    [The prepared statement of Ms. Parnes can be found on page 
173 of the appendix.]
    Chairman Watt. Thank you so much for your testimony.
    Commissioner McCarty, you are recognized for 5 minutes.

      STATEMENT OF THE HONORABLE KEVIN MCCARTY, INSURANCE 
   COMMISSIONER, STATE OF FLORIDA, ON BEHALF OF THE NATIONAL 
         ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

    Mr. McCarty. Chairman Watt, Ranking Member Miller, and 
members of the subcommittee, I want to thank you for the 
opportunity to testify on the use of credit-based insurance 
scores and the provision of personal line insurance products. I 
am Kevin McCarty, the Insurance Commissioner in Florida. I am 
also here representing the National Association of Insurance 
Commissioners.
    Proponents have argued over the years that credit scores 
are predictive of the future losses based on the insurance 
claims experience, and are a necessary and inexpensive 
underwriting tool. Critics argue that the use of credit scores 
discriminates against protected classes of people.
    Technology over the years has allowed insurance companies 
access to enormous amounts of new information, including credit 
reports. Although some of this information may show actuarial 
relationships with insurance claims, this does not 
automatically make it an appropriate, fair, and valid criteria 
for insurance purposes.
    The most notable example of this is the use of race-based 
rates. In 2002, the NAIC concluded several multi-State 
investigations on companies that historically rated life 
insurance differently based on the race of the applicant.
    Even today, Caucasians born in the United States have a 
longer life expectancy than African Americans. Based purely on 
this actuarial science, this would indicate a higher premium 
for life insurance. While the outcome of African Americans 
paying more is correct from an actuarial perspective, it is 
certainly counter to equal protections for Americans and is an 
abhorrent public policy.
    The use of credit reports represents many potential 
problems. Consumer report studies show that 50 percent of the 
credit reports contained errors, which can be exacerbated today 
by the increased amount of identity theft and the proliferation 
of our access to credit.
    Thus, even if the methodologies were correct, it is 
possible that inaccuracies in the reports may in fact 
invalidate their use.
    Credit reports also disproportionately and negatively 
affect the recently divorced, recently naturalized citizens, 
the elderly, those of certain religious beliefs that do not 
believe in the use of credit, and younger individuals who have 
not established credit histories.
    The overwhelming problem with the use of credit scoring is 
the relationship between credit scores and race, ethnicity, and 
income.
    The 2004 Texas Insurance Department study previously 
referenced that African Americans have an average credit score 
of 10 to 35 percent below that of Caucasians. Hispanic scores 
were roughly 5 to 25 percent below.
    I do not believe the insurance industry uses credit scoring 
to intentionally discriminate or impact minorities. Yet, recent 
empirical studies demonstrate a negative impact on these 
protected classes.
    I am also concerned about other tools that share many of 
the same characteristics of using credit scoring. A year ago, I 
held a public hearing in Florida on occupational and 
educational rating as an underwriting factor for private 
passenger autos. Testimony at the hearing and information 
gathered as a result of that indicated that insurers would 
refuse to study the underwriting practices on minorities and 
low-income consumers.
    I'm especially troubled by the growing use of occupational 
and educational rating, and would encourage the subcommittee to 
broaden the scope of its investigation to consider these unfair 
regulatory practices.
    The 2007 FTC report was very disappointing. The narrative 
appeared very one-sided in support of the predictive powers of 
credit scoring, while equally downplaying the negative impacts 
on protected classes of citizens.
    I did agree with one aspect of the FTC report, that the 
State insurance regulatory community has identified credit 
scoring as a problem and has taken action. As previously 
mentioned, 48 States have passed some legislation limiting the 
use of credit scoring. Many States have adopted laws that 
require regulators to have access to the internal operations of 
the credit-scoring models, that the decisions are not based 
solely on credit reports, and that consumers be notified of the 
use of these reports, and if there is any adverse decisions 
based on their credit scores.
    It is my sincere desire that the Federal Government assist 
the States in its regulatory efforts to address this important 
issue and better protect our consumers.
    The proposed bill, H.R. 5633, has many favorable 
provisions. My colleagues around the country and I welcome a 
more comprehensive study by the Federal Trade Commission to 
determine if the use of credit reports disparately impacts 
minorities and does in fact create a proxy effect.
    I am also personally in favor of H.R. 6062, which 
implicitly accepts the notion that credit scoring disparately 
impacts minorities based on a 2007 study.
    Thank you for holding this hearing and for inviting me to 
participate. I look forward to your continued leadership on 
this very important consumer protection issue.
    [The prepared statement of Commissioner McCarty can be 
found on page 112 of the appendix.]
    Chairman Watt. Thank you so much for your testimony.
    Representative Keiser, State Representative, State of North 
Dakota, is recognized for 5 minutes.

 STATEMENT OF THE HONORABLE GEORGE J. KEISER, REPRESENTATIVE, 
STATE OF NORTH DAKOTA, ON BEHALF OF THE NATIONAL CONFERENCE OF 
                 INSURANCE LEGISLATORS (NCOIL)

