[House Hearing, 111 Congress] [From the U.S. Government Publishing Office] USE OF CREDIT INFORMATION BEYOND LENDING: ISSUES AND REFORM PROPOSALS ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION __________ MAY 12, 2010 __________ Printed for the use of the Committee on Financial Services Serial No. 111-134 U.S. GOVERNMENT PRINTING OFFICE 58-044 PDF WASHINGTON : 2010 ----------------------------------------------------------------------- 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 MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York PETER T. KING, New York LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina RON PAUL, Texas GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois BRAD SHERMAN, California WALTER B. JONES, Jr., North GREGORY W. MEEKS, New York Carolina DENNIS MOORE, Kansas JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West WM. LACY CLAY, Missouri Virginia CAROLYN McCARTHY, New York JEB HENSARLING, Texas JOE BACA, California SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas AL GREEN, Texas TOM PRICE, Georgia EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina MELISSA L. BEAN, Illinois JOHN CAMPBELL, California GWEN MOORE, Wisconsin ADAM PUTNAM, Florida PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota KEITH ELLISON, Minnesota THADDEUS G. McCOTTER, Michigan RON KLEIN, Florida KEVIN McCARTHY, California CHARLES A. WILSON, Ohio BILL POSEY, Florida ED PERLMUTTER, Colorado LYNN JENKINS, Kansas JOE DONNELLY, Indiana BILL FOSTER, Illinois ANDRE CARSON, Indiana JACKIE SPEIER, California TRAVIS CHILDERS, Mississippi WALT MINNICK, Idaho JOHN ADLER, New Jersey MARY JO KILROY, Ohio STEVE DRIEHAUS, Ohio SUZANNE KOSMAS, Florida ALAN GRAYSON, Florida JIM HIMES, Connecticut GARY PETERS, Michigan DAN MAFFEI, New York Jeanne M. Roslanowick, Staff Director and Chief Counsel Subcommittee on Financial Institutions and Consumer Credit LUIS V. GUTIERREZ, Illinois, Chairman CAROLYN B. MALONEY, New York JEB HENSARLING, Texas MELVIN L. WATT, North Carolina J. GRESHAM BARRETT, South Carolina GARY L. ACKERMAN, New York MICHAEL N. CASTLE, Delaware BRAD SHERMAN, California PETER T. KING, New York DENNIS MOORE, Kansas EDWARD R. ROYCE, California PAUL E. KANJORSKI, Pennsylvania WALTER B. JONES, Jr., North MAXINE WATERS, California Carolina RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West CAROLYN McCARTHY, New York Virginia JOE BACA, California SCOTT GARRETT, New Jersey AL GREEN, Texas JIM GERLACH, Pennsylvania WM. LACY CLAY, Missouri RANDY NEUGEBAUER, Texas BRAD MILLER, North Carolina TOM PRICE, Georgia DAVID SCOTT, Georgia PATRICK T. McHENRY, North Carolina EMANUEL CLEAVER, Missouri JOHN CAMPBELL, California MELISSA L. BEAN, Illinois KEVIN McCARTHY, California PAUL W. HODES, New Hampshire KENNY MARCHANT, Texas KEITH ELLISON, Minnesota CHRISTOPHER LEE, New York RON KLEIN, Florida ERIK PAULSEN, Minnesota CHARLES A. WILSON, Ohio LEONARD LANCE, New Jersey GREGORY W. MEEKS, New York BILL FOSTER, Illinois ED PERLMUTTER, Colorado JACKIE SPEIER, California TRAVIS CHILDERS, Mississippi WALT MINNICK, Idaho C O N T E N T S ---------- Page Hearing held on: May 12, 2010................................................. 1 Appendix: May 12, 2010................................................. 57 WITNESSES Wednesday, May 12, 2010 Fortney, Anne P., Partner, Hudson Cook, LLP...................... 44 McRaith, Michael T., Director, Illinois Department of Insurance, on behalf of the National Association of Insurance Commissioners (NAIC)........................................... 8 Pratt, Stuart K., President and CEO, Consumer Data Industry Association.................................................... 42 Rukavina, Mark, Executive Director, The Access Project........... 40 Snyder, David F., Vice President and Associate General Counsel, American Insurance Association................................. 10 Wilson, John, Director, Analytics, LexisNexis Risk Solutions..... 12 Wu, Chi Chi, Staff Attorney, National Consumer Law Center........ 38 APPENDIX Prepared statements: Gutierrez, Hon. Luis......................................... 58 Waters, Hon. Maxine.......................................... 63 Fortney, Anne P.............................................. 67 McRaith, Michael T........................................... 81 Pratt, Stuart K.............................................. 115 Rukavina, Mark............................................... 137 Snyder, David F.............................................. 147 Wilson, John................................................. 180 Wu, Chi Chi.................................................. 186 Additional Material Submitted for the Record Hensarling, Hon. Jeb: Written statement of the Independent Insurance Agents & Brokers of America, Inc. (IIBA)............................ 241 Kilroy, Hon. Mary Jo: Letters of support from various organizations................ 243 Letter from VantageScore Solutions, LLC, dated May 3, 2010... 255 USE OF CREDIT INFORMATION BEYOND LENDING: ISSUES AND REFORM PROPOSALS ---------- Wednesday, May 12, 2010 U.S. House of Representatives, Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Luis V. Gutierrez [chairman of the subcommittee] presiding. Members present: Representatives Gutierrez, Maloney, Watt, Moore of Kansas, Waters, Hinojosa, McCarthy of New York, Baca, Green, Scott, Cleaver, Ellison, Klein, Foster, Speier; Hensarling, Royce, Capito, Garrett, Neugebauer, Price, Marchant, Lee, Paulsen, and Lance. Also present: Representatives Kilroy, Manzullo, and Cohen. Chairman Gutierrez. This hearing of the Subcommittee on Financial Institutions and Consumer Credit will come to order. Good morning and thanks to all of the witnesses for agreeing to appear before the subcommittee today. Today's hearing will examine the impact that the use of credit reports and information has on consumers outside of the traditional use for lending and credit purposes. We will examine the use of credit-based insurance scores, where the medical debt is predictive of a person's chances of defaulting, and finally, whether or not a consumer's credit information should be used to determine their employability. We will be limiting opening statements to 10 minutes per side, but without objection, all members' opening statements will be made a part of the record. We may have members who wish to attend but do not sit on the subcommittee. As they join us, I will offer an unanimous consent motion for each to sit with the subcommittee and for them to ask questions when time allows. I yield myself 5 minutes for my opening statement. This morning's hearing is about the use of credit information in areas such as insurance underwriting and employment purposes. We will hear about important yet complex and often opaque processes concerning credit board insurance and insurance scores in the first panel. In the second panel, we will hear about issues that are equally important to a vast number of consumers--the little known or understood use of credit information for hiring and even firing decisions, and the effect medical debt has on one's consumer report, even after you paid the medical debt off. When legislators or regulators attempt to fully grasp an issue such as credit-based insurance scores, they see a complex system laden with ever-changing computer applications and models, but it is precisely this complexity that should make us here in Congress delve further into an issue that affects every single American who owns or rents a house, a car, has insurance, has a job or is looking for a job, or is likely to incur medical debt. Do most consumers know that their car or homeowner's insurance rates may go up due to their credit score? Do they know that if one of their medical bills goes to a collection agency and they pay it in full and settle it, it will still affect their credit report for up to 7 years? Do people realize that even in these tough economic times, pre-employment consumer credit checks are increasingly widespread, trapping many people in the cycle of debt that makes it harder for them to pay off their debts and harder for them to get the job that would allow them to pay off the debt? I wonder--when you go to State Farm or Allstate or GEICO to get your insurance and they have a credit score, and that credit score was negative, so they are going to charge you more for your insurance, do they send you a note in the mail telling you that you are going to pay more for that insurance? I think these are all very important questions that the American public should know. Indeed, the current system facilitates the denial of employment to those who have bad debt, even though bad debt oftentimes results from the denial of employment, a vicious cycle. You cannot get a job, so you get a bad credit score. You have a bad credit score, so you cannot