    Mr. Keiser. Chairman Watt, Ranking Member Miller, and--
    Chairman Watt. Pull that microphone closer to you.
    Mr. Keiser. Thank you very much for inviting NCOIL to 
participate in this process.
    Using objective methods, which are blind to ethnicity, 
gender, income, and other factors, credit scoring may offer a 
consistent, accurate, and valid way to underwrite and rate 
risk, and may mean lower prices for many consumers, primarily 
those with lower risk.
    However, NCOIL has taken a position that as State 
legislators, we are concerned about any abuses that might occur 
relative to the application of the credit scores. We encourage 
laws that understand and accommodate and benefit consumers. For 
example, our model has looked at the impact on seniors, has 
looked at the impact on young people, has addressed the 
situation where people have an extreme financial crisis occur 
in their life, and we have attempted to adopt that and address 
that.
    There are 26 States which have currently adopted the NCOIL 
model that has been developed and it appears to be working 
relatively well in those States. We believe that an appropriate 
approach is to allow the States to take the NCOIL model and to 
modify it when appropriate for their States.
    Well, what is the NCOIL model and what does it do? The 
NCOIL model is non-discriminatory. It assists the young, old, 
and those who suffer extraordinary events, and requires the 
provision of updated credit information. It goes beyond Federal 
law by prohibiting insurers from calculating scores based on 
income, gender, address, zip code, ethnic group, religion, 
marital status, or nationality. It also prohibits denying, 
canceling, or non-renewing coverage due solely to a credit 
score, or from basing renewal rates solely on credit.
    Consumer protection under the NCOIL language, an insurer 
must use data taken within 90 days from the time of adverse 
action. It must be disclosed to the consumer that when adverse 
action is taken, a consumer has the right to appeal or object 
to it. The insurance companies are required to review any 
objection and to address it.
    Relative to consumers, for young people, for old people who 
don't have credit--many of the panelists in their opening 
comments addressed that--the NCOIL model requires either in the 
cases of what would term ``thin credit'' that the credit be 
treated either as neutral on the credit score or in a positive 
manner.
    Inquiries are another big issue relative to credit scores. 
The NCOIL model offers common sense restrictions on how 
insurers can treat inquiries the credit card companies make 
before sending out promotional offers; inquiries based on 
consumers wisely shopping around for deals on auto and home 
loans; collection accounts related to sickness or other medical 
events; and bad credit resulting from extraordinary events like 
divorce, illness, or death of a spouse, as mentioned earlier.
    The NCOIL model says that insurers can give these 
extraordinary victims a credit pass in those situations. The 
insurer must re-underwrite and re-rate using new data. If the 
consumer has overpaid as a result of a mistake made, then they 
are eligible for a credit or refund for that amount.
    If the insurer does take an adverse action due to credit, 
the insurer must give up to four good reasons why. The insurer 
must be clear up-front that credit will be used.
    In conclusion, we appreciate the work of the subcommittee 
to ensure that credit history is used fairly. The 26 States 
regulating credit scoring based on the NCOIL model have 
responded effectively to an issue demanding a timely solution. 
States as diverse as New York, North Dakota, Texas, and Maine 
have successfully used this model to meet their different 
demographics.
    We ask that you recognize the efforts States have made to 
balance consumer protection with the need for healthy insurance 
markets and that one-size-fits-all doesn't work.
    Federal legislation that would satisfy the laws of these 
States is unneeded and may actually bring higher rates for 
consumers who are benefitting from their good credit.
    Thank you for the opportunity to appear, and NCOIL looks 
forward to working with your committee, Mr. Chairman.
    [The prepared statement of Mr. Keiser can be found on page 
101 of the appendix.]
    Chairman Watt. Thank you so much for your testimony, and I 
thank all of the witnesses for being here today.
    I will now recognize each member of the subcommittee for 
questions of this panel, and I will recognize myself for 5 
minutes. I may be a little aggressive in enforcing the 5 
minutes against us, since we have a second panel to go after 
this panel, also.
    Representative Keiser, how, if at all, would you 
distinguish between this, the use of credit scoring here, and 
the public policy position that we have taken with respect to 
life insurance, where there is an actuarial, predictive 
documented relationship? We have said that as a matter of 
public policy, this is unacceptable; and even more recently in 
the House at least, and I think maybe even in the Senate, we 
have passed a bill that prohibits genetic information from 
being used. How do you distinguish this from that, if you are 
able to do that?
    Mr. Keiser. Well, Mr. Chairman, I'm not sure that I am 100 
percent qualified to answer that question. But let me say that 
NCOIL, as the policymakers in the State on insurance issues, is 
extremely concerned in protecting valid predictors of risk, 
whatever they might be--
    Chairman Watt. Even if it is race--
    Mr. Keiser. Let me just finish. If they can validly predict 
risk--and I question, although it's done, that grade point 
averages for high school students can be a valid predictor of 
risk for insurance companies, that family history can be a 
valid predictor for health, when I have an application for life 
insurance or health insurance; that age can be a valid 
predictor--those are all valid predictors, we are committed to 
protecting the industry's opportunity to use valid predictors 
and at the same time protecting the consumer to ensure that 
invalid application of predictors doesn't occur.
    In the NCOIL model, what we attempted to do--
    Chairman Watt. I understand that. You are going back, and I 
only have 5 minutes, so I am not trying to argue with you on 
this; I can't distinguish these things.
    Let me also, just as a factual backdrop, get you and Mr. 
McCarty, if you would, to distinguish between--or is there a 
distinction between being a valid predictor of risk versus a 
valid predictor of claims? Which one have you determined that 
credit scores are valid predictors of?
    Mr. Keiser. Mr. Chairman, I'll answer first, and then 
Commissioner McCarty can answer.
    Chairman Watt. Go right ahead.
    Mr. Keiser. It is my understanding that it is a valid 
predictor of claims that--
    Chairman Watt. Okay--
    Mr. Keiser. That credit score is valid predictor of 
claims--
    Chairman Watt. Okay. And that is different, is it not, from 
being a valid predictor of risk?
    Mr. Keiser. Mr. Chairman, from the standpoint of risk of 
having an accident or something, yes, I would agree. But from 
an insurance company's management standpoint, I would argue 
that the claim itself is the exposure to risk that the 
insurance company has.
    Chairman Watt. So if there were other factors that kept 
people, even if they were in automobile accidents from making a 
claim, the fact that this predicts their willingness to make a 
claim, which is what the insurance policy was written for, 
would be acceptable under what you are saying.
    Mr. Keiser. If I understand your question--I'm not sure, 
Mr. Chairman--but my insurance agent oftentimes tells me, 
``Even though you have a claim, you sometimes are better off to 
pay that auto damage yourself, because it is a relatively minor 
claim, than to apply it to your policy and do the deductible 
plus $100 or $200.'' I am well-served from a responsibility 
standpoint--
    Chairman Watt. You are well-served, but would a poor person 
who didn't have the option of paying that claim himself be 
well-served? I guess that is the question. Can you just comment 
on that, Mr. McCarty? And then I am going to--
    Mr. McCarty. Thank you, Mr. Chairman. I agree with my 
colleague that the measurement is a measurement of claims. 
There's no evidence to suggest that regardless of your credit 
score, you have more accidents. Certainly a reasonable analysis 
of that data is that credit scoring is really a proxy for your 
economic class, or your income; and as a consequence, if you 
have lower income, you are not able do to as the Representative 
had suggested, to pay out of pocket. And as a consequence, 
actually people with more money will forego making a claim, 
knowing that their insurance premiums may go up in the future, 
and they have the ability to make that economic choice. Lower-
income people do not have that option.
    And so what is interesting about the analysis done by the 
Federal Trade Commission is addressing the issue of claims, 
which I think can be reasonably explained by you having enough 
wealth to pay for those claims out of pocket.
    Chairman Watt. I recognize the ranking member for 5 
minutes.
    Mr. Miller. Thank you very much.
    Ms. Parnes, you talked about the individuals, the Ph.D.'s 
in economics, and you consulted with community groups and civil 
rights groups and such in your report. Is it fair to say that 
you're confident in the integrity of your initial report, that 
you examined the analysis you performed and the findings are 
correct in that report?
    Ms. Parnes. The Commission definitely was confident in the 
reliability of its initial report. And you know that one of our 
Commissioners did dissent from that.
    Mr. Miller. Is it fair to say that the FTC doesn't support 
the legislation, that it would ban credit scores?
    Ms. Parnes. The Commission hasn't taken a position on the 
legislation.
    Mr. Miller. Okay. You heard Chairman Watt say that nobody 
has asked you to use subpoena power. When we previously talked 
to the FTC, they said that the industry was very cooperative in 
providing information necessary to prepare the report. Is that 
correct?
    Ms. Parnes. The industry has been cooperative--
    Mr. Miller. Then why would you use subpoena powers?
    Ms. Parnes. FTC studies are important, we think, both in 
terms of the actual reliability of the study, and also in the 
perception of its reliability--
    Mr. Miller. So it's not for the quality of the material; 
it's for perceptions reasons that you are doing it?
    Ms. Parnes. Well, there was certainly a lot of concern 
expressed about our initial report and whether it was adequate, 
because we obtained the information voluntarily and for a host 
of procedural reasons. We feel that by using our subpoena 
authority, we can address those concerns.
    And I should add that we use subpoenas often when we are 
collecting information in studies, and it certainly isn't meant 
to suggest that the industry that we're working with is in any 
way uncooperative.
    Mr. Miller. Did you review the Federal Reserve Board study? 
Are you familiar with it?
    Ms. Parnes. I am somewhat familiar with the Board's study.
    Mr. Miller. Because it found that some elderly have better 
scores, and if this legislation is passed, it would actually 
harm the elderly. Is that a fair statement?
    Ms. Parnes. I know that it found that the results were 
somewhat similar to the results that the Commission--
    Mr. Miller. Okay. Mr. McCarty, you said you're representing 
the National Association of Insurance Commissioners? Do they 
agree with your opinion? They supported that? Have they 
supported your opinion today?
    Mr. McCarty. The National Association of Insurance 
Commissioners supports the testimony today with regard to the 
need to continue to study this issue, and is deeply concerned 
about--
    Mr. Miller. Yes, but that's not what you said. You spoke 
against it. And if this legislation is passed, it would 
overturn every State law except Hawaii's. Even your own States 
would pre-empt it.
    Mr. McCarty. That is correct. The NAIC's position is not 
supporting--
    Mr. Miller. But you said you were representing them, and 
that's I don't really think factual, in their opinion. I looked 
at data that said after all the States in the jurisdiction 
reviewed the use of credit scores extensively, that it's 
basically true that only one State out of 56 jurisdictions have 
actually banned the use of credit scores, including yours.
    Mr. McCarty. I said I personally favor H.R. 6062.
    Mr. Miller. Okay. I just want to make sure the record is 
very clear, that is not the position of the National 
Association of Insurance Commissioners. In fact, as I said, out 
of 56 jurisdictions, including States, only one State bans it, 
so there is a huge difference between that and--I mean this 
would overturn your own State law.
    Mr. McCarty. Yes, I understand that. And I want to clear--
    Mr. Miller. Well, you're going to have fun going back home, 
aren't you, on this one? That is going to be an interesting 
process.
    Mr. McCarty. I did want to clarify that with regard to H.R. 
6062, that was my personal view, not the view of the NAIC.
    Mr. Miller. Yes. Okay. I have no problem with your personal 
opinion. I mean everybody has a right to one; I just didn't 
want a perception to be created or anybody to think that you 
represented the opinion of the National Association of 
Insurance Commissioners. In fact, it seems to be quite the 
opposite; your own State legislators would disagree with your 
opinion today, based on what they voted into law.
    Mr. McCarty. The National Association supports continued 
study of this issue, and is deeply concerned about the 
disparate impact on minorities--
    Mr. Miller. I have no problem with continued studies--that 
is what we are doing today--
    Mr. McCarty. And it supports H.R. 5633.
    Mr. Miller. Mr. Keiser, you testified that the State 
legislators were initially skeptical about credit scores, but 
ultimately found that they increased availability and 
affordability for consumers, and they were racially blind, and 
to help insurers compete. Is that a fair statement?
    Mr. Keiser. Representative Miller, that is actually as 
accurate a statement as I could make regarding that subject. 
Senator Craig Eiland from Texas--
    Mr. Miller. My time is up, so just in closing, would you 
agree that if this were enacted, it would really harm seniors? 
In your opinion?
    Mr. Keiser. I could not agree more strongly, and also NCOIL 
opposes this legislation.
    Mr. Miller. Thank you very much for your testimony.
    Chairman Watt. The gentleman from Illinois, Mr. Gutierrez, 
is recognized for 5 minutes.
    Mr. Gutierrez. Thank you very much, Mr. Chairman. Director 
Parnes, it is my understanding that the FTC shared advance 
copies of its draft report with the insurance trade 
associations, but not with the insurance regulatory community. 
Is that the case? And if so, what was the reason behind this 
decision?
    Ms. Parnes. That is not the case.
    Mr. Gutierrez. You absolutely deny that the FTC shared this 
with the insurance industry, and not with the regulatory 
community? Just answer yes or no.
    Ms. Parnes. Well, certainly as far as I know--
    Mr. Gutierrez. Thank you. Director Parnes, the July 2007 
FTC report found--I read it--that credit-based insurance scores 
are a proxy, or a substitute for race or ethnicity in three out 
of four lines of automobile insurance: Collision; 
comprehensive; and bodily injury. But in your written testimony 
for this hearing this morning, you state that the FTC ``found 
that credit-based insurance scores appear to have little effect 
as a proxy.'' Your written testimony appears to be backing away 
from the conclusions of the FTC's report. I hope that is not 
the case, but I am going to ask you, for the record, do you 
stand by the original FTC report?
    Ms. Parnes. The Commission certainly does stand behind the 
original report. I think that it may be worth explaining a 
little about this proxy effect. Proxy, when used in usual 
conversation, it's kind of like an absolute substitute, 
something substitutes for another thing. It's an all or 
nothing. And when we use proxy effect in the study, we were 
talking about the effect, as you understand of course, of a 
statistical analysis--
    Mr. Gutierrez. I guess I understand that. And we only have 
5 minutes. But when I read the FTC report, and I read your 
comments and your written statement for this committee today, 
they seem to be different. They seem to be backing away. They 
seem to be kind of light, kind of like, ``Well, let me 
reinterpret, let me re-evaluate what the FTC really meant when 
they issued their report.''
    They seem different, and I think that most people might--so 
I just wanted to ask you if they're different, because I read 
the original report, which gave birth to the legislation that 
we're proposing. I mean we didn't just base it on thin air; we 
read your report. And today it seems like, ``Well, yes, it's a 
proxy, but it's no big deal. It's really not that relevant; 
it's really not that important.'' That seems to be the way I 
interpret what you bring to the committee today, vis-a-vis what 
the committee heard when the FTC first reported.
    So I just thought I would ask you.
    Ms. Parnes. The Agency has no intent to back away from its 
earlier report.
    Mr. Gutierrez. Mr. McCarty, in your written testimony, you 
referred to ``economic advantages'' to insurance companies from 
using credit-based insurance scores that have largely been 
ignored by empirical studies, including the 2007 FTC study. 
What are these economic advantages, and why do they deserve any 
scrutiny?
    Mr. McCarty. Well, I think the insurance industry and 
insurance trade associations would argue that using credit 
scoring is an inexpensive underwriting tool, that it would be 
more expensive to underwrite if they did not have the ability 
to use credit scoring freely as one of many tools in their 
underwriting situation.
    The concern is notwithstanding that it is predictive, and 
that it is inexpensive, if you strike the balances, what impact 
does it have if there is a disparate impact on races, and how 
much of that is tolerable?
    Mr. Gutierrez. I just wanted to share with you, Mr. 
McCarty, that when I read your testimony, I fully understood 
the difference between your Association and their position and 
your personal position here today. So I wouldn't make a big 
deal out of it. We are elected officials and we are people who 
represent different views.
    Let me ask Mr. McCarty, do you have any information that 
the FTC may have shared their report with the insurance 
industry?
    Mr. McCarty. That was our understanding in our Association, 
that the report had been shared. I have no evidence to support 
that, but that was--it was a common understanding. And the 
reason it came to our attention because we would certainly 
would have welcomed the opportunity--as the consumer protectors 
for the State insurance regulators, would have welcomed the 
opportunity to have reviewed the report in advance as well, to 
provide some guidance. And hopefully we'll have that 
opportunity to work collaboratively with the FTC in the future.
    Mr. Gutierrez. All right. Let me just end by saying that I 
thank you all for your testimony. I have been here for 16 
years, and I assure you that the insurance industry and the 
financial services industry has no lack of power, no lack of 
influence on the members of this committee, and no difficulty 
in getting their way.
    That has been my experience during the last 16 years. So I 
am sorry if I am not real sorry for the insurance industry or 
for questioning their motivations or their tactics. Thank you 
very much.
    Chairman Watt. I thank the gentleman. The gentleman from 
North Carolina, Mr. McHenry, is recognized for 5 minutes.
    Mr. McHenry. I thank the chairman.
    Now, Representative Keiser, the Federal Reserve shows 
that--one of their studies shows that seniors tend to have 
higher credit scores. I don't know if you have seen that fact. 
But if this legislation were in place, could it cause higher 
insurance rates for those with higher credit scores?
    Mr. Keiser. Mr. Chairman, and Representative McHenry, I 
think that is the important point to be made today, that if 
this legislation were to pass, there would be losers and there 
would be winners. Those people who currently are having the 
advantage of having good credit are going to pay higher 
premiums. Those who have, for whatever reason, not as good a 
credit score, are going to pay less. There's no free lunch. The 
insurance companies are going to make their money.
    Now the question is: Do you reward good behavior in the 
form of good credit? Good credit is a fine thing. And again, 
NCOIL has been very deliberative on this, and we have attempted 
to protect those unique situations that occur. Young people, 
old people with no credit line; those people who have 
extraordinary circumstances; those people--and I went through 
it in my testimony to Mr. Chairman--but the point is there is a 
way to address application of credit scores to make it as 
reasonable as is possible and as fair as is possible without 
throwing credit scores out, to the disadvantage of some groups 
who have worked very hard to establish good credit.
    Mr. McHenry. Commissioner McCarty, do you have a response 
to that?
    Mr. McCarty. I'm sorry. Would you repeat the question?
    Mr. McHenry. Do you have a response to that?
    Mr. McCarty. I don't recall your question, sir. I 
apologize.
    Mr. McHenry. If you were actually listening to 
Representative Keiser, I'm asking if you have a response to 
what he just said. I don't know if you were doing what many 
behind you were doing, listening to something else. But--
    Mr. McCarty. No. What our concern is with regard to credit 
scoring is first of all with it in terms of its potential 
impact and redistribution with regard to senior citizens; our 
evidence and our research has found that many senior citizens 
have thin credit files. My grandfather, for instance, didn't 
have a credit card; he paid his rent in cash. His credit score 
probably would not be good, although he was certainly 
financially responsible.
    But the Representative is absolutely right. If you 
eliminate an underwriting tool for determination of premiums 
paid, there are going to be some winners and some losers. And 
what the balance is of that is if credit scoring is used and it 
has a disparate impact on--racially discriminates against 
protected classes of people, where do the public policymakers 
strike a balance--
    Mr. McHenry. So is your issue with the insurer's use of a 
credit score? Or is it your belief that a credit score--or 
maybe both--that a credit score has an innate racial component 
to it?
    Mr. McCarty. My concern is both. Historically, insurance 
has been for two purposes: Number one, to provide for financial 
security; and number two, loss prevention. And with regard to 
loss prevention, I don't see how credit scoring really supports 
that insurance principle, since what we want to do is to get 
people to drive more responsibly. And I don't see how improving 
your credit score serves the purpose of loss reduction.
    Mr. McHenry. But do people not also have to pay for 
insurance? Therefore, their record of paying or not paying in 
other financial service products could be an indicator of 
whether or not they will pay for a renewal of their insurance.
    Mr. McCarty. Well, that's possible, but the insurance 
premium is paid up-front.
    Mr. McHenry. It is--
    Mr. McCarty. Yes--
    Mr. McHenry. But under State mandates, doesn't an insurer 
have to cover them for 30 days? Isn't there a gap by which 
insurers have to cover?
    Mr. McCarty. Failure to pay your policy will result in 
cancellation of your policy.
    Mr. McHenry. But you have to give them 30 days to do that.
    Mr. McCarty. You give them a notification, but they will 
notify you if you don't make that payment. They are not behind 
in terms of collecting the premium. They will cancel you and 
earn the premium that you have paid up to that point.
    Mr. McHenry. There should be an expense associated with 
that as well, if you're slow to pay or you have to send out 
multiple notices. So wouldn't an insurer, wouldn't they be wise 
to know that, up-front?
    Mr. McCarty. Yes, they would be.
    Mr. McHenry. So wouldn't a credit score be useful, then?
    Mr. McCarty. Would a credit score be useful? In my opinion, 
I think that there are enough built-in costs and expenses, if 
you premium finance, that the companies who use premium 
financing are able to secure and to pay for those additional 
charges.
    Mr. McHenry. Interesting. Thank you, Mr. Chairman.
    Chairman Watt. Thank you.
    The gentlelady from California, Ms. Waters, is recognized 
for 5 minutes.
    Ms. Waters. Thank you very much.
    Ms. Parnes, I want to know how credit scoring is balanced 
against the experiences of the driver; for example, in 
automobile insurance, I would think that the indicators of 
whether or not you have a lot of tickets, you have had 
accidents, etc., plays a role. What role does credit scoring 
play in the decisionmaking?
    Ms. Parnes. I don't think that our study told us exactly 
what role it played.
    Ms. Waters. Did you ask anybody? Without a study? You are 
the Federal Trade Commission. Do you know whether or not they 
make these decisions solely on credit scores, or is it a 
combination of factors?
    Ms. Parnes. It's based on a combination of factors.
    Ms. Waters. How do you know?
    Ms. Parnes. We know that from talking to people in--
    Ms. Waters. What are the other factors?
    Ms. Parnes. The other factors like--
    Ms. Waters. Who knows this information? What are the other 
factors? How do they do this?
    Mr. McCarty. They do it on age, your driving history, and 
claims made in the past. There is a myriad of factors that 
could be used. Most States have passed some laws that say that 
you cannot use credit scoring as the sole factor. But that can 
be somewhat misleading.
    It could be the predominant factor, and in some insurance 
companies--not all--but some insurance companies heavily rely 
on it because of its predictability.
    Ms. Waters. The Honorable George Keiser, do you know the 
weight that credit scores have on the decision of the cost of 
insurance? How heavily does it weigh?
    Mr. Keiser. Mr. Chairman and Representative Waters, our 
insurance commissioner could answer that question, because 
everything is filed in our insurance--
    Ms. Waters. Are there any companies who use it solely? Or 
is it 50 percent of the decision? Is it 75 percent of the 
decision? How does it work?
    Mr. Keiser. In our State, and I believe in all States that 
have adopted the NCOIL model--and that would be 26 States at 
least--it cannot be used solely. And we have by definition said 
``solely'' would be 51 percent cannot be weighted. So it could 
be a significant weighting factor, but I cannot answer the 
specific combination of factors used or the weights applied.
    Ms. Waters. All right. Let's see. Mr. McCarty, would you 
agree that if you use credit scoring solely or it's heavily 
weighted to make the decision that it reduces your costs of 
investigations and of collecting and gathering information, so 
that you can make determination about one's ability to pay? 
Does it reduce the costs, the personnel costs, the 
investigation costs, the vetting costs?
    Mr. McCarty. According to industry spokesmen and industry 
trade associations, it is substantially cheaper to use a credit 
scoring mechanism than it is to do traditional underwriting.
    Ms. Waters. Well, you know, I have looked at this, and I 
have tried to figure out why there is an argument that somehow 
credit scoring is a strong indicator. And it just doesn't make 
good sense to me. I cannot make sense out of it. And I don't 
even know why the FTC would spend the taxpayer's money, except 
I guess you were asked to do it. It just doesn't make good 
sense.
    So I am trying to figure out why. And as I listen to all of 
this, I recognize that the cost of reviewing an application and 
determining what kind of experiences these drivers in 
automobile insurance have had, whether or not--it costs a lot 
of money to do that. And so to just go to the credit score 
really reduces the cost of the insurance company. And I'm 
beginning to believe that's really what this is all about.
    Mr. Keiser, you mentioned that even GPAs are a good 
indicator of something. Did you say that?
    Mr. Keiser. Representative, absolutely. In our State, good 
students get a discount.
    Ms. Waters. So you are telling me that a smart student is a 
better driver.
    Mr. Keiser. Good students can get a discount.
    Ms. Waters. Having nothing to do with their driving--
    Mr. Keiser. And good students--
    Ms. Waters. Just a moment--
    Mr. Keiser. That is correct.
    Ms. Waters. Had nothing to do with their driving record. A 
low GPA indicates that you're not as good a driver. Is that 
right?
    Mr. Keiser. It is a predictor that is used in some cases.
    Ms. Waters. Well, that is absolutely nonsensical. I know 
some of the smartest people, I mean geniuses, who are just 
stupid. I mean they make good grades, but they can't find their 
way to the toilet. And if you're telling me that's an 
indicator, I'm more convinced than ever that this is not good. 
And so--my time is up. Enough said. I'm moving forward with my 
legislation. This doesn't make good sense. Thank you.
    Chairman Watt. I thank the gentlelady for her testimony. I 
was going to withhold this until the second panel, but since 
the gentlelady made inquiries, I wanted to ask unanimous 
consent to submit information from the Web sites of three 
insurance companies: AllState; Traveler's; and State Farm, on 
what factors they consider in determining rates, and I would 
invite the gentlelady to take a look at these. She will find 
them very unenlightening in trying to figure out what factors 
are used.
    Mr. Miller. At the same time--I would like to submit--
    Chairman Watt. I recognize Mr. Miller for--
    Mr. Miller. --a letter from the American Insurance 
Association, the Financial Services Roundtable, the U.S. 
Chamber of Commerce, the Independent Insurance Agents and 
Brokers of America, the National Association of Mutual 
Insurance Companies, and the Independent Insurance Agents and 
Brokers of America. I would also like to submit: a statement 
from the National Association of Mutual Insurance Companies; a 
statement from Michael J. Miller and EPIC Consulting; and a 
statement from the Property Casualty Insurers Association of 
America.
    Chairman Watt. I have those, sir, and we will make sure 
they get in the record, without objection.
    Mr. Miller. Thank you.
    Chairman Watt. Mr. Boren from Oklahoma is recognized.
    Mr. Boren. Thank you, Mr.--
    Chairman Watt. I'm sorry. We have--somebody else came in 
that I didn't see. Mr. Barrett from South Carolina is 
recognized for 5 minutes.
    Mr. Barrett. Thank you, Mr. Chairman. I would like to yield 
30 seconds to Mr. Miller from California.
    Mr. Miller. Yes. I just wanted to follow up. Mr. McCarthy, 
you made an interesting comment. You said that the industry 
relies upon credit scores because of its predictability. It's 
proven to be right. Nobody knows why, but it's proven to be a 
predictable measure of determining risk. Is that not a fair 
statement?
    Mr. McCarty. Yes. There's a strong correlation between 
credit scores and claims.
    Mr. Miller. Yes.
    Mr. McCarty. Predication of claims.
    Mr. Miller. And that's--
    Mr. McCarty. Not necessarily accidents, but claims.
    Mr. Miller. Okay. But claims. I think that speaks volumes.
    Chairman Watt. Would the gentleman yield just for a second?
    Mr. Barrett. Absolutely, Mr. Chairman.
    Chairman Watt. This is a good time to--Florida did a study 
about this claims versus risk issue, in which you found that 
doctors, accountants, and lawyers all have higher accident 
rates, yet they get lower rates because of their occupation and 
education. And your study found that 50 percent of eligible 
claims are not reported for fear of a rise in insurance 
premiums. Does that play into your response to Mr. Miller's 
question?
    Mr. McCarty. Yes, sir. And this refers back to a public 
hearing we had with regard to occupation and education used as 
criteria, where your doctors, lawyers, etc., who may have a 
higher claims experience, get more favorable treatment with 
regard to the cost of premiums. Those with lower education 
levels and with other occupations like mechanics, etc., pay 
substantially more, even though the evidence does not support a 
higher loss ratio. There may be more frequent claims, but that 
again can be explained by the fact that higher-income 
individual policyholders have the wherewithal to pay them, 
whereas lower-income folks will file a claim.
    Mr. Miller. Well, Mr. Chairman, I'm convinced we need to 
introduce a bill outlawing attorneys, without a doubt. We need 
to stop those people.
    Chairman Watt. You mean just attorneys? Not doctors, or 
accountants, or--
    Mr. Miller. I might need a doctor. I don't need an 
attorney.
    Chairman Watt. Oh, okay.
    I thank the gentleman. I appreciate him, and I will ask 
unanimous consent for 2 additional minutes for the gentleman, 
so that he is not deprived of his time.
    Mr. Barrett. Outstanding. Thank you, Mr. Chairman.
    Gentleman and lady, thank you so much for being here today. 
I am certainly a free market believer. I think the less 
government interference, the better. And I am concerned when we 
have government mandates, how that affects the market in the 
redistribution. I would like Ms. Parnes and Mr. Keiser to 
answer this: Do you think if we ban the use of credit scoring, 
that we might have a socialization, meaning the lower-risked 
folks subsidizing the cost of the folks who have a higher 
credit rating? Either one of you, or both of you, please.
    Mr. Keiser. I have already answered that and the answer is 
``yes.''
    Mr. Barrett. I apologize. Same thing.
    Ms. Parnes. As I have indicated earlier, the Commission has 
not taken a position on legislation, and really hasn't 
considered what the impact of a ban would be.
    Mr. Barrett. Okay. For all three of you, if you would 
please, let's just say, for example, the credit-based insurance 
scoring is banned or curtailed, and we went with something 
different. First of all, what might that be? What is a better 
way to do that? And would it be less accurate than what we are 
using now or more accurate? Please answer that one, if you can.
    Mr. McCarty. Prior to the use of credit scoring, insurance 
companies had a long, mature history of looking at a variety of 
factors, including geographic area, the driving experience, 
number of years you have been insured, have you been 
continuously insured, your driving history, driving record, 
traffic violations, etc. Those have been historically used in 
the determination and underwriting of auto policies. Removing 
today immediately the use of credit scoring, since it's used 
very heavily by the insurance industry, would be disruptive. 
That could be ameliorated to some extent by phasing it out over 
time.
    Mr. Barrett. Mr. Keiser?
    Mr. Keiser. I would simply respond that, again, any valid 
measures that can be developed for predicting risk exposure 
claims should be developed for the benefit of consumers in our 
country.
    On the other hand, again, we have to make sure that the 
abuses that can accompany any of these measures, whether it's 
credit scoring or any other measure, not be allowed.
    Ms. Parnes. The Commission looked at other models, other 
possible models, and was not able to come up with one in its 
study.
    Mr. Barrett. Okay. I can think of several different 
examples where government mandates rather than the free-market 
process have led to the consequences that we're not looking 
for. In fact, the one that comes closest to mind is ethanol. We 
mandate certain things on ethanol, we monkey with the free 
market process, and all of a sudden food prices go up.
    Can you--in the financial realm, can you give me some 
examples of where government intervention in free market 
process has led to consequences where the government actually 
said that they were going to try to fix something, and the 
opposite consequence happened? Can you give me some examples, 
any of you?
    Mr. Keiser. Well, I think the most obvious one as a State 
legislator that comes to my mind, was welfare reform when it 
was federalized. The Federal Government was very quick to send 
it back to the States once it was entirely mismanaged at the 
Federal level. And the States have done a fairly good job with 
that. But in the case of the subject at hand, again, to tie the 
hands of the industry in terms of valid predictors will create 
some offset--and there is no alternative.
    The insurance companies, I don't believe, are going to lose 
money. Somehow the cost will be shifted if this legislation 
were to pass.
    Mr. Barrett. I see my time is up. Thank you, Mr. Chairman.
    Chairman Watt. I thank the gentleman. Mr. Boren from 
Oklahoma is recognized for 5 minutes.
    Mr. Boren. Thank you, Mr. Chairman. I want to say thank you 
for allowing me to be on this subcommittee, and also, the 
Housing Subcommittee, with Ms. Waters. I am honored to join 
both of you, and I know we have worked on a lot of contentious 
issues over the past couple of years, and hopefully we can work 
together in the next few years.
    I have a couple of questions, very brief. First for 
Director Parnes, you kind of answered this earlier, but again I 
would like the answer. Did not the industry provide the data 
for auto and homeowners voluntarily? Did they come to the 
Commission and say, ``We're going to bring this information 
voluntarily?''
    Ms. Parnes. The industry did provide the information for 
the auto insurance study voluntarily. We went to the industry, 
we were directed to do this study, and we talked to the 
industry about voluntary submissions. And we were able to reach 
agreement on that.
    Mr. Boren. And did you respond formally to the industry? 
And if you didn't, why did you not?
    Ms. Parnes. Respond formally?
    Mr. Boren. Like in a letter, or some kind of formal 
response. If they said, ``We're going to provide for the 
homeowners' study,'' for instance.
    Ms. Parnes. Well, for the homeowners' study, we began the 
process of discussing voluntary submissions. But it was shortly 
after we began those discussions, the Commission made the 
decision that it would proceed through a subpoena process.
    Mr. Boren. Do you think that is premature, to do that, when 
you have an industry that is basically begging you, saying, 
``Here is the information, so we're going to take the added 
step to beat someone over the head when they have actually come 
to you.'' That is really not the role of government to hurt 
someone when they are actually trying to help you and provide 
information. Is that correct?
    Ms. Parnes. Well, it certainly isn't the role of 
government, and it's not the approach that the Commission has 
taken. We do use these subpoenas typically when we're doing 
industry-wide studies. And they're not intended to suggest that 
the industry that we're studying is not being cooperative.
    I think the Commission's concern in the homeowners' study, 
as indicated earlier, is that the value of Commission studies 
is really based on both their actual reliability and also the 
perception of their reliability. And there was a lot of concern 
expressed about the auto insurance study as not being reliable 
because the data was submitted voluntarily.
    The Commission supports the study, the Commission stands 
behind it, believes that the study is reliable; but in response 
to those concerns, decided to pursue information under subpoena 
for purposes of the homeowners' insurance study.
    Mr. Boren. Okay. One final one for you: Since there are 
questions as to the Commission's legal authority under either 
Section 6 of the FTC Act or Section 215 of the FACT Act to 
compel information from insurers generally or with regard to 
this specific study, is it possible that actually using these 
subpoenas would delay the study, or has delayed the study?
    Ms. Parnes. Well, we hope that it doesn't delay the study. 
Certainly if the subpoenas are challenged, there could be some 
delay, but we will--
    Mr. Boren. Do you know how long a delay that would be? Or, 
is there is a precedent?
    Ms. Parnes. I don't, and I don't know if they will be 
challenged, either.
    Mr. Boren. Okay. That would be interesting to know if they 
would be challenged.
    I have a question for Commission McCarty. This is 
actually--I have an e-mail here from my State insurance 
commissioner, Kim Holland, who is a great friend of mine. And 
this is what her e-mail basically says: ``Oklahoma's experience 
suggests that the vast majority of our policyholders are not 
impacted, or actually save money due to credit scoring. We also 
prohibit most of the activities found objectionable by other 
regulators, such as--rates to be affected by race, gender, or 
no credit history.'' Do you have a response to that? And you 
know, compare Oklahoma to maybe Florida. What are your 
thoughts?
    Mr. McCarty. Yes. I actually discussed this issue on the 
telephone with Commissioner Holland the other day, and she 
feels very strongly as long as there is a predictive value, 
that there is an argument to be made that you're actually 
providing better value for a majority of consumers, that it is 
color-blind with regard to--or from the initial question, since 
the asking about the running of a credit report does not ask 
the question up-front, so any consequential racial 
discrimination is not intentional. And that does represent a 
view within our organization. Other commissioners would share 
that view. I do not.
    Mr. Boren. Well, I would love to ask more questions, but it 
looks like my time is up. Thank you all so much for your 
testimony.
    Chairman Watt. I thank the gentleman for his questions. Can 
I just have unanimous consent to ask Mr. Keiser one clarifying 
question? You said that the result of not using insurance 
scoring for this purpose would result in winners and losers; 
some people would be adjusted up, and some people would be 
adjusted down. But if that is a greater reflection of actual 
risk, are you suggesting that is a bad thing?
    Mr. Keiser. Mr. Chairman, I think if it is a valid 
predictor, and your committee, through the investigation, can 
determine that, if it is a valid predictor and it can be 
accomplished inexpensively, it diminishes, number one, the cost 
to the insured; and number two, if it's a valid predictor, it 
gives those people for whom it validly predicts good credit a 
lower rate, those people with poor credit a higher rate.
    Chairman Watt. I appreciate that answer, but it is not 
responsive to the question I asked, unfortunately.
    Mr. Keiser. I apologize. I don't understand--
    Chairman Watt. And I understood that you had testified to 
exactly what you just said. The question I'm asking is, if 
there are winners and losers as a result of using a different 
kind of mechanism other than credit-based insurance scoring, 
and you get a more accurate reflection of what the risks 
actually are, are you suggesting that is a bad thing?
    Mr. Keiser. Mr. Chairman, no. I don't believe that 
measure--
    Chairman Watt. Okay. All right. I didn't think you were. I 
just wanted to make sure that we got that on the record. We 
obviously know that there are winners and losers. And, as you 
say, insurance companies will try to find a way to make a 
profit; that is what they are in business for. But there is an 
also important factor here in trying to come up with a fair 
system that does not shift the burden as a result of unfairness 
in credit scoring to poorer people and minorities. And I wasn't 
trying to trick you on that; I was just trying to make sure 
that I understood what you were saying in your testimony.
    Mr. Miller. May I have one minute?
    Chairman Watt. Yes.
    Mr. Miller. There are a couple of things I didn't bring up. 
The State of Oregon decided they wanted to eliminate credit 
scores, and they went to the voters, and it was overturned 2 to 
1. The people said, ``No,'' they think that's a reasonable way 
to predict rates. New Jersey actually reversed itself when they 
went the other direction, and came back the other way.
    I guess the difference between what a lot of us are 
hearing, but even Mr. McCarty, you said that the industry 
relies upon credit scores because of its predictability as it 
applies to claims, and that is what we are looking at. The 
testimony I have heard today said that if we eliminated that, 
seniors are likely to be impacted unfairly by changing the 
requirements. So until I can find a better way, or somebody 
presents a better way of predictability, it seems like the 
system today is working, and it is predictable. And if I 
thought it was discriminatory, I would absolutely oppose it. 
Thank you. I yield back.
    Chairman Watt. I thank the gentleman, and I wasn't going to 
offer this until you raised the question. But--
    Mr. Miller. Oh well, equal time.
    Chairman Watt. No. I'm just going to make a unanimous 
consent request to offer into the record, since you raised the 
question of the Oregon vote, the information about who paid for 
lobbying and the amounts that the insurance industry paid for 
lobbying in Oregon--just for the purpose of completeness of the 
record.
    Mr. Miller. Well, those people voted for Obama, too, didn't 
they? Something is wrong with that State. I can tell. I yield 
back.
    Chairman Watt. Thank you. I ask unanimous consent to put an 
article from USA Today, ``Credit scores' link to insurance 
rates tested,'' by Christine Dugas, into the record. The 
article discusses what insurers spent opposing the use of 
credit scoring in insurance. Without objection, it is so 
ordered.
    We thank these witnesses for testifying. I think you have 
added immensely to our knowledge base here, and we will excuse 
you, and call up the second panel of witnesses.
    If I could ask the witnesses on the second panel to be 
seated? We seem to be missing one. In the interest of time, I 
am going to proceed with the introduction of the witnesses. I 
think Mr. Poe is here; he must have stepped out for a moment. 
He has returned.
    We are delighted to welcome our second panel of witnesses. 
They will testify in the following order: Mr. Bob Hunter, 
director of insurance of the Consumer Federation of America; 
Ms. Lisa Rice, vice president of the National Fair Housing 
Alliance; Mr. Eric Poe, chief operating officer of CURE 
Insurance, a New Jersey-based insurer; Mr. Charles Neeson, 
senior executive, personal lines products, Westfield Group, who 
is testifying on behalf of the Property Casualty Insurers' 
Association of America; Mr. Stuart Pratt, president of Consumer 
Data Industry Association; and Dr. Lawrence S. Powell, 
professor, University of Arkansas at Little Rock.
    I think all of you were present earlier when I laid out the 
rules of the road. Each of you will have your entire statement 
submitted in its entirety for the record, and we would ask you 
to summarize your testimony in 5 minutes or less. You will get 
a green light at 4 minutes, a yellow light for the 4th minute, 
and then a red light at the end of 5 minutes, and we would ask 
you to wrap up when you see the red light as expeditiously as 
possible.
    With that, Mr. Bob Hunter, director of insurance, Consumer 
Federation of America, you are recognized for 5 minutes.