get a job. I wonder who is most likely to be affected, especially in these economic times. What? Extend unemployment compensation? What about the national debt? I have a way maybe we could settle unemployment compensation, how about letting somebody get a job and prove who they are without some mysterious number coming out of a black box somewhere where nobody knows about it. That is why the subcommittee is holding this hearing, the second so far this year on the issue of credit reports, credit scores, and their impact on consumers. We will look at reports and studies about the predictive nature of insurance scores and traditional scores among other things. As we do so, we also need to look at the basic guiding principles of equity, fairness and transparency. Some have contended that there is no disparate treatment of minorities in credit-based insurance scores. Some will say that even if there is a disparate impact on some groups, the system still does not need to be changed. The question of how predictive a credit-based insurance score is on an insured's likelihood to file a claim is important, as it is the predictive value of traditional credit scores used for credit granting. As long as there continue to be disparities in the outcomes of the current system for racial and ethnic groups and along class and geographical lines, I believe the system needs strenuous oversight and may need fundamental change. How to correct the disparities in the system with this disproportionately negative impact on minorities and low-income groups while maintaining the core framework of credit information as a risk management tool is a challenge we should take on. For example, on issues like the use of credit information for developing insurance pricing and the inclusion of medical debt collection in determining a consumer's risk of default, I have doubts as to whether there are biased uses of data. The Equal Employment Opportunity Commission, the Federal Reserve, the Brookings Institution, the Federal Trade Commission, and the Texas Department of Insurance have all found that racial disparities between African Americans, Latinos and Whites in credit scores exist, and we will see this has wide ranging implications beyond simply obtaining consumer credit. Defending a system where decisions such as determining car insurance rates or even something as vital as to whether or not to hire someone is based on something that has shown to possess a degree of bias is difficult, to say the least. I welcome the testimony this morning of those who believe the system works, and of those who believe the system needs to be changed to work in a more equitable, fair, and transparent fashion. In the same spirit of transparency, I am making it clear at the outset that I side with the latter group. I do not think you need any sort of score to predict that, from my point of view. In order to persuade this committee not to move forward on legislation that would strongly limit what we believe to be unfair practices, the industry witnesses before us must prove to me that not only are the practices we call into question scientifically predictive, but more importantly, they are fair and equitable to all Americans. The ranking member, Mr. Hensarling, is recognized. Mr. Hensarling. Thank you, Mr. Chairman. Thank you for calling this hearing. As we all know, last week we were greeted with more bad economic news in our Nation as unemployment ticked up yet again to 9.9 percent. Again, unemployment remains mired at a generational high. Since the President asked for and the Congress passed the stimulus bill, approximately 3 million of our fellow countrymen have now lost their jobs. There are countless stories of hardship, and countless stories of suffering. We know that the underemployment rate hovers around 17 to 18 percent of our country. By any historical standard, we should already be out of this recession. We should have robust GDP growth. We should have robust employment growth. Unfortunately, we do not. I believe, as do many, that the reckless spending, the enormous debt and deficit that has been brought up on us by this Congress, by this Administration, the serial bailouts, the government takeovers, and legislation passed that ultimately restricts access to credit have all contributed to the fact that we are still mired at almost double digit unemployment. I believe the Administration and Congress are holding back our economic recovery, an economy that wants to recover. Economies work on reverse gravity. What goes down must come up Yet, this recovery has been the most tepid and languishing recovery in the modern economic era. I did not even mention the impact of the high cost of the new health care bill and the threat of a national energy tax. As I talk to small business people in the 5th Congressional District of Texas, as I talk to investors, as I talk to bankers, as I talk to Fortune 500 CEOs, I hear the same message over and over, and that is, ``I am not willing to expand my business and create more jobs today. I do not know what the health care costs are going to be for my employees. I do not know what the energy costs might be associated with cap and trade. I do not know what my tax bill is going to be as tax relief expires at year's end, and I do not know how my Nation is going to pay for all of this debt.'' More taxes. More inflation. Given this backdrop, I would hope that any legislation that this subcommittee or full committee considers, that we would consider jobs to be job number one for our committees. I feel we are considering at least three more policy ideas that are going to further harm job creation in America by restricting access to credit. All of the ideas before us are either going to prohibit accurate data from going into a credit file or prohibit the use of accurate data that may be in a credit file. To many of us, this all has the distinct odor of government censorship and even the faint whiff of Orwellian thought control. The bottom line is, thinner credit files are going to erode risk-based pricing of these products, which in turn is going to lead to less available credit and more expensive credit, at a time again when our Nation is mired in almost double digit unemployment. Should credit scores be used in insurance underwriting? Are they predictive? I have seen a number of studies that claim they are but most importantly, I suppose those who are using them find them to be predictive. I believe they have an incentive to get it right. Otherwise, they would ultimately lose money and they would have to fold up shop. Those who get it wrong ultimately go out of business. Maybe one insurance company feels those who wear blue ties are riskier than those who do not. I do not know. I do not know if that is predictive. It is not logical, but maybe it is. One company may decide to use it and another one may choose not to use it. Information about discharged medical bills. There are a lot of setbacks that one can have in their life that ultimately impact their credit: divorce; unemployment; a medical bill. At the same time, are they predictive? If they are predictive, if we do not allow that information in, ultimately small businesses, many of which are organized as sole proprietorships-- Chairman Gutierrez. The gentleman's time has expired. Mr. Hensarling. In that case, Mr. Chairman, I will stop there. Chairman Gutierrez. I am going to ask unanimous consent that Ms. Kilroy be allowed to sit in this hearing, and grant her 2 minutes for an opening statement. Hearing no objection, it is so ordered. Ms. Kilroy. Thank you, Mr. Chairman. Thank you for your leadership in this important issue. I thank the witnesses for their time here today. I am interested in what you have to say, particularly about medical debt and the impact it has on the credit scores for millions of Americans, and their ability to get an affordable home loan or car loan, long after they have paid their medical debt. I ask for unanimous consent to enter into the record a letter written to me from my constituent, Julia Mueller of Columbus, Ohio. She is a responsible young adult, a college student. She pays her credit cards on time. She purchased health insurance. She checked with them before she was going to have an expensive procedure to see if it would be covered. She was assured it was. That was her understanding until the bills came and her insurance company denied coverage. She ended up in a year-long dispute with them on that. It was eventually resolved, but it destroyed her credit score. Now, she is worried about her ability after college to buy a car, and to buy a house. I worry it might even affect her ability to get a job. I introduced the Medical Debt Relief Act to help hard- working Americans like Julia who play by the rules, pay or settle their medical debts, yet find their credit scores adversely affected for years to come. Today, we are taking an important step in the right direction to deal with this important issue. I want to tell Julia when she writes to me that, ``I am fiscally responsible and I would like to be treated that way,'' and that is what we are aiming to do here today. Thank you, Mr. Chairman. I yield back my time. Chairman Gutierrez. The gentlelady yields back the balance of her time. Mr. Price of Georgia is recognized for 2 minutes. Mr. Price. Thank you, Mr. Chairman. Mr. Chairman, if the past 2 years have taught us anything, it is that risk is unavoidable and ever present. In order for the economy to work, businesses must be able to price their products for the risk that they incur. Risk- based pricing is especially important when trying to determine the reliability of the insured and the exposure of job creators. Credit-based insurance scores have proven to be the most predictive factor in determining the likelihood of a consumer filing a claim. This risk model enables insurers to more accurately underwrite and price for risk, and when this is done well, everyone wins. Democrats want you to believe that everyone should not be judged by their past actions. However, it is the American way to pull one's self up by working hard and making responsible decisions. What makes risk-based pricing and insurance scores important is the ability for people to improve their scores and lower their rates by paying their bills on time and taking responsibility for their financial decisions. What would happen if there was no risk pricing? Everyone would get the same price regardless of how much an insurer has to pay to cover a claim. This would result in significant and dramatic increases in rates to virtually all Americans, less credit available, more expensive credit, and more job destruction. This is clearly not the most wise avenue. I look forward to the testimony and hopefully our response in wisdom. I yield back. Chairman Gutierrez. Mr. Green is recognized for 2 minutes. Mr. Green. Thank you, Mr. Chairman. I thank the witnesses for appearing. Mr. Chairman, I am concerned about credit-based insurance scores, especially as they relate to employment. It is very difficult to be poor. It is very expensive to be poor. In poor neighborhoods, goods cost more. In poor neighborhoods, you find that unemployment is obviously higher for any number of reasons. It is very difficult to be poor. When you are poor and you need a job, and it is difficult to get a job because of credit scores, it seems that we compound the problem. I am very concerned about how we approach credit scoring with reference to employing people, especially people who are poor. I look forward to hearing from the witnesses and I look forward to solutions such that poor people will not find that they are being invidiously discriminated against. Thank you, Mr. Chairman. I yield back the balance of my time. Chairman Gutierrez. The gentleman yields back the balance of his time. I ask unanimous consent that Mr. Manzullo be allowed to sit on the subcommittee, and hearing no objection, I recognize him for 1\1/2\ minutes. Mr. Manzullo. Thank you, Mr. Chairman. There is a distinction between people who incur medical debt and those who go out and charge vacations and consumer items. I practiced law for 22 years and have been through probably 1,000 bankruptcies. In several of those cases, the people I put into bankruptcy either exhausted their insurance or had no insurance and they filed bankruptcy not because they wanted to, not because they did anything intentionally, but simply because they could not pay off their medical bills. I talked to two colleagues of mine in Rockford, Illinois, who specialize in bankruptcy. The two of them have been through 30,000 bankruptcies together. One had the record for credit card debt, $140,000. Mr. Chairman, it was all medical expenses. We have to draw a distinction here between people who because of their spendthrift outrageous uncreditworthy conduct go out and buy things just because they want them, and people who are caught up, especially today, without insurance or lack of insurance or many times very high deductibles, co-pays, etc. I am a sponsor of this bill because it is the right thing to do, especially with so many credit card companies, the case that my wife and I had on a simple $150 coat that was put on layaway, it took us 4 years to clear that. It was not until I threatened a lawsuit under the Fair Credit Reporting Act that the credit companies finally backed off on it. Credit card reporting companies do a job and I understand what they are doing, but for people who are the unfortunate victims-- Chairman Gutierrez. The gentleman's time has expired. Mr. Manzullo. They should not have to suffer the consequences. Chairman Gutierrez. My friend, Mr. Watt, is recognized for a minute. Mr. Watt. Thank you, Mr. Chairman. I may not even take a minute. I just wanted to applaud your continuing effort to shed some light in this area, an area that a number of us started looking at during the last term of Congress and found some very disturbing things, like credit scores determine your automobile insurance rates. I never could quite figure out why somebody's credit had anything to do with their driving record or how somebody's credit had anything to do with the insurance rates that they paid on their homeowner's insurance. There are a lot of disconnects here, and we need more information about this so we can make some good judgments and possibly do some legislation in this area. I think that is why this hearing is so important, and I applaud the chairman for the hearing. Thank you. Chairman Gutierrez. I thank the gentleman. Mr. Garrett of New Jersey is recognized for 2 minutes. Mr. Garrett. I thank the chairman, and I thank the ranking member, and I thank the members of the panel who are here. Credit information has obviously become an essential and valuable tool in allowing various market participants to more accurately price for the risk. One of the areas we are examining today is how this information is used by property casualty insurance companies in determining the premiums they charge to their clients. There have been numerous actuarial reports that have studied this. By using consumer-based insurance or CBIS, in determining premium rates for P&C lines, insurance companies are basically more able to accurately price for the risk of the consumer and the rates have significantly decreased for a broad majority of the policyholders. Credit scores are really just one of a number of different data points that insurers consider when determining a consumer's premium. If we were to now limit or restrict certain types of information from being used to allow insurers to more accurately price for risk, two things are going to happen: One, more people will pay higher premiums; and two, fewer people will be able to purchase insurance. Neither of these things are good. In the wake of the recent financial crisis, instead of looking for ways to decrease credit availability and the accurate pricing of risk, I believe Congress should be considering policies that will help expand credit for consumers and small businesses and lower the cost of credit and insurance premiums for the majority of Americans. With our current unemployment rate around 10 percent, we really must work on initiatives to expand economic opportunities for all Americans, not ways for the government to micro-manage our Nation's small businesses and risk trying to restrict the aggregate price of risk. With that, I yield back the balance of my time. Chairman Gutierrez. Last for our side, we have Congresswoman Maloney for 30 seconds. Mrs. Maloney. Thank you, Mr. Chairman. First, I want to welcome Mr. Wilson. LexisNexis is headquartered in the district I represent and I am very proud to represent his company which is so valuable to our country. The number of consumer complaints related to credit scores have been going up, and I look forward to his testimony and others on how we can better move forward in a way that is fair to consumers and fair to business. Thank you. Chairman Gutierrez. We have two panels this morning. The first panel will focus on the use of credit information for insurance underwriting and ratings, and the second panel will focus on the use of credit information in other areas such as employment. The first panel consists of three witnesses. First, the honorable Michael T. McRaith, director of the Illinois Department of Insurance, on behalf of the National Association of Insurance Commissioners. I welcome Mr. McRaith here from Illinois. He is doing a great job out in the State of Illinois. I am happy to have him here. Then, we have Mr. David Snyder, the vice president and associate general counsel of the American