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Hunter. Thank you, Mr. Chairman, and members of the 
subcommittee. My name is Bob Hunter, and I served as Federal 
Insurance Administrator under Presidents Ford and Carter. I 
also served as Texas Insurance Commissioner.
    Insurance scoring is used to determine whether a customer 
will be eligible for coverage, and the premiums that the 
customer will pay. In response to a question earlier, I would 
say that for many companies, credit scoring can have a greater 
impact than claims and other key factors on a final rate of an 
individual.
    CFA and many organizations, civil rights and others, have 
called for a prohibition on insurance scoring because its use 
in insurance undermines core functions of the insurance system, 
decreasing insurance availability and affordability, 
undermining the critical role of insurance and encouraging loss 
prevention. It has an adverse disparate impact and 
discriminates against low-income and minority consumers. It's 
based on reports that often have errors or are incomplete. It's 
inherently unfair and penalizes consumers who are the victims 
of economic or medical or natural catastrophes. It even 
penalizes them for improper lending business decisions that 
we've noticed over the last few years. And it violates sound 
actuarial principles.
    The insurance industry claims a variety of benefits; but 
when you boil it all down, it basically says, ``We have a 
correlation,'' and therefore we're more predictive with it of 
the likelihood of a consumer having a claim. If that were true, 
we would expect an increase in delinquencies in bankruptcies 
would be matched by an increase in insurance claims. Since 
2000, bankruptcies and delinquencies have risen sharply, but 
auto claim frequencies have declined sharply. This suggests 
there is no correlation.
    Why aren't we seeing the correlation at work over time? 
Insurers can't tell us what it is about a credit score that is 
linked with risk. This is what Ms. Waters and others have 
raised. What is it linked to? If you ask them why a person who 
suffered a decline in credit because of Hurricane Katrina or 
losing a job because of outsourcing is a worse risk, they can't 
answer.
    Unlike every insurance class before credit scoring was 
adopted, credit scoring is not based on a logical rationale 
confirmed later by a statistical analysis. A correlation alone 
with no thesis being measured means the credit score violates 
actuarial principles.
    The only thesis insurers have manufactured but cannot prove 
with data is that people with bad credit are irresponsible. But 
try telling that to people laid off from a job, or after a 
major medical problem, or after suffering financial difficulty 
from a divorce. These 3 life events account for 87 percent of 
family bankruptcies. That is not irresponsibility; that is life 
events.
    If insurers call this irresponsible, they're even more 
heartless than I thought. In fact, there's strong evidence that 
insurance scoring is not a predictor of insurance claims, but 
rather a proxy for other factors that are related to claims 
experience, such as income or geographical location of the car. 
But it also is a proxy for race as well as income.
    Two independent studies by Texas and Missouri found strong 
relationships between race and income. The Missouri department 
said race was the strongest, when you look at the correlation 
between race and credit scoring. Even the recent flawed FTC 
report, as we've already heard, found this correlation. 
Hopefully, the home insurance study will be better because of 
what we've heard today that they'll actually collect the data 
that they didn't have, which was hugely inadequate, the auto 
insurance study, for reasons I've listed in my testimony.
    Insurers claim that competition would be harmed and 
availability reduced if credit scoring is banned. This is 
false. I need only to point to California, where credit scoring 
is banned for use in auto insurance. In our recent in-depth 
study of auto insurance regulation, we found that State has the 
best system in the Nation, including the ban on credit scoring. 
While the insurers claim competition would be harmed by it, our 
data shows that California has the 4th most competitive market 
in the Nation, measured by HHI. Plus the assigned risk rate has 
dropped to only \1/10\ of 1 percent of the autos insured in the 
State.
    This proves availability and competition are not harmed by 
banning the use of credit scoring. Indeed, Massachusetts, which 
was praised earlier, as becoming less State-controlled, still 
has prior approval and bans credit scoring. So does Maryland 
for home credit scoring.
    We applaud the sponsors of H.R. 5633 and 6062. We have 
concerns about the first one, H.R. 5633. The legislation's goal 
of banning credit scoring if the use of consumer credit 
information discriminates on the basis of race is a good one, 
but we fear that the legislation will not achieve the results 
for a series of reasons I listed in my testimony.
    CFA believes that simple banning of credit scoring in 
insurance is necessary, and everything we've studied indicates 
it's the right thing to do; therefore, we enthusiastically 
support Ms. Waters' bill, H.R. 6062.
    [The prepared statement of Mr. Hunter can be found on page 
59 of the appendix.]
    Chairman Watt. I thank the gentleman for his testimony. Ms. 
Lisa Rice, vice president, National Fair Housing Alliance, is 
recognized for 5 minutes.