Insurance Association. Our third witness is going to be introduced by Mr. Price of Georgia. Mr. Price. Thank you, Mr. Chairman. Mr. Wilson is a constituent and I want to welcome him to our panel today. Mr. Wilson serves as the director of analytics for the Insurance Data Services Group at LexisNexis Risk Solutions. He joined Equifax in 1983, and his early experience included roles as a marketing analyst and as a field operations manager for electric gas and telephone utility customers, and he then served as manager of strategic planning and research before moving to Equifax Insurance Services in New Product Development. He has worked extensively on the development and introduction of the first credit scoring models, and has a wealth of knowledge in this area. In his current role with LexisNexis, he continues to support insurance risk scoring models and manages a team of statisticians and modelers, holds a B.A. in marketing from Oglethorpe, a grand university down in Georgia, and an MBA from Mercer University, another great education institution in Georgia. We want to welcome Mr. Wilson. Chairman Gutierrez. You are welcome here. We are going to start with the gentleman from Illinois, Mr. McRaith. You are recognized for 5 minutes. There is a clock there. It is green at the start of your 5 minutes. When there is a minute left, it will turn yellow. When you see it turning yellow, you have a minute left. A minute can last quite a while. When you see it turn red, I will tap. Five seconds later, we hope you will wrap it up. Please, Mr. McRaith, you are recognized for 5 minutes. STATEMENT OF MICHAEL T. McRAITH, DIRECTOR, ILLINOIS DEPARTMENT OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) Mr. McRaith. Thank you. Chairman Gutierrez, Ranking Member Hensarling, and members of the subcommittee, thank you for inviting me to testify. I am Michael McRaith, director of Insurance in Illinois, and I serve as chairman of the Property and Casualty Committee for the National Association of Insurance Commissioners. Today, I offer the views of my fellow regulators on behalf of the NAIC. Thank you for your attention to the use of credit information in personal lines insurance. H.R. 5633, introduced and sponsored by the chairman last year, coincided with our own effort to scrutinize the use of insurance scores. As regulators, we do not fashion public policy. Those decisions are made by Congress and State legislatures. States view insurance scores from different perspectives. Some States have banned the use of credit information, others impose rate bans or prohibit use on renewal or allow only if credit information would reduce premium. Still others require only that credit not be the sole basis for an insurer's decision. In Illinois, unlike most States, our law requires only that insurers consider extraordinary life events and does not even recognize military deployment as an extraordinary event. In Illinois, an older gentleman from a small town wrote that he had paid cash for everything his whole life, car, farm land, etc. His handwritten note explained that he bought car insurance before the law required, never ate fancy meals or bought pricey clothes. He even added that he had been married 47 years to the same woman, but confronted a greater than 20 percent premium increase due to his thin file. Illinois law should be improved. For the NAIC, we applaud this committee's desire to move past the rhetoric of interested parties and toward a fully informed approach. To that same end, the NAIC held public hearings in 2009. Interested parties, insurers, actuaries, and insurance score vendors argued that insurance scores allow for more accurate underwriting and rating. Consumer representatives argued that credit-based insurance scores have a disparate impact on members of protected classes and are premised upon irrelevant if not inaccurate information. We heard in great length about the studies that support both positions. In our own States, insurers sell homeowner insurance in urban neighborhoods where homeowners were previously stretched to find affordable coverage. Insurers argue that credit-based insurance scores have facilitated that market change. Studies also indicate that individuals of racial and ethnic minority heritage are overrepresented in low credit score categories and that credit-based insurance scores discriminate on the basis of that heritage. Our national focus has turned. Rather than engage in that circular debate, we have undertaken a two-pronged strategy to assist policymakers. First, we are developing a standardized data call or detailed interrogatories for personal lines auto companies. This data call will target the impact of different factors upon rates paid by consumers: gender; marital status; age; and credit score, among others. This data will enable Congress and the States to measure the consumer and market impact of one State's law versus another's. Second, the NAIC is developing a model law to bring insurance score vendors within insurance regulator oversight. One panelist indicates in written testimony that those vendors are already subject to State regulator oversight, an assertion with which we largely agree. However, those same vendors argued the exact opposite before the NAIC, and we intend to eliminate the ambiguity. As digital information expands insurer access to consumer specific details, insurance regulators remain vigilant in protecting consumers against potentially abusive underwriting and rating practices. We are watchful for any underwriting or rating formula that may constitute a proxy for race, gender or other protected characteristics. Insurance must function as insurance. For the NAIC, we appreciate the chance to assist this subcommittee and pledge our continued support of your efforts. With our two-pronged approach, State regulators intend to offer reliable, fact-based information for Congress and the States. As our data call and model law development conclude, we will deliver the results to this committee and to Congress. Thank you for your attention. I look forward to your questions. [The prepared statement of Mr. McRaith can be found on page 81 of the appendix.] Chairman Gutierrez. Thank you so much. Mr. Snyder, you are recognized for 5 minutes, sir. STATEMENT OF DAVID F. SNYDER, VICE PRESIDENT AND ASSOCIATE GENERAL COUNSEL, AMERICAN INSURANCE ASSOCIATION Mr. Snyder. Good morning. Chairman Gutierrez, Ranking Member Hensarling, Mr. Price, and members of the subcommittee, my name is Dave Snyder, and I am vice president and associate general counsel for the American Insurance Association. In the midst of the financial turmoil and its related chaos, the U.S. property and casualty insurance sector is stable, secure, and strong. There are good reasons for this. We, you and the States never lost sight of our fundamental shared goals, reduce risk where possible, accurately assess and assume the remaining risk, and provide effective coverage to the American people. As a result, auto and homeowner's insurance markets are by every measure financially sound, competitive, and affordable. Claims are being paid daily by solvent companies. The market is very competitive by any measure and insurance is taking less of a bite out of household incomes than in the past. This is good for the economy because this maximized competition forces prices down to the lowest feasible level so people have money to spend on other things. Insurance scoring has played a major role in creating this positive market for all concerned. By empowering more effective risk assessment and pricing, the majority of the population pays less. Insurance is more available and more people can receive reasonably priced coverage, instead of being relegated to the high-risk pools, because insurers have a cost-effective tool to assess and price for risk, giving them the certainty they need to provide coverage to nearly everyone. You have asked us to address certain issues relating to insurance scoring. In summary, it is race and income blind, and has repeatedly been proven to be an accurate predictor of risk, indeed, one of the most accurate. The States have actively regulated it and insurance commissioners have full access to all the information they desire. In response to your request for recommendations, we suggest that all States adopt the National Conference of Insurance Legislators' model law. Second, the States should make sure they capture and analyze all of the credit complaints they can and communicate with insurance companies about them, individually, and any trends. We note, for example, from Director McRaith's testimony, that the rate of complaints under the existing system for credit-based insurance scores is about 1 complaint out of every 1.5 million policies issued or renewed. In addition, we all need to work together more effectively on financial literacy to help the American people understand how insurance scores are used by insurance companies to provide them with coverage. There is one other recommendation we did not emphasize in our written statement, that is to make it more possible to innovate on a pilot basis. For example, to introduce more direct measures of driving performance, such as the ability to assess risk, based not only on mileage, but how, when, and where those miles were driven. One other factor in the strength of the personal lines insurance market is that we have collectively reduced risk. Thanks to your leadership and that of safety groups, the insurance industry, and the States, far fewer Americans are injured and killed on our highways than ever would have been expected. Using fatality rates of 1964, last year alone, we have collectively saved 120,000 lives and prevented millions of injuries. This has created a solid foundation of the healthy auto insurance system we have today. The insurance industry is focused on building safety as never before through advocacy of smoke detector laws and codes requiring sprinklers and disaster resistant buildings, and the eminent opening of a building construction test center with wind turbines powerful enough to test the structural integrity of buildings. We hope to see a pattern of positive change similar to that which we helped bring about in auto safety with your cooperation and assistance. Thank you for inviting me to speak with you today. I would be pleased to answer any questions you may have. [The prepared statement of Mr. Snyder can be found on page 147 of the appendix.] Chairman Gutierrez. Mr. Wilson, you are now recognized for 5 minutes, sir. STATEMENT OF JOHN WILSON, DIRECTOR, ANALYTICS, LEXISNEXIS RISK SOLUTIONS Mr. Wilson. Good morning. My name is John Wilson, and I am director of analytics for the Insurance Data Services Group at LexisNexis Risk Solutions. LexisNexis provides technology and information that helps businesses, government agencies, and other organizations reduce fraud and mitigate risks. In our Insurance Data Services Group, we provide a variety of products and services to support the insurance industry, including credit-based insurance scores. In my remarks today, I will focus specifically on how our insurance scores are developed, utilized, and regulated. Credit-based insurance scores have long been used by insurance underwriters and actuaries to more accurately assess risk for auto and homeowner's insurance policies. Insurance scores provide an objective, effective, and consistent tool that insurers use with other information such as driving histories and prior claims to better predict the likelihood of future claims and the cost of those claims. Deriving an insurance score follows a straightforward process. A carrier compiles historical policy experience, including earned premiums and incurred losses, on a selected population of risks. LexisNexis then works with the credit bureau to match that policy experience to the historical consumer credit from the particular point in time to which the policy performance data pertains. Then, using regression techniques, we identify the credit variables that taken together provide the best representation of the observed loss ratio performance. Most credit variables can be grouped into one of five primary areas: one, how long you have had accounts established; two, the number and type of accounts that you hold; three, indications of recent activity, including inquiries and new account openings; four, the degree of utilization on your accounts; and five, payment history. The relevant weight of each of these areas can vary depending on the line of business being modeled but for any specific model, the insurance regulator is given access to the individual variable descriptions, bins, and point assignments. Insurance scores do not consider factors such as race, religion, national origin, gender, marital status, age, sexual orientation, address, income, occupation, disability or education. Also, inquiries made for account review or promotional or insurance purposes are not used in calculating insurance scores. We also exclude medical collections. It is important to note that while LexisNexis provides insurance scores, we are not an insurance company. We are not involved in insurer rate setting determinations or rate decisions with respect to groups of individuals or individual consumers. LexisNexis is also not a consumer credit bureau, and we do not make credit decisions. Our role is to supply information to the insurance carriers to assist them in making underwriting decisions. The credit-based insurance scoring process is currently regulated at multiple levels. LexisNexis is considered a consumer reporting agency under the Federal Fair Credit Reporting Act and its State analogues. As required by that Act, LexisNexis provides consumers upon request with access to all the information in the consumer's file at the time of the request. We have also set up a process by which any consumer may order a copy of their insurance score via our Choicetrust.com Web site. Additionally, because insurance is regulated at the State level, LexisNexis must conform its models to specific State statutes, regulations, and guidelines relative to insurance scoring. Most States have adopted regulations based on the model law on insurance scoring developed by the National Conference of Insurance Legislators. Pursuant to State requirements, a third party vendor like LexisNexis must file its model for review with State insurance departments. In many States, carriers are required to include the LexisNexis model filing materials in their rate filing. In other States, a carrier may be allowed to reference the LexisNexis model once it has been filed. Finally, the insurer must gain approval of its rate filing that may include an insurance scoring component. As a result, LexisNexis works on an ongoing basis with State departments of insurance to explain our models and to create State-approved scoring solutions for our insurance customers. In addition, LexisNexis provides two consumer Web sites, Choicetrust.com and Consumerdisclosure.com, to make information about our insurance scores and processes more readily accessible to consumers and to other interested individuals. In conclusion, credit-based insurance scores provide an objective, effective, and consistent tool that insurers use with other information to better predict the likelihood of future claims and the cost of those claims. There are existing Federal and State regulation and approval processes that provide comprehensive oversight by individual State departments of insurance over insurance scores, insurance score developers, and the use of insurance scores. LexisNexis works cooperatively with State insurance commissioners and their staffs in seeking approval for our scoring models. I appreciate the opportunity to provide the subcommittee with information on insurance scoring, and I am happy to answer any questions you may have. [The prepared statement of Mr. Wilson can be found on page 180 of the appendix.] Chairman Gutierrez. Thank you so much. I welcome all of you here. I know there are a lot of questions because I can see that quite a number of members have shown up this morning. Let me just take a couple of minutes, and then I will allow members to ask questions. I will just make some general comments. If someone has cancer and they become very ill and they do not have health insurance, they are likely to suffer great economic harm, and that is going to affect their credit score. Let me ask you, if someone becomes ill, is it more likely they are going to drive quickly, get into an accident, or drive erratically if they become ill? Their credit score, as we know, is going to be affected. Each of you answer the question, please, from left to right. Mr. McRaith? Mr. McRaith. Mr. Chairman, first of all, let me say and also in reply to Congresswoman Kilroy's concern about medical expenses, we are aware that two-thirds of all personal bankruptcies are based on medical costs. Three-quarters of those people filed even though they had health insurance. It is a significant problem. Different States have adopted different approaches to dealing with an extraordinary life event like medical expenses as you have described, and allowing-- Chairman Gutierrez. If you use my credit score, a deteriorating credit score, is it more likely I am going to cause the insurance company additional liability? Mr. McRaith. To answer that question, I do not know the answer to that. I am not sure that anyone has explained directly the nexus between credit score and driving. Chairman Gutierrez. Mr. Snyder? Am I more likely to survive cancer and have incredible debt? Is my house more likely to have a