 STATEMENT OF LISA RICE, VICE PRESIDENT, NATIONAL FAIR HOUSING 
                            ALLIANCE

    Ms. Rice. Thank you, Chairman Watt, Ranking Member Miller, 
and members of the subcommittee for the opportunity to testify 
today on credit-based insurance scoring.
    The National Fair Housing Alliance (NFHA) is a consortium 
of more than 220 private nonprofit fair housing organizations 
and State and local civil rights agencies. Our mission is to 
eliminate all forms of housing discrimination and to expand 
equal housing opportunities.
    It is NFHA's position that Congress should ban the use of 
credit scoring in insurance. Studies by the Missouri and Texas 
Departments of Insurance have found that insurance scoring 
discriminates against minority consumers because of the racial 
and economic disparities inherent in the scoring systems.
    Even though the Federal Trade Commission used data hand-
picked by the industry for its 2007 study, it found that credit 
scoring discriminates against low-income and minority consumers 
and that credit-based insurance scores ``appear to have some 
proxy effect for three of the four coverages studied.'' 
Unfortunately, instead of highlighting this discriminatory 
connection, the FTC chose to restate the arguments of the 
insurance industry that scores are related to responsibility 
and risk management.
    The industry claims that there are ``intrinsic underlying 
individual biological and psychological characteristics of risk 
taking in both financial behavior and driving.'' This argument, 
however, ignores the fact that racism and discrimination have 
always been present in our society, and that discrimination is 
inextricably tied to inequality in our lending and financial 
markets.
    People of color do not have a risk-taking biology. African 
Americans and Latinos have lower insurance scores because of 
direct and indirect discrimination in the marketplace. America 
has a bifurcated lending system that disproportionately 
discriminates against borrowers of color.
    Countless studies and court cases have demonstrated this. 
My own organization conducted a multi-year lending testing 
project which uncovered multiple ways in which African 
Americans were denied lending opportunities, including 
receiving inferior basis information that their white 
counterparts were given, being urged, unlike their white 
counterparts, to go to a different lender, and being told, 
unlike their white counterparts, that they would not qualify 
for a loan. This happened even though both the African American 
and white consumers were equally qualified.
    Parenthetically, NFHA has been involved in conducting 
hundreds, probably thousands of tests of insurance companies, 
and we have found similar biases there too, based on race.
    Our bifurcated lending system has also helped to lead to 
the current foreclosure crisis. As we all know, African 
Americans and Latinos were disproportionately targeted for 
subprime loans and unsustainable mortgages, even when they 
qualified for better rates. Thus, borrowers who entered the 
mortgage cycle with sound credit are now facing plummeting 
credit scores.
    It is wholly unfair to further burden borrowers who were 
unfairly targeted by unscrupulous lenders with higher insurance 
premiums. These borrowers will not suddenly turn into poor 
drivers or lax homeowners simply because their credit scores 
have decreased. Banning credit-based insurance scores is a 
civil rights issue, which is why NFHA supports H.R. 6062.
    We also appreciate the efforts regarding H.R. 5633, but are 
concerned that the bill lacks an objective standard for 
identifying racial discrimination, gives broad discretion to 
the FTC, and has no private right of action. Most importantly, 
H.R. 5633 could serve to legitimize insurers' use of credit-
based insurance scoring in general.
    A recent study demonstrates that if you crash your car, you 
can blame the stars. The study found, looking at records of 
100,000 drivers that there is a statistically significant 
correlation between Zodiac signs and car accidents. Based on 
the study's findings, Libras, Aquarians, and Aries are the 
worst drivers. Who knew?
    The National Fair Housing Administration was involved in 
litigation against a major insurance company that utilized a 
credit scoring model. An analysis of the model, which we could 
do because of discovery under a protective order, found clear 
disproportionate impact on African Americans and the price they 
paid for insurance, which could not be accounted for by 
differences in the risk they posed. In other words, African 
Americans paid a higher rate than was commensurate for their 
level of risk.
    We urge you to ban the use of consumer credit information 
for insurance, and thank you again for the opportunity and the 
invitation to speak to you today.
    [The prepared statement of Ms. Rice can be found on page 
233 of the appendix.]
    Chairman Watt. Thank you for your testimony.
    Mr. Poe, chief operating officer of CURE Insurance.

STATEMENT OF ERIC POE, CHIEF OPERATING OFFICER, CURE AUTOMOBILE 
                           INSURANCE

    Mr. Poe. Thank you very much, Mr. Chairman, and members of 
the subcommittee for inviting me today to talk about this 
proposed bill. As you said earlier, I am the chief operating 
officer of CURE Auto Insurance. We are a regional insurance 
carrier based out of Princeton, New Jersey. We are licensed to 
write in the State of Pennsylvania, as well as the State of New 
Jersey.
    I would like to start out by giving some background on our 
interest in this particular issue. Prior to 2003, in the State 
of New Jersey, insurance carriers were not approved for the use 
of credit scores, education, occupation, as well as 
homeownership status as factors in underwriting.
    However, in 2003, the New Jersey government decided that 
they wanted to attract more market players, new national 
carriers into the marketplace. And it was at that time they 
started permitting credit scores, education, occupation, and 
homeownership. As an organization that writes private passenger 
automobile insurance, it was at that time that we had to study 
and analyze these underwriting methods to determine their 
validity.
    After significant review, CURE Auto Insurance determined 
that while these rating and underwriting variables do correlate 
to loss ratios, they merely serve as statistical proxies for 
income, which is why CURE Auto Insurance does not employ any of 
those factors. However, we believe that we will soon be 
compelled to for competitive measures if this is not stopped.
    To start, I would like to explain some of the conclusions 
that we found when reading the reports that were issued dealing 
with credit scores. It appears evident that the auto insurance 
industry uses loss ratio models as justification for using 
credit scores, education, as well as occupation. Now showing 
statistical correlation to these characteristic traits to loss 
ratios, the entire industry has been able to validate using 
credit scores and all these other factors.
    However, I think it is important for everybody to 
understand what is a loss ratio. By definition, a loss ratio is 
the incurred losses and loss adjustment expenses divided by net 
earned premium. In layperson's terms, it's a measure of 
profitability which we call rate adequacy.
    Surprisingly, what our examination yielded was that the 
studies dealing with credit scores, education as well as 
occupation, have made an inappropriate conclusion--that simply 
because you show a correlation to loss ratios, it means that 
the variable that you are testing automatically is a predictor 
of risk.
    However, it's important to understand that there's an 
infinite number of characteristic traits that you can draw 
correlations to loss ratios, but they would all be invalid if 
you can explain a more valid characteristic trait that's 
imbedded in that variable. The best example that was given 
before was life insurance and mortality tables with African 
Americans in the past, with African Americans having shorter 
life spans. Life insurance companies still aren't able to use 
it.
    My example would be that African Americans have shorter 
mortality tables not because they're black; it's because 
socioeconomics are involved with them having lower mortality 
tables. Because they are in lower-income neighborhoods; it is 
more likely there are homicides; it is more likely there is 
crime; it is more likely that because they are less educated on 
average, they are going to eat worse foods, they are going to 
have diabetes, and they are going to have high blood pressure. 
Those are the reasons that are the driving factor of why 
mortality tables for life insurance may be shorter for African 
Americans than whites; it's not because of the color of their 
skin.
    Similar to loss ratios that we have here with credit 
scores. In an example that I just gave, I would say that with 
credit scores, what we found is that they are very good valid 
predictors of income, but not necessarily good valid predictors 
of risk in terms of anything else.
    Now our fellow members of our industry would like to 
disguise the public policymakers as regulators, as well that 
these rating variables of credit scores possess some 
unexplainable commonality of why they correlate to risk, and 
therefore are valid predictors of risk. But this is in light of 
the fact that all of these variables that we're talking about 
here have an obvious correlation to income, and it is income 
that is correlated to loss ratio or profitability for our 
industry.
    Now speaking about credit scores specifically: To clarify 
first credit-based insurance scores, when we examined them, the 
differences between an insurance score and a credit score is at 
least we found to be negligible. Asking how many oil accounts 
and gas cards somebody has really didn't make a big difference 
with what you would yield in terms of a credit score versus an 
insurance score.
    But the reason why we concluded that credit scores are 
correlated to income is because if you look at the FICO credit 
scoring model and you look at the models in which the companies 
that offer credit scores to us, you would notice that although 
35 percent of your credit score is determined based upon your 
prior history of making on-time payments, number two in that 
list is 30 percent going to credit utilization.
    Now due to the fact that credit lines by lenders are 
directly calculated, based upon a borrower's income, this is 
why we believe the credit scoring model more significantly 
based our belief on the conclusion that this was a strong 
predictor of somebody's income.
    The best example that I can give is really, looking at 
somebody who does not make a high income, has a $1,000 credit 
line granted; somebody who makes a lot of money has a $20,000 
credit line granted, if they charge $800 in groceries, there's 
an 80 percent utilization factor for those people who have low 
incomes because they are using 80 percent of their credit line.
    But I think the reason why the industry really wants to 
adopt this practice of credit scores is for three reasons. 
Number one, the industry itself wants to attract high-income 
drivers for three reasons: Number one, we produce higher 
revenue streams for people; number two, the insurance industry 
data-mines for higher-income individuals that yield a lot of 
money; and number three, richer people can absorb more of their 
claims, which was spoken to earlier.
    Finally, in summary, I just think that the subcommittee 
needs to be more aware of the fact that the bigger problem in 
our industry is the use of education and occupation as 
underwriting variables in our industry. What companies are 
doing, specifically GEICO, is they are basing whether or not 
you have a 4-year college degree and whether or not you work in 
a traditionally high-income earning job, as the basis of 
putting you in the most expensive insurance company that the 
affiliate has, and they don't tell them.
    So, thank you very much.
    [The prepared statement of Mr. Poe can be found on page 181 
of the appendix.]
    Chairman Watt. Thank you for your testimony.
    Mr. Neeson, senior executive, personal lines products, 
Westfield Group, you are recognized for 5 minutes.

 STATEMENT OF CHARLES NEESON, SENIOR EXECUTIVE, PERSONAL LINES 
   PRODUCTS, WESTFIELD GROUP, ON BEHALF OF PROPERTY CASUALTY 
                INSURERS ASSOCIATION OF AMERICA

    Mr. Neeson. Chairman Watt and members of the subcommittee, 
thank you for the opportunity to comment on H.R. 5633 and H.R. 
6062, legislation that seeks to prohibit the use of information 
on credit reports for issuing and setting premiums for motor 
vehicle and property insurance. My name is Charles Neeson, and 
I appear before you today as a senior executive with Westfield 
Insurance, and as a representative for the Property Casualty 
Insurers' Association of America, a national trade insurance 
association, of which Westfield is a member.
    I am also a member of the American Academy of Actuaries and 
an associate of the Casualty Actuarial Society. An insurance 
company's ability to more accurately predict losses is a 
critical component of property underwriting risks. Our industry 
is united in our concern over the negative impacts that 
restricting the use of credit-based insurance scores will have 
on American consumers.
    When insurers are able to properly underwrite risks, 
consumers benefit with lower rates and more choices. Because 
credit-based insurance scoring is an objective and accurate 
method for assessing the likelihood of insurance loss, we 
strongly oppose the passage of H.R. 5633 and H.R. 6062.
    Insurance is an incredibly competitive business, and one 
way for an insurance company such as Westfield to distinguish 
itself from its competitors is to develop better ways of 
gauging risk to more accurately price an insurance policy. 
Westfield Insurance began using insurance scores in 2000 to 
improve the pricing of our automobile and homeowners' insurance 
products.
    In analyzing the relationship between credit information 
and our loss data, we found a strong correlation. Used in 
conjunction with more traditional rating factors such as 
vehicle age, performance, gender, territory, and driver age, 
credit-based insurance scoring allowed Westfield to more 
accurately price our products and improve our competitive 
position.
    Mr. Chairman, today approximately 75 percent of our auto 
and home package customers pay less because of insurance 
scores, while only 8 percent pay more. Outside of Westfield's 
own experience with credit-based insurance scoring, an annual 
survey published by the Arkansas insurance department shows 
that insurance scores either benefit or have no effect on the 
vast majority of consumers in Arkansas.
    The latest survey shows that 90.2 percent of automobile 
insurance policyholders, and 90.8 percent of homeowners' 
insurance policyholders either received a discount or were 
otherwise unaffected by the use of credit-based insurance 
scores.
    In July 2007, the Federal Trade Commission issued a report 
to Congress on insurers' use of credit-based insurance scores. 
In that report, the FTC concluded that insurance companies 
which use credit-based insurance scores are more likely to 
price automobile insurance more closely to the risk of loss 
that the consumer poses.
    This results, on average, in higher-risk customers paying 
higher premiums and lower-risk customers paying lower premiums.
    The use of credit-based insurance scoring is subject to 
extensive regulation by the States. The National Conference of 
Insurance Legislators (NCOIL) promulgated model legislation 
regarding its use. And most States have either enacted that 
model or have adopted restrictions similar to those contained 
in the model.
    Insurers that consider credit information in their 
underwriting and pricing do so for only one reason: Insurance 
scoring allows them to rate and price business with a greater 
degree of accuracy and certainty. Sound underwriting and 
rating, in turn, allows insurers to write more business, which 
is a direct benefit to consumers. Without the ability to 
consider credit, many insurers would be less aggressive in 
their marketing, and far more cautious in accepting new 
business.
    Every serious and reputable actuarial study on the issue 
has reached the same conclusion: There is a very high 
correlation between insurance scores and the likelihood of 
filing insurance claims. And while it is a common criticism of 
insurance scoring that the exact reason for that correlation is 
unknown, there are also numerous other rating factors, of which 
causality is also unknown.
    For example, even though there is no definitive explanation 
as to why married individuals represent less risk than single 
individuals, marital status is a widely accepted and widely 
utilized rating variable. Credit-based insurance scoring is an 
effective tool for insurers, and a fair one to consumers. To 
protect competition and consumer choice, it is imperative that 
insurers be permitted to fully price risks, using non-
discriminatory and statistically valid tools, such as credit-
based insurance scores.
    Thank you very much for allowing me to come and testify 
before you today, and I would be happy to address any questions 
that you may have on this subject.
    [The prepared statement of Mr. Neeson can be found on page 
168 of the appendix.]
    Chairman Watt. Thank you, Mr. Neeson, for your testimony.
    Mr. Pratt, president, Consumer Data Industry Association, 
you are recognized for 5 minutes.