fire? Mr. Snyder. Mr. Chairman, the answer to that is no. That is why we have supported language in the National Conference of Insurance Legislators' model that removes collection accounts with a medical industry code. That is what was done first, and then this past summer, the National Conference of Insurance Legislators tightened that up even more with our support. It removes the consideration of negative factors resulting from a serious illness or injury. Chairman Gutierrez. Just for the record, just so it is clear to all the members of this committee, you are coming here representing who? Just so we have it for the record. You are representing the American insurance industry? Mr. Snyder. Yes, sir. Chairman Gutierrez. Thank you. Mr. Wilson, you provide them with the information, so what do you think? Mr. Wilson. We have not tried to study the specific question that you have asked. We also agree that medical collections should not be used in our scores. Chairman Gutierrez. But they are used in scores. Mr. Wilson. They are not. Chairman Gutierrez. In your credit report, they are. If someone fails to pay a medical bill, it has a derogatory impact on my credit report, which is going to have a derogatory impact on my credit score. Mr. Wilson. I am not going to-- Chairman Gutierrez. You cannot. It shows up. In other words, Mr. Wilson, if someone does have difficulty paying a hospital bill and it goes to a collection agency, does that show up on the individual's credit report? Mr. Wilson. It will show up on the credit report. Chairman Gutierrez. Does it have a derogatory effect on their credit score? Mr. Wilson. It is not used in our scores. Chairman Gutierrez. It is not used in your scores, but it is used in their credit reports. Mr. Wilson. It is on the credit report. Chairman Gutierrez. Thank you. It is used on the credit report. Everybody has witnesses here. I do not think Mr. Wilson is too upset at me asking him the questions. What we are trying to get at here is how is it that people who have an accident, who have an illness, in the end are not deprived of insurance even though they had no way of dealing with this and maybe it does not have anything to do with them. Let me ask, if I am employed and I become unemployed and cannot pay my bills because I have become unemployed, does that mean I am more likely to have an accident or fire in my house? Mr. Wilson? Mr. Wilson. Again, the scoring models that do look at delinquent payments which would potentially be a result of having lost a job show that those delinquencies are in fact indicative of greater risk of claim filing. Chairman Gutierrez. Therefore, I would pay more in health care insurance? I am sorry. Therefore, I would pay more in car or home insurance? Mr. Wilson. You could; yes. Chairman Gutierrez. I would. Mr. Wilson. Not every carrier uses credit scoring and the weights-- Chairman Gutierrez. Thank you. My time has expired. Mr. Snyder. Mr. Chairman, if I might, just to provide a further response to that, the extraordinary life circumstances language added to the National Conference of Insurance Legislators' model specifically excludes the use of loss of employment for a period of 3 months or more if it results from involuntary termination. Yes, that is a factor which we are trying to work with consistent with your question. Chairman Gutierrez. Thank you. Mr. McRaith. Mr. Chairman, if I could add-- Chairman Gutierrez. I am sorry. I ask unanimous consent for 10 more seconds. Mr. McRaith, please? Mr. McRaith. They cannot both be true; if medical loss expenses are not considered, then there would be no reason to have an extraordinary life exception. Also, the so-called NCOIL model has been adopted in different States in different variations, as I said. The State of Illinois, for example, only requires that the company consider such an event. Chairman Gutierrez. Thank you. I recognize Mr. Price for 5 minutes. Mr. Price. This is a remarkably important topic and I think there is a lot of misinformation that is going into the debate, and there is a lot of hyperbole that occurs. I am hopeful that throughout the question period in this hearing, we will be able to sort out some of that. Mr. Wilson, you mentioned in your testimony that the main variables, the primary areas where credit variables are looked at are: length of time of an account; number and type of credit accounts; indications of recent activity; the degree of utilization; and payment practices. In your next statement, ``Insurance scores do not consider factors such as race, religion, national origin, gender, marital status, age, sexual orientation, address, income, occupation, disability or education.'' Given that, why do you think there is all this misinformation about what goes into a credit score? Mr. Wilson. I do think some of the comments that were introductory to this session are accurate, that not every consumer has a clear understanding of all of the details of credit reports, credit scoring, or how these things are used in making decisions about them. I do think we have tried to be out there making information available to consumers. We developed training programs for continuing education credits for agents, insurance agents, because they are very often the first line of answering questions about these things. Mr. Price. Providing a score, you are not an insurance company, you are not a credit bureau, you do not provide credit, you provide information? Mr. Wilson. Right. Mr. Price. There is a lot of information that goes into the rationale for why a consumer might be excluded from gaining credit. I would be interested in the opinion of the panel on if we as a Congress determine we ought to exclude certain things from being considered, is it possible that would actually harm consumers as opposed to helping consumers, Mr. Wilson? Mr. Snyder? Mr. Snyder. Mr. Price, the FTC estimated that 59 percent of the people pay less as a result of credit-based insurance scores. Frankly, in public testimony given by companies in the States, the numbers are really much higher for many companies. We would envision first of all a very negative effect on the vast majority of policyholders directly. Secondly, it would deprive the market of a critical tool that has allowed the market to evolve much more toward objective underwriting individually tailored to each risk, which in turn is giving the companies the confidence to write virtually everybody. Under the old system that was sort of pass/fail, you were either very good, normal or you were relegated to the high cost assigned risk plans. Now, because of the tool that is capable of individual accurate and objective risk assessment, insurance companies are pretty much able to write anyone who comes to them, which has resulted in the shrinkage to historic lows of these high risk pools, so there are a number of harms that would come, some directly, to the majority of policyholders, and then indirectly to a market as a whole resulting in less competition and potentially less availability of insurance. Mr. Price. And higher costs? Less availability and higher costs. Mr. Snyder. And higher costs. Mr. Price. Mr. McRaith, do you agree with that? Mr. McRaith. Congressman, we should always be concerned about unintended consequences and certainly the pricing of one risk in a company's pool affects the pricing of another risk in that same pool. However, we should not accept as gospel that 60 percent of people benefit from the use of credit-based insurance scores because we do not know what the baseline is. Mr. Price. Do you dispute that number? Mr. McRaith. What I am saying is, I described earlier our effort with the data call to collect information from insurance companies. One is to get behind the rhetoric which argues that a certain percentage of consumers benefit from the use of credit-based insurance scores. We do not know when we hear the word ``benefit,'' what is the starting point. We do not know what the baseline is. That is what we intend to find out. We will report back to you. Mr. Price. Mr. Wilson, do you have any comments? Mr. Wilson. No. Mr. Price. In the remaining seconds, what factors did Congress rely on when examining and endorsing the non-lending uses of credit information while amending the Fair Credit Reporting Act in 1996 and the FACT Act in 2003? Mr. Snyder? Mr. Snyder. Congress continued the ability of insurers to use credit information for insurance underwriting, and that has long been the case. Congress continued that through the recent amendments. The recent amendments also made the whole credit scoring system better. Frankly, we have a major interest in making sure that scores are accurate and that people have access to their credit history and the ability to correct any issues that may exist. I think the Congress improved all of that through the most recent amendments, but did maintain the long-standing ability on the part of insurers to use credit for underwriting subject to Federal law under the Fair Credit Reporting Act, and all that implies as well as being currently State regulated, all the State regulation that applies as well. Mr. Price. Thank you, Mr. Chairman. Chairman Gutierrez. The time of the gentleman has expired. Mr. Watt, you are recognized for 5 minutes, sir. Mr. Watt. Thank you, Mr. Chairman. I want to try to make a distinction here between causation and correlation. I take it, Mr. Wilson, you are in the nexus business. That is the correlation business. What you are saying is, there is a correlation between somebody's credit score and these factors that impact driving insurance rates and homeowner's insurance rates. I am not clear whether you are prepared to assert to me that there is some causal connection between those things as opposed to a correlation between those things. Let me ask the question directly: Are you prepared to assert to me that if I have a low credit score, that will cause me to be a worse driver? Mr. Wilson. No. Mr. Watt. Are you prepared to assert to me that if I have a low credit score, that is likely to cause me to have a fire at my house? Mr. Wilson. I am not saying it is causal. Mr. Watt. You are saying that the correlation factor makes it more likely that I will be a bad driver; right? That is what the nexus is in your LexisNexis, I take it. Is that right? Mr. Wilson. I am not actually familiar with what the nexus in our LexisNexis-- Mr. Watt. Do not waste my time on hyperbole. Let's talk about insurance, not LexisNexis. I am sorry. I got you off track. You are saying there is a correlation. We have made it explicitly clear that if there is a correlation between race and bad driving or race and more likelihood that I will have a fire, that is prohibited; right? You cannot take that into account. There is no question about that. If you find some substitute for race that correlates in the same way, has the same impact, would you think it would be appropriate to use that as a factor and then turn around and say well, no, we are not considering race at all, we are just considering this correlation factor that we have out here? Mr. Wilson. You are giving me a hypothetical. Mr. Watt. No, I am just asking you a question. Would you think it would be appropriate to do that? Mr. Wilson. If you could find a pure proxy, you should not be able to use it; yes. Mr. Watt. Okay. What about you, Mr. McRaith? I assume you would not think it would be appropriate to do that. Mr. McRaith. It is absolutely fair to say, Congressman, that the States have taken different approaches to this subject. If one factor were identified to be a proxy, I believe all States would be opposed to that. Mr. Snyder. Mr. Watt, if I might add that-- Mr. Watt. I am not sure I asked you anything, Mr. Snyder. You are welcome to add something. Mr. Snyder. Thank you, sir. The FTC did conclude that credit-based insurance scoring is not serving as a proxy for race. Mr. Watt. I read that study. We had a hearing about that study. It did not exactly say that. I understand you want to get that in the record. Maybe we ought to put that study in the record. We had it in the record last year when we had a hearing about this. That is not exactly what it says. It says kind of there is the same kind of correlation that you are talking about as legitimate here for credit-based scoring between this and race. You want to use it on one side and say we like the correlation on one side and we are going to use it, and on the other side, we do not like the correlation, so we want to say no, no, we should not be using correlations here. Is there not a strong correlation between these factors and race? That requires either a yes or no answer. Is there a strong correlation or is there not? Mr. Snyder. It found that it was not a proxy for race. Mr. Watt. I heard that. That is what you testified to earlier. That is not the question I asked. I want to know, is there a strong correlation, not whether there is a proxy. I do not think anybody in here knows what ``proxy'' means. Tell us, is there a strong correlation or not? Chairman Gutierrez. The time of the gentleman has expired. Answer the question. Mr. Snyder. It found that there were larger percentages in various demographic groups with lower credit scores than other groups. It also found that within these groups-- Chairman Gutierrez. Your time has expired. Mr. Watt. Can I just get him to answer my question, Mr. Chairman? Chairman Gutierrez. I tried. We will come back around. Mr. Watt. I just want to know whether there is a strong correlation or not. That is a simple question. It is not a trick. Chairman Gutierrez. Mr. Marchant, you are recognized for 5 minutes, sir. Mr. Marchant. Thank you. Mr. Wilson, talk to us about the relationship you have with your customer. Your customer is an insurance underwriter, salesman, company? Mr. Wilson. Right. Our primary customer is the underwriting department and/or the actuarial department in the personal lines property casualty industries. Mr. Marchant. Is a major consideration--would the insurance company come to you regardless of whether there was credit being extended to the customer to purchase the product? Mr. Wilson. Yes. The credit scoring used by insurance companies is generally not a part of say premium finance decisions. It is a risk indication. Mr. Marchant. The credit history that you are looking at has nothing to do with the fact as to whether the insurance company is going to get paid for the product they are selling? Mr. Wilson. Right. It is not about payment of premium. Mr. Marchant. It is purely a historical fact that gets plugged into the fact of what they pay for insurance actually; right? Mr. Wilson. Right. The credit factors or the score in conjunction with driving record, in conjunction with coverage amounts, in conjunction with prior losses, it all goes into the underwriting or rating of the policy. Mr. Marchant. If a customer comes to the insurance company and says, I want this kind of coverage and I am going to pay cash, the companies still go through the same process, and if your information taints that customer, even though they are planning to pay cash or pay for it other than with that company, it still taints that customer or has the potential to taint them? Mr. Wilson. Right. If the carrier does use credit scores as part of their rating, then it would be used even if the consumer were paying cash for their premium. Mr. Marchant. This is the complaint that I get from my constituents the most. They feel that because they have had bad credit or they have had a car repossessed or they paid their last insurance policy and their premiums were slow, they feel like when they apply for more insurance, the reason why their insurance--the rate has been raised is because there is a direct correlation between the late payments on a previous policy. You are saying it is the late payments on any kind of credit they may have? Mr. Wilson. That is right. Mr. Marchant. Not specifically on that product, on the insurance itself? Mr. Wilson. On the premiums; right. Mr. Marchant. You give the report to them, but it is up to the underwriting department to make its own decision based on your report, how much they weigh each of those things? Mr. Wilson. That is correct. Mr. Marchant. What is your experience in that weighing process? Is it pretty reliable if you have a very low credit score that you are going to pay more for your insurance? Mr. Wilson. These scores have been tested not only by independent parties like actuaries and the Federal Government and the Texas Department of Insurance, but also by carriers themselves. Carriers would not use these tools if they did not work well for them. There is a great deal of variation, however, in the weight that individual carriers assign to credit score in their overall rating programs. Mr. Marchant. Mr. Snyder, in your particular instance, would a driving record be a significant factor in your information that you gave to an underwriter that bought your service? Mr. Snyder. Absolutely. Auto insurance rating generally involves not only credit information but the age of the driver, the prior driving experience, the make and model of the vehicle, and on and on. The ultimate underwriting and rating decision is based upon many factors, only one of which is credit. Chairman Gutierrez. The time of the gentleman has expired. Mr. Moore is recognized for 5 minutes. Mr. Moore of Kansas. Thank you, Mr. Chairman. Our Oversight and Investigations Subcommittee held the first in a series of hearings last week on the topic of the end of excess, a broad look at lessons learned from the crisis. I believe that one lesson from the financial crisis is we need