 STATEMENT OF STUART PRATT, PRESIDENT, CONSUMER DATA INDUSTRY 
                          ASSOCIATION

    Mr. Pratt. Chairman Watt, Ranking Member Miller, and 
members of the subcommittee, thank you for the opportunity to 
appear before you today. We commend you for holding this 
hearing, and my comments will focus on just a few key points 
drawn from our written testimony.
    First, the States have fulfilled their mandate to protect 
consumers through careful deliberations and extensive oversight 
of the use of credit histories and scores for insurance 
underwriting.
    Second, our members management of the quality of data in 
their databases is a proven success story.
    And third, the market is addressing the question of 
consumers with a thin credit report or no credit report at all.
    In 1945, Congress enacted the McCarran-Ferguson Act, and in 
doing so left the regulation of the business of insurance to 
the States. And perhaps the question before us today is how 
have they done with regard to the use of credit histories and 
credit history-based insurance scores as a factor in 
underwriting for personal lines of insurance? I think the 
answer is clear and positive for all of us as consumers.
    Virtually all States permit and regulate the use of credit 
histories and scores. These decisions have been made with an 
eye towards fairness. Studies by regulators have found that the 
use of credit histories is fair and predictive.
    In 2003, in testimony offered on behalf of the NAIC before 
the full House Financial Services Committee, with regard to a 
report from the American Academy of Actuaries, they stated the 
following: ``The Academy members have reviewed studies and 
believe that credit histories can be used effectively to 
differentiate between groups of policyholders. Therefore, they 
believe credit scoring is an effective tool in underwriting and 
rating personal lines of insurance.''
    There is no dearth of quality oversight regarding the use 
of credit histories and scores. However, some suggest that 
credit reports are not accurate and thus shouldn't be used for 
underwriting. We could not disagree more strongly. Never before 
have we had so much definitive data with regard to the accuracy 
of credit reports.
    In 2004, the Federal Reserve studied 300,000 credit reports 
and they found the following to be true: ``Available evidence 
indicates that the information that credit reporting agencies 
maintain on credit-related experiences of consumers and credit 
history scoring models derived from these experiences have 
substantially improved the overall quality of credit decisions 
while reducing costs of such decision-making.''
    Consumer experiences in reviewing their credit report 
disclosures validate the conclusions of the Federal Reserve. 
Out of 52 million free credit report disclosures provided, only 
1.98 percent of these reviews resulted in a dispute where data 
was deleted. Often-cited studies with regard to accuracy have 
been rejected by the Government Accountability Office, and in 
their 2003 testimony, they state, ``We cannot determine the 
frequency of errors in credit reports based on the Consumer 
Federation of America, U.S. PIRG, and Consumer's Union 
studies.'' Two of the studies did not use a statistically 
representative methodology because they examined only the 
credit files of their employees, who verified the accuracy of 
the information, and it was not clear if the sampling 
methodology in the third study was statistically projectable.
    Our members data management is a success story, and we can 
all have full confidence in the data upon which decisions are 
based.
    Some suggest that credit history should not be used because 
some consumers do not have a credit report which can be scored 
or don't have a credit report at all. State laws address this 
by prohibiting insurers from denying, canceling, or non-
renewing a policy based solely on credit information. And we 
agree with this position.
    The good news, and the real good news for consumers is that 
CDIA's members are leading the effort to expand the types of 
payment data, which can be used for underwriting. Several of 
our members have already brought to market public record data 
products, which allow a user to consider assets where there's 
an absence of credit payment history.
    Some CDIA members already include utility and 
telecommunications payment data in traditional credit-reporting 
databases. Other members of the CDIA are aggregating checking 
account consumer payment data, where such data is reported 
directly by the consumer's bank to the database, and some CDIA 
members provide services where they validate payment data 
provided by the consumer.
    The Political and Economic Research Council's empirical 
study of 8 million credit reports found the following to be 
true, including alternative data such as those that I've 
discussed, are especially beneficial for members of ethnic 
communities and other borrower groups. Hispanics saw a 22 
percent increase in acceptance rates. The rate of increase was 
21 percent for blacks, 14 percent for those age 25 or younger, 
and 21 percent for those who earned $20,000 or less annually.
    In conclusion, we believe the right balance has been struck 
with regard to the Federal and State laws and that no new law 
is necessary. The States have fulfilled the role expected of 
them.
    Our members' data contributes to fair treatment. A May 18, 
2008, Washington Post story reported that a study of an entire 
year's FHA applications turned up the additional fact that FHA 
lower-income borrowers typically had higher scores than those 
with larger incomes. This is powerful new data that should give 
us confidence in the core value of credit histories. Our 
members' data is blind to race and ethnicity. Our members' data 
helps consumers. Consumers want to be recognized for their 
years of care and responsible actions, regardless of their race 
or ethnicity.
    I thank you, Mr. Chairman, for your time, and I look 
forward to answering your questions.
    [The prepared statement of Mr. Pratt can be found on page 
214 of the appendix.]
    Chairman Watt. Thank you, Mr. Pratt, for your testimony.
    Dr. Powell, professor, University of Arkansas at Little 
Rock, you are recognized for 5 minutes.

 STATEMENT OF LAWRENCE S. POWELL, PH.D., PROFESSOR, UNIVERSITY 
                   OF ARKANSAS AT LITTLE ROCK

    Mr. Powell. Thank you, Chairman Watt, Ranking Member 
Miller, and members of the subcommittee. I'm honored to be 
invited to share information with you about insurance scoring. 
I appear on behalf of the Independent Institute as a research 
fellow. I have a Ph.D. in insurance, and I hold the Whitbeck-
Beyer Chair of Insurance and Financial Services at the 
University of Arkansas at Little Rock.
    This is an important topic, given the financial stability 
the insurance industry provides consumers. And accurate pricing 
is a cornerstone of the insurance mechanism.
    My perspective is that of an educator and a researcher. And 
I think it's instructive to begin with a big-picture view of 
insurance pricing. Insurance companies face an unusual 
challenge; they must set prices for the products they sell 
before they know all of the costs. To meet this challenge, they 
employ complex pricing methods developed by actuaries, using 
economic and statistical techniques.
    It should then come as no surprise that some aspects of 
actuarial science and insurance pricing are puzzling to people 
who have not developed substantial expertise in this field. 
Insurance scoring is an example of a beneficial innovation in 
insurance pricing that causes some people concern.
    It's my opinion that thorough consideration of insurance 
scoring should lead one to conclude it is not only appropriate 
for insurers, but that using it creates value and promotes 
fairness in society. There are many compelling arguments in 
favor of these conclusions.
    Given the time limit in this forum, I would like to share 
with you a fundamental reason why insurance scoring is a good 
practice, and a fundamental observation suggesting that any 
potential misuse of insurance scoring cannot persist in the 
market.
    The first fundamental point is that insurance scoring is an 
extremely powerful and accurate predictor of insured losses. 
Evidence of this is conclusive. Studies by the Texas Department 
of Insurance, the Federal Trade Commission, and several others 
showed that the subset of drivers with low insurance credit 
scores submit more claims and cause more total loss payments 
than those with high credit scores.
    In fact, it has been shown that drivers with two or more 
prior losses, but good credit, are less likely to have a loss 
in the current year than drivers with clean driving records and 
bad credit. There are many benefits to using accurate 
predictors of loss in insurance pricing models.
    For use of innovative, accurate predictors of loss, such as 
insurance scores, availability of insurance has improved, 
competition in insurance markets has increased, and costs have 
decreased for many insurance consumers.
    Many experts believe the coinciding advent of insurance 
scoring and the decrease in residual market populations for 
automobile insurance are directly linked. By introducing new 
information to the insurance pricing models, insurers were able 
to find acceptable risk they were previously unable to 
identify.
    Accurate loss models also benefit society by producing fair 
outcomes in which insurance premiums are commensurate with risk 
of loss. When insurers cannot use accurate predictors of loss, 
low-risk drivers must pay higher premiums to subsidize high-
risk drivers. In addition to a general sense of fairness, 
accurate loss predictors also create incentives for high-risk 
drivers to take more care in driving.
    Effective competition is a fundamental characteristic 
observed in U.S. insurance markets. Competition prevents 
insurers from charging excessive or unfair premiums. In 2005, 
the NAIC data show an average of 157 insurance companies 
underwriting the private passenger automobile cover in each 
State. It's therefore reasonable to believe that an insurer 
cannot systemically overcharge a group of drivers, because then 
one of the other 156 existing companies, or perhaps a new 
company, has an opportunity to cover that group of drivers at 
an equilibrium price.
    But we're not here because everyone likes insurance 
scoring. I've heard critics describe potential or anecdotal 
unfair outcomes associated with insurance scoring. And I do not 
dispute the fact that some consumers have encountered 
individual rating scenarios that seem to lack intuition.
    For example, I know of a consumer in Arkansas who received 
an increase in his premium because his wife canceled a credit 
card they were not using. However, he called a few competing 
insurance companies and found one that offered him the same 
coverage at a significant discount from what he was paying 
before the change in his credit. And this is an example of 
competitive markets reaching an optimal outcome.
    While competitive markets are very effective at making 
goods and services consumers want available to them, critics 
have voiced concerns that when a drop in credit is unrelated to 
insurance risk, some individuals could be mistreated by 
insurance scoring. In response to such concerns, almost every 
State has regulations in place to recognize the benefits of 
scoring, while limiting its use in these certain scenarios.
    I think it's worth noting that many insurers offered the 
same protections as these regulations require before the laws 
were enacted. And this is another example of competitive 
markets creating an optimal outcome.
    Thank you again for this opportunity to share with you 
today. I look forward to addressing your questions.
    [The prepared statement of Dr. Powell can be found on page 
193 of the appendix.]
    Chairman Watt. Thank you, Dr. Powell, and I thank all of 
the witnesses for their testimony.
    I will recognize myself for 5 minutes for questions. Not 
for the purpose of discounting your testimony, but for the 
purpose of making sure that we understand that there is some 
vested interest that the members of your organization have in 
this, the members of your organization provide the credit 
scoring that insurance companies rely on? Reports?
    Mr. Pratt. To clarify, Mr. Chairman, our members do two 
things. They provide the underlying credit data, the credit 
history that is the basis for the score, and in some cases they 
may be the score provider; in some cases there may be a third-
party company that is providing the score which is used by the 
insurer.
    Chairman Watt. Okay. Would you have access to information 
about what part of your members' business is related to 
providing insurance credit scoring as opposed to other 
information?
    Mr. Pratt. I can't answer the question here at the table.
    Chairman Watt. I understand that. But would you have access 
to the information if we ask you to obtain that?
    Mr. Pratt. I don't know, because it might be market-based, 
and publicly traded companies sometimes make different 
decisions about what they want to make public and what they 
don't, Mr. Chairman.
    Chairman Watt. Okay. But I suppose it would vary from 
company to company?
    Mr. Pratt. I have no doubt that different companies would 
claim different market shares.
    Chairman Watt. Mr. Neeson, your company did not use credit-
based insurance scores until 2000, is that correct?
    Mr. Neeson. That's correct, sir.
    Chairman Watt. And what were the factors that you were 
using prior to your use of credit-based insurance scoring?
    Mr. Neeson. The industry is very competitive, and--
    Chairman Watt. I'm talking about your company.
    Mr. Neeson. Well, I'll just say that the sort of things 
that we used in the past would be age of driver, marital 
status, sex of driver, use of car, location of the risk, the 
limit of liability, the value of the car, the age of the car. 
Things like that. Prior accidents--I don't know if--
    Chairman Watt. Those kinds of things that people would 
normally associate with having some connection to risk when 
you're driving?
    Mr. Neeson. I would say it would also include things that 
we talked about earlier, like good student driver discounts.
    Chairman Watt. Okay. What percentage, how much weight does 
your company give to credit scoring versus those other more 
traditional underwriting factors?
    Mr. Neeson. We don't deal in weights in the pricing of a 
vehicle, but I do know about the kinds of pricing factors--
    Chairman Watt. Well, if I walked into your office--
    Mr. Neeson. Okay, the weight--
    Chairman Watt. You're saying you wouldn't--I mean you have 
to have a weight.
    Mr. Neeson. Yes. For example, I don't know if you've had a 
teenage driver before, but a teenage driver added to the policy 
would increase the rates substantially, 3 times, and so forth, 
whereas the value of having a--
    Chairman Watt. Well, would the weight of a credit report be 
less for a teenage driver?
    Mr. Neeson. Far less than that. A 16-year-old driver versus 
someone with--
    Chairman Watt. Mr. Neeson, please listen to my question.
    Mr. Neeson. Sure.
    Chairman Watt. What percentage weight do you give to credit 
scoring in determining rates? I appreciate the information 
about being a teenage driver, but this hearing is about credit 
scoring, and so it's that particular factor that I'm trying to 
find out what weight you give to it.
    Mr. Neeson. I don't have the exact figures, but I would say 
that in automobile insurance, that would range from about a 15 
to 20 percent discount to a surcharge of 50 percent, something 
in that neighborhood.
    Chairman Watt. I am not talking about the discount; I am 
talking about the underwriting decision.
    Mr. Neeson. Westfield does not use the insurance score as 
any part of its weighting or whatever, for underwriting. We 
only use it for pricing, not for underwriting.
    Chairman Watt. Oh, okay. Yes.
    Dr. Powell, you have talked about the predictive value of 
insurance-based scores for risk. Let me be clear about whether 
you are talking about risk or claims. Which one are you talking 
about when you say risk?
    Mr. Powell. The risk of claims. I don't see where there's a 
difference if we're talking about an insurance mechanism.
    Chairman Watt. Well, there is a difference if somebody has 
an accident and elects not to file a claim.
    Mr. Powell. Not in the amount of money that is paid out by 
the insurance company.
    Chairman Watt. Okay. So you are talking about the actual 
amount of claims that people, pay is what you are talking 
about.
    Mr. Powell. Yes.
    Chairman Watt. Okay. That's fine.
    My time has expired. I will recognize the ranking member 
for 5 minutes.
    Mr. Miller. Thank you. We've talked about a lot of things. 
We've talked about underwriting standards, pricing, loss 
ratios, profitability, risk have all been used in 
conversations, premiums based on higher risk, lower risk. 
Insurance companies are not nonprofit organizations; they are a 
for-profit industry.
    And in order to set premiums, you have to consider risk and 
the probability of a loss or how many losses, and the factors 
associated with it.
    And I know, Mr. Poe, you testified that CURE does not use 
credit scores because of your belief that they are proxies for 
incomes. And that's really completely different than most of 
the witnesses we have had today; their opinion has really not 
said that; they have not raised that issue. And yet FHA has now 
determined they're going to use a new policy; they're going to 
use credit scores for risk-based pricing. And in fact, the 
report they just completed, they found that lower-income FHA 
borrowers have average FICO scores that are higher than for 
borrowers with larger incomes.
    I know that's kind of shocking to people, but that's how 
FHA is going to do it in the future. Do you think that's a 
reasonable and appropriate thing for FHA to do?
    Mr. Poe. You know, I haven't seen the study, but I don't 
know, so I can't really comment on that.
    Mr. Miller. Okay. Now the study that was generated earlier 
by the FTC and the Federal Reserve basically said that for 
whatever reason, credit scores is a predictor of risk loss. I 
mean, that is what their report came out and said.
    Mr. Poe. Correct.
    Mr. Miller. Okay. Thank you. Your argument was different, 
then. I just wanted to get an opinion.
    Okay. Mr. Neeson, you were testifying on behalf of PCI, who 
adamantly opposes H.R. 5633 and H.R. 6062 because these bills 
would increase prices and reduce the availability for most 
consumers. What are the facts? And are most of the consumers 
helped or hurt by credit score usage, in your opinion?
    Mr. Neeson. From our own company experience, the vast 
majority of our customers are benefitting from the use of 
insurance scores. In my written testimony about our auto home 
package policyholders, three-quarters of those received 
discounts and another 15 percent or so are neutral.
    In the Arkansas surveys that are run annually, comparable 
numbers of people benefiting, and neutral persist. In my 
testimony earlier it was 90.3 and 8 percent. Amazing 
percentage.
    Mr. Miller. Can you take a credit score on an individual, 
is there any way you can glean from that gender or race from 
that credit score?
    Mr. Neeson. No.
    Mr. Miller. Okay. So it's pretty much a neutral score. You 
wouldn't have an idea if it was male, female, black, white--
    Mr. Neeson. In the reverse, all insurance companies really 
have no idea of the race of their customers. Westfield would 
have no idea of that. And what we do know is that the vast 
majority of our customers do benefit from insurance scores. By 
eliminating that I also know that there would be a vast number 
of people then that would be severely harmed, and those would 
include groups such as senior citizens on a fixed income, you 
know, lower-income people who are working hard to pay their 
bills, to pay their gas bills, to pay their electric, and food 
costs. In these economic times, it would be very difficult for 
so many people to have higher payments such as that.
    Mr. Miller. And if insurers are unable to price for risk, 
for example, because credit score usage is banned, does this 
increase overall costs for consumers, in your opinion, as the 
Federal Reserve Board found, because you have to charge higher 
premiums for risk uncertainty?
    Mr. Neeson. Yes. In my opinion, that would be the case. It 
would be no different. I'm sure that all of you are aware of 
the difference between Treasury bonds and junk bonds; the risk 
of each causes a higher rate to be charged for the risks with 
higher risk of loss and insurance.
    Mr. Miller. Mr. Pratt, you found that the elderly have 
better scores on average? Based on reports we have seen, the 
Federal Reserve said that seniors have better credit scores on 
average. And Mr. McCarty was on the panel before, and he 
testified to the opposite. But who, in your opinion, would you 
believe to be correct in that?
    Mr. Pratt. The preponderance of the evidence supports the 
conclusion that seniors more often have higher credit scores. 
By the way, the reason for that is in part because they have 
been in the marketplace longer, so as they have built a history 
over time and demonstrated--you can have a consumer with a 1-
year credit history and a consumer with a 50-year credit 
history. And even if their credit reports looked exactly the 
same, there would be some difference in the score, because one 
consumer is demonstrating good hard work and good behavior for 
a year, and the other consumer is demonstrating it for 50 
years.
    Mr. Miller. Okay. So banning it could particularly harm 
seniors?
    Mr. Pratt. That's possible. That's a possible outcome.
    Mr. Miller. I'm in the situation you're in; I'm out of 
time, Mr. Chairman, so I yield back. Thank you.
    Chairman Watt. Could I ask unanimous consent for 30 
additional seconds and ask you to yield just on this last 
point, because I'm trying to square Mr. Pratt's testimony and 
Mr. Neeson's testimony.
    Mr. Miller. Oh, sure.
    Chairman Watt. Seniors have higher, better credit scores, 
yet Mr. Neeson said they have--one of the traditional factors 
that they were taking into account was age. That suggests to me 
that seniors may have higher incidents of accidents. Is that 
correct? Or am I wrong about that? Mr. Neeson?
    Mr. Neeson. Seniors do have better insurance scores from 
what at least I've heard.
    Chairman Watt. I got that from Mr. Pratt. I'm talking about 
their driving record.
    Mr. Neeson. I've seen where people 60 years old and so 
forth have better driving, and as they get to be 80 or 90 years 
old get worse. And that's what I've seen.
    Chairman Watt. So you would factor that in--
    Mr. Neeson. However, the improved insurance score, these 
work independently. It's like your value of your car, and the 
location that you--
    Chairman Watt. I appreciate it. I understand they work 
independently, but they work counterproductively, it seems to 
me. If you are taking credit scores into account, and seniors 
have better credit scores, then you must be saying they have 
less accidents, or they at least, according to Dr. Powell, 
submit less claims for this to make sense. Otherwise--but I 
yield back to the--
    Mr. Miller. Can I have 30--
    Chairman Watt. Sure.
    Mr. Miller. But I heard the testimony earlier that 
underwriting standards are different, and that would be the 
loss ratio, accidents and stuff that they tend to have. And 
then this would be used after that. Is that not correct?
    Mr. Neeson. That's correct. Different insurance companies 
do--
    Chairman Watt. In his company.
    Mr. Miller. Yes.
    Mr. Pratt. Could I just add one additional comment, Mr. 
Chairman?
    Chairman Watt. Yes, sir.
    Mr. Pratt. It's a personal experience. When I was 24 years 
old in Texas--
    Chairman Watt. Does this have something to do with aging?
    Mr. Pratt. It does. It has something to do with aging.
    Chairman Watt. All right.
    Mr. Pratt. And I needed insurance and I needed a new car, 
so I went out and bought my new car, and I got my insurance 
policy. And because I was 24 years old, my insurance premium 
per month was higher than my car payment per month.
    Chairman Watt. I'm sure that has something to do with what 
we were just talking about.
    Mr. Pratt. When I was 25, my insurance premium--
    Chairman Watt. You're going to have to make this point a 
little bit quicker, because my time--
    Mr. Pratt. Well, the bottom line is I think the age issue 
works on both ends. In other words, had a credit score been 
used, it might have been a counterbalance and actually caused 
the insurance company to be able to rate me differently and to 
allow me to pay a lesser price, and not to have used age as the 
preponderant factor in determining my premium. I think it's 
just worth the consideration that it works on both ends of the 
scale, Mr. Chairman.
    Chairman Watt. I hope somebody understands the value of 
that. Because I don't. I'm sorry.
    Mr. Hunter. Mr. Chairman, could I add something?
    Chairman Watt. No. All of our time expired 5 minutes ago. I 
am sorry, but I don't want to penalize the other members of the 
committee.
    I recognize the gentlelady from California for 5 minutes.
    Ms. Waters. Ms. Rice, with the National Fair Housing 
Alliance, will you please explain the disparate impact on 
racial minorities from the use of credit-based insurance 
scores?
    Ms. Rice. Well, as is identified in our testimony, 
discrimination in the marketplace cannot be excised from the 
credit repository data. And there are so many instances of 
discrimination in our marketplace where African Americans and 
Latinos are disparately impacted or disproportionately 
negatively impacted, such as the current foreclosure crisis 
that we are experiencing. If you compare the rate of 
foreclosures across various demographic designations, you'll 
see that African Americans and Latinos are harder hit by that.
    Now they're harder hit not because they posed a greater 
risk, but they're harder hit because they were 
disproportionately marketed loan products that were non-
performing and that were unsustainable. It had nothing to do 
with their individual level of risk; it had everything to do 
with discrimination in the marketplace. And we feel that using 
credit information, particularly at this juncture, is going to 
do more harm than good, and we're going to see even greater 
disparities.
    As you've heard other people say before, African Americans 
and Latinos score anywhere between 10 points and 35 points 
lower than their white counterparts. And again, we argue that 
is not because they are more intrinsically or inherently risky, 
but due to discrimination in the marketplace.
    Ms. Waters. Thank you. Mr. Hunter, do you agree with that?
    Mr. Hunter. Yes. I believe that's correct, and I do believe 
that's why people are paying more if they're lower income and 
if they're minorities for insurance.
    Ms. Waters. Mr. Poe, do you agree with that?
    Mr. Poe. Yes, I do.
    Ms. Waters. Mr. Neeson, do you understand that?
    Mr. Neeson. His answer?
    Ms. Waters. No. I have been talking with the three 
witnesses who preceded you about the disparity in pricing and 
how it impacts minorities. And I wanted an explanation so that 
everybody could hear it, to see if you understand it or you 
agree with it or disagree.
    Mr. Neeson. I know that insurance scoring does work within 
races and nationalities. That was based on the FTC study. It 
shows--
    Ms. Waters. I'm sorry, what did you just say? It works 
within? What does that mean?
    Mr. Neeson. One of the charts towards the back of the 
survey shows that those individuals with better insurance 
scores by race had lower loss costs. And one of the things that 
we saw--and again, we are not privy to any racial information 
of the company; but people that live in perhaps urban areas or 
whatever may have prior claims. And what I have seen is that 
the--
    Ms. Waters. My question to the first person was to explain 
the disparate impact on racial minorities from the use of 
credit-based insurance scores. She did an explanation. My 
question to you was: Did you understand that, what she said?
    Mr. Neeson. I did understand that.
    Ms. Waters. Do you agree with that?
    Mr. Neeson. No, I don't.
    Ms. Waters. Thank you.
    Let me go on to Mr. Pratt. Did you hear what was explained 
by Ms. Rice?
    Mr. Pratt. I did.
    Ms. Waters. Do you agree with that?
    Mr. Pratt. I do not.
    Ms. Waters. I beg your pardon?
    Mr. Pratt. I do not.
    Ms. Waters. You do not.
    Okay. And lastly, Mr. Powell, did you hear the explanation 
about the disparate impact on racial minorities from the use of 
credit-based insurance scores? Do you agree with that?
    Mr. Powell. I heard it; I disagree with the conclusion.
    Ms. Waters. Okay.
    Mr. Chairman, your bill--if I may--I know this is a little 
bit unusual--your bill was introduced because of the disparity. 
And you said that you had some documentation for it. Would you 
repeat that documentation?
    Chairman Watt. My documentation is based on the FTC's 
report that credit scores in this case are a proxy for race. 
And I think--well, that's what we based it on, yes.
    Ms. Waters. I see. Mr. Neeson, have you seen the report?
    Mr. Neeson. Yes, I have.
    Ms. Waters. And you think that the FTC is wrong?
    Mr. Neeson. I saw that it showed little proxy effect.
    Ms. Waters. I can't hear you.
    Mr. Neeson. I heard that it said little proxy effect.
    Ms. Waters. What does that mean?
    Mr. Neeson. Negligible.
    Ms. Waters. What percentage? How much? How little?
    Mr. Neeson. I don't know.
    Ms. Waters. Mr. Pratt, have you seen the report or read the 
report?
    Mr. Pratt. I have.
    Ms. Waters. Do you think it's wrong? Do you disagree with 
that?
    Mr. Pratt. I think the report shows that with many 
different underwriting factors, if you pull it out on its own 
and you don't consider it in the context of the other factors 
used in the decision, you might find some kind of proxy effect; 
but I think the key point here is that it was a negligible or 
minimal proxy effect.
    Ms. Waters. Not enough to be concerned about?
    Mr. Pratt. Well, I think the insurance industry, and I 
suspect all industries, are always concerned to make sure there 
is not a sizeable proxy effect. Nobody wants that in the real 
market.
    Ms. Waters. But if it is a proxy effect, it should be 
corrected. Is that correct?
    Mr. Pratt. I think that if--I don't believe that the credit 
scoring system or the credit reporting system we have today is 
an enabler of the kind of proxy that I think we're talking 
about here.
    Ms. Waters. So the FTC report was wrong?
    Mr. Pratt. The FTC report suggests minimal proxy effects. 
You might get that with education. You might find that with 
geography. You might find that with other factors. And I think 
that is what is so key in this discussion is that you can hold 
out any individual factor and potentially find some effect that 
might speak to race or might speak to ethnicity or might speak 
to income. I think that's really the key.
    Ms. Waters. Mr. Powell, I saw you shaking your head. That 
FTC report is just wrong, right?
    Mr. Powell. That specific result I would take issue with. I 
do not believe that it would withstand any sort of objective 
scrutiny, based on the way it was calculated. If I were 
reviewing that as an academic peer reviewer, which is a role 
that I take on frequently, I would not accept that as something 
that could be stated as a conclusion, based on the measurement.
    Ms. Waters. I see. Given your academic and intellectual 
review of the study, could you respond to this committee with 
you conclusion, based on the study that you have alluded to?
    Mr. Powell. Based on the FTC study--
    Ms. Waters. Yes--
    Mr. Powell. From the results that they present, I would 
conclude that there is not a detectable proxy, that the result 
they get is invalid, and they all but say that in their report, 
that--
    Ms. Waters. Would you present that to this committee? Could 
we ask you to give us your conclusion in writing, based on your 
review and your study?
    Mr. Powell. I would be pleased to, yes.
    Ms. Waters. I'm not simply asking for the conclusion, as 
you are giving it now--
    Mr. Powell. Oh, yes. Sure--
    Ms. Waters. But because of your intellectual study, I would 
like to see how that is set forth. Thank you.
    Mr. Powell. I'd be happy to.
    Ms. Waters. I yield back the balance of my time.
    Chairman Watt. I thank the gentlelady.
    The gentleman from Texas, Mr. Green, is recognized for 5 
minutes.
    Mr. Green. Mr. Chairman, because Representative Boren needs 
to leave, may I switch places with him, please?
    Chairman Watt. I would be delighted to have you switch 
places with Mr. Boren.
    Mr. Green. Thank you.
    Mr. Boren. Thank you, my good friend, Al Green, and Mr. 
Chairman.
    I just have one question, and starting with Mr. Neeson, 
going to Mr. Hunter, I would like your response on this. As 
Kevin McCarty testified in our earlier panel, there are 
inherent weaknesses in the credit reporting system. Though 
reports vary, there is no question that many credit reports 
contain mistakes, and it is a lengthy process to correct 
mistakes, and on the credit report of our constituents and your 
consumers.
    Additionally, the methodology used in credit scoring is 
opaque to customers, leading to greater confusion and hurdles 
in obtaining and maintaining a good credit score. Some business 
practices in my State of Oklahoma allow a consumer to obtain a 
policy with their current credit score and their premium with 
that company will not go above the pricing floor due to this 
credit score change, due to any credit score change. In fact, 
the consumer's better credit gets a proportionate decrease in 
the premium.
    So basically, this. If you start getting bad credit--after 
I go in to meet with my insurance agent, and I get a premium 
let's say on an automobile, if I have bad credit after that, my 
premium can't go down because my credit rating goes down. If my 
credit rating goes up, I actually save money. And so that is 
kind of a unique thing that is happening in Oklahoma.
    What do you all think about that practice? And is that 
something that our committee needs to kind of look at, at the 
Federal level? Starting with Mr. Neeson, going to Mr. Poe.
    Mr. Neeson. Thank you, Congressman. Again, the industry's 
extremely competitive and the pricing algorithms for each 
company vary dramatically, not only in the factors used and the 
approach used.
    For example, as you mentioned, there are a number of 
companies that use credit at the initial issuing of the policy 
and then either don't use it later or only use it as an 
improvement factor. There are also regulations by different 
States that may or may not require review of credit over, you 
know, different years.
    But the short answer to you is yes, many companies do look 
only for the improvements, so that it can be used in a positive 
fashion, again, to retain customers. It's very hard to sell new 
customers; they want to keep them, so they can continue to have 
those customers as customers.
    Mr. Poe. Thank you, Congressman. Actually, I think that 
probably a bigger impact of the use of education and occupation 
is far greater than the discussion on credit scores, because if 
you study the use of education, whether you have a 4-year 
college degree, or whether you have a masters degree, or 
whether you work in a white-collar high-paid traditional 
occupation, it is far greater in the impact of every person, in 
particular minorities and lower-income people.
    So to be honest with you, even if you adopted some sort of 
practice like that, dealing with credit scores, you would not 
escape the inevitable impact that education and occupation has 
in our industry. So I don't think it would make any difference, 
to be honest with you.
    Mr. Boren. Thank you. Ms. Rice?
    Ms. Rice. I think I agree with Mr. Poe that first of all, 
for consumers sort of coming into the system, you are going to 
be disproportionately affected, just by sheer virtue of the 
fact that you are using a scoring mechanism, you are going to 
be disproportionately negatively impacting African-American and 
Latino customers coming into the system. So to say that we are 
going to disparately impact you coming into the system, but 
you're not going to have to pay a higher premium beyond the 
higher premium that--the inappropriately higher premium that 
you paid coming into the system, is not an adequate answer.
    Mr. Boren. Okay. Mr. Hunter?
    Mr. Hunter. Well, if I put myself into the position--I 
don't agree with the use of credit scoring, as I've indicated--
if credit scoring works, then the system you just described 
makes no sense. I mean if credit scoring really works, and 
somebody gets a worse score, their rate should go up. And if it 
gets a better score, rates should go down. And it's not a zero-
sum game. Because if the score doesn't go up, that means 
there's less money coming in from the credit scoring system, 
which goes into the base premium. That means the people with 
thin files and all are going to pay more. Today people with 
thin files pay too much because the neutral rate has off-
balance built in from inadequate credit scoring collections 
like that.
    And so the neutral people are going to have pay more, if 
you don't raise them on the people who are getting worse. But I 
don't think the whole system should be used at all. But if you 
use it and you really believe in it, then it makes no sense to 
cap it.
    Mr. Boren. Thank you all so much. I yield back.
    Chairman Watt. The gentleman from Texas, Mr. Green?
    Mr. Green. Thank you, Mr. Chairman. Let's start with Mr. 
Neeson. Mr. Neeson, do you agree that persons who are more 
wealthy tend to elect to have higher deductibles?
    Mr. Neeson. I've not done any study on that, so my opinion 
might be that that would be the case. But--
    Mr. Green. If this is true--
    Mr. Neeson. I don't have that information.
    Mr. Green. I understand. You don't have the empirical data. 
But it seems to suggest--my question would seem to suggest that 
if you have more money, you might have a $1,000 deductible as 
opposed to a $250 deductible. You have not found that to be the 
case? Persons who have more money tend to take out higher 
deductibles?
    Mr. Neeson. I have observed that people who want to manage 
their prices, their costs of insurance, take out higher 
deductibles. Our agents often encourage customers to have 
higher deductibles, so that they can manage the expense of 
their insurance better. That's what I have observed.
    Mr. Green. And this means, of course, that these persons 
with higher deductibles are prepared to pay a higher amount of 
money for any infraction, for an accident.
    Mr. Neeson. I think--
    Mr. Green. Or they should be, because if you have a $1,000 
deductible, you're going to pay the first $1,000.
    Mr. Neeson. Or they would get a loan to pay for it. Or--
    Mr. Green. Right--
    Mr. Neeson. If they think they aren't going to have a 
claim.
    Mr. Green. But generally speaking, this would benefit a 
person who has the money to pay that $1,000 deductible, 
wouldn't it?
    Mr. Neeson. Very wealthy people may not even choose to 
purchase physical damage on their cars.
    Mr. Green. We're not talking about very wealthy, we're 
talking about people who are more wealthy than some other 
people.
    Mr. Neeson. I don't--
    Mr. Green. See, I'm not a very wealthy person, but when I 
was--I've had the privilege of being poor, and to have acquired 
some amount of status in life. And when I was poor, I had the 
lowest deductible I could get and I used my insurance every 
chance I could whenever something happened. But when I gained a 
little more status, then I decided I wanted to get a $1,000 
deductible because I'll pay the first $1,000 to keep you from 
going up on my policy. That's what I did. Does that make sense?
    Mr. Neeson. That does make a lot of sense--
    Mr. Green. I hope it makes sense, because that's what your 
agents encourage us to do when we can afford it.
    Mr. Neeson. The premium would be higher for the lower 
deductible, so a lot of people do use higher deductibles.
    Mr. Green. And do you agree that generally speaking, 
minorities in this country--just as a matter of fact--tend to 
be the persons who are less wealthy than others? Generally 
speaking?
    Mr. Neeson. I'm listening to you. I don't have any 
information on that.
    Mr. Green. You don't have any observations? Have you kind 
of looked around?
    Mr. Neeson. Certainly.
    Mr. Green. Have you not noticed? You read the newspaper?
    Mr. Neeson. Yes.
    Mr. Green. Okay. All right. So it's a fair statement, I 
think.
    Mr. Neeson. Yes.
    Mr. Green. Well, let's just see how your colleagues feel. 
Do you agree that minorities tend to be poorer than some others 
in this country? If so, raise your hand.
    [Show of hands]
    Mr. Green. Okay. Everybody seems to agree with this, Mr. 
Neeson.
    Mr. Neeson. There are wealthy people of all races.
    Mr. Green. Yes, there are. But minorities don't tend to be 
in a disproportionate number of the more wealthy people of all 
races. Do you agree?
    Mr. Neeson. Yes.
    Mr. Green. Okay. There are some things that we just have to 
agree to, we can take notice of, without having to have 
empirical evidence. So if this is the case, then probably 
minorities are going to be persons who are not going to have 
the higher deductibles because generally speaking, you have to 
be prepared to pay that deduction before you can get your car 
back and make it road-worthy again.
    Let me go on another point quickly. You mentioned teenaged 
drivers increasing the rate paid by some multiple. What was 
that number again? Teenage drivers or a teenage driver coming 
onto a policy?
    Mr. Neeson. I've--three or four times.
    Mr. Green. Three or four times whatever the current premium 
is? Now this is somewhat enigmatic for me, because I was born 
into a family that happens to be paying a high premium because 
of my father or my mother having a low credit score, and now 
because of my birth--I have no record of driving poorly, I have 
no credit history, but their premium will go up three or four 
times, some multiple, just because I was born into the family. 
Is this true? Of course it is.
    Mr. Neeson. The age of the driver? That had nothing to do 
with credit.
    Mr. Green. No, but you're going to increase the premium 
some multiple, based upon what the mom and pop are already 
paying, right?
    Mr. Neeson. That's correct.
    Mr. Green. Okay. So this driver has no history, has no 
credit score, but that driver is going to increase the family's 
premium some multiple simply because he was born.
    Mr. Neeson. At least with Westfield, the insurance score is 
based on the parents, so he would benefit from the better 
insurance score of the parents--
    Mr. Green. I understand. But if the parents don't have--
suppose they have a poor insurance score, then the parents will 
pay more because the child was born.
    Mr. Neeson. Because of the age. And you would probably 
agree that youthful drivers do present a higher likelihood of 
future--
    Mr. Green. I do--but the question is should the multiple 
that the parents pay be increased, based upon that driver being 
born into the family, when the multiple is already high? You 
see, if you neutralize that driver, then it would be okay. But 
now what you're saying is that family is going to pay some 
multiple because that driver was born, and that multiple is 
based upon the credit score of the parents, not the driver.
    Mr. Neeson. I do know that the majority of people do have 
better insurance scores. And so the parent would likely benefit 
from that. If we add--
    Mr. Green. But those that don't, does it benefit those who 
don't have better credit scores?
    Mr. Neeson. They would be paying higher, yes.
    Mr. Green. They would be penalized?
    Mr. Neeson. Yes.
    Mr. Green. Okay. Thank you.
    Thank you, Mr. Chairman.
    Chairman Watt. I thank all of the members and the witnesses 
for their participation in this hearing.
    Let me just ask Mr. Neeson one question, if I may. A public 
policy that says one should not be charged a higher insurance 
rate because of their race, that seems reasonable, then? Okay. 
So--
    Mr. Neeson. For automobile insurance?
    Chairman Watt. Automobile or homeowners'. So if we just 
passed a law that said, ``Thou shall not discriminate in rates 
based on race,'' and gave individuals a private right of 
action, would that be preferable to what we have proposed here?
    Mr. Neeson. I know of no company that uses race for 
pricing--
    Chairman Watt. I didn't ask you that. I said, would that be 
preferable to what has been proposed here? I mean, just a 
straightforward prohibition on using anything that 
discriminates, and give individuals the right to enforce it.
    Mr. Neeson. I as a person, as an individual, feel that it 
would be wrong to charge by race for automobile and homeowners' 
insurance.
    Chairman Watt. Okay. Thank you.
    I appreciate it.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing, as well as for the earlier panel. Without objection, 
the hearing record will remain open for 30 days for members to 
submit written questions to these witnesses and to place their 
responses in the record.
    We thank every single one of you for your participation 
today. We have been called for votes, and the hearing is 
concluded anyway, so we came out just in time. Thank you so 
much. The hearing is adjourned.
    [Whereupon, at 1:09 p.m., the hearing was adjourned.]











































                            A P P E N D I X



                              May 21, 2008

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