to go back to living within our means and that is true for our government, for financial firms, for businesses, families, and individuals. Mr. Snyder, I agree with the point you make in your testimony that we need to increase financial literacy, which will be the focus of one of our subcommittee hearings in our lessons learned series. We need to teach personal finance to our students in high school and college, ensuring that our young people are fully empowered to make sound financial decisions. Mr. Snyder, as we think about credit scores, how can we encourage individuals to regularly review their credit report, correct any misinformation, and learn how to build their credit scores? Mr. Snyder. Thank you. It is a message which we try to repeat on Web sites. Attached to my testimony is some information where we talk about what goes into an insurance score and the need to stay on top of it. There are adverse action notices that make that point as well. I know the credit industry is doing a lot. Frankly, we look forward to increased cooperation with the Congress and the States on improving financial literacy. We have done some work on our own. We would like to work collaboratively to see what we can do to raise the level of financial literacy for everyone in this country. Mr. Moore of Kansas. Mr. McRaith or Mr. Wilson, do either of you have any comments? Mr. McRaith. Financial literacy is important for all sectors of consumer finance. Insurance in particular can be very confusing to the average family, the average small business. States are committed to helping consumers understand how their insurance policies are underwritten, how they are priced, and providing whatever direct consumer assistance we can. Mr. Moore of Kansas. Mr. Wilson? Mr. Wilson. I would agree with the gentleman. Mr. Moore of Kansas. Mr. McRaith, in your experience as a State regulator, how accurate are these credit scores? Do they get abused in how are they used by insurance firms? Do credit scores assign reasonable value if one is comparing medical debt to excessive spending habits, and do insurance firms focus more on credit scores or the inputs that provide the credit scores? What is your view? Mr. McRaith. Congressman, in fact, we understand a broad range. What one company does and the weights that one company might assign to one factor like a credit score might be significantly different from another company. Of course, different States have different parameters. There is a wide variation. I think one State estimates a variance of credit score affecting a rate from 7 percent up to the high double digits. That indicates that companies use this one factor of credit scores in a way that--companies use them differently based on their proprietary or pricing formula. Medical expenses and the debt associated with medical expenses frequently is a problem for consumers. State law varies with respect to whether consumers can be penalized for that or what is the recourse the consumer might have in the event that consumer is penalized for medical debt. It is inaccurate to say that companies do not consider medical debt as part of a credit score. It is also inaccurate to say that all States allow medical debt to be exempted as an extraordinary life event. Some States do. Some States do not. Mr. Moore of Kansas. Do either of the other witnesses have a comment? Mr. Snyder? Mr. Snyder. Yes, sir. With regard to the latest point, we support the enactment of the National Conference of Insurance Legislators' model, including extraordinary life circumstances, including the provision on use of serious injury or serious illness with the individual or family member. Mr. Moore of Kansas. Thank you. Mr. Wilson. I think I would just add that even in States that have not adopted an NCOIL model or an NCOIL-like model, we still do not consider medically coded collection items in our scoring. Mr. Moore of Kansas. Thank you, Mr. Chairman. I yield back my time. Chairman Gutierrez. The gentleman yields back the balance of his time. Congressman Lance, you are recognized for 5 minutes, sir. Mr. Lance. Thank you, Mr. Chairman. Good morning to you all. Commissioner McRaith, if credit-based insurance scores were not used by insurers as one factor out of many for setting premiums, what other factors, in your opinion, would be more heavily weighted and what would be the likely effect on rates? Mr. McRaith. Congressman, the availability of data to any one insurance company at this point is so expansive, it is impossible to determine exactly what or to conclude what factors would replace a credit score. Some companies are using all of the sub-components of a credit score right now for pricing and not relying solely upon a credit score in and of itself. What we expect is that eliminating one rating factor will shift costs. There are some people who might pay more. Others might pay less. When you affect the price of one person in a risk pool, you are going to also affect someone else in that same pool. Mr. Lance. That is obviously my point, and whether that would be fair to others where the risk would be shifted is obviously a question of great concern. Mr. Snyder, do you have an opinion on that? Mr. Snyder. I would agree with the comments of Director McRaith on the potential impact on people paying more as a result. Mr. Lance. Mr. Snyder, could you move your microphone closer? Mr. Snyder. Yes. I would just indicate my agreement with the comments Director McRaith just made, that if some people pay less, many more people will pay more. Mr. Lance. From your experience, what might be those factors if we were to eliminate this factor? Mr. Snyder. Well, in one sense it might force the industry to go back to larger classifications and rely more on those, such as territory and other factors which themselves were controversial. With the addition of credit-based insurance scores, you have added a degree of objectivity and individual tailoring that did not exist before, and it allows both not only accurate rating and underwriting of individuals but has improved availability in the market because the confidence companies have that they have the ability to price every risk and therefore, many more risks are being written in the voluntary market. Mr. Lance. Credit scores are individual. I recognize a once-in-a-lifetime situation should be excluded. Credit scores are individual in a way that geographical territory is not and may be bitterly unfair to those who live within the territory, and actually in my judgment may be extremely harmful to those whom we are trying to help. Mr. Wilson, your thoughts? Mr. Wilson. That is certainly a possibility. There are only so many factors that have been demonstrated to have a correlation with expected loss costs, and insurance companies do try to use them as effectively as they can to write risks. Mr. Lance. What would your view be on a risk based upon territory? Mr. Wilson. Territory has been demonstrated to be strongly indicative, but as you know, it is broad, and one of the benefits as we saw it for credit scoring is it was individual. Mr. Lance. Yes. It is my observation that in several other areas, unrelated to the discussion this morning, Congress has inappropriately tried to pressure those. Fannie Mae and Freddie Mac certainly come to mind. I trust as we move forward on this issue that we do not engage in the type of behavior in which Congress was certainly guilty regarding that matter. I yield back the balance of my time. Thank you, Mr. Chairman. Chairman Gutierrez. The gentleman yields back the balance of his time. Congressman Hinojosa is recognized for 5 minutes. Mr. Hinojosa. Thank you, Mr. Chairman. Chairman Gutierrez, I want to thank you for holding this important hearing on a very important issue, consumer credit. I commend my colleague, Congresswoman Mary Jo Kilroy, for introducing H.R. 3421, the Medical Debt Relief Act of 2009. The intent of her legislation is admirable. I agree with her that medical debt should be removed from credit reports 30 days after that debt has been repaid or settled, and that it not continue to hurt the credit rating of that individual, having gone through so many difficulties with sickness. I am concerned about one issue involving credit reporting agencies. They buy and sell information from virtually all adult residents in the United States. For a long time, we have been encouraging them to provide credit reports in languages other than English, especially Spanish. Mr. Chairman, I would ask that each credit reporting agency provide in writing their proposals to provide credit reports in languages other than English or that we at least have an opportunity to debate that. I would like to ask my question to Mr. Snyder. I am interested in legislation that would require that every adult American citizen 21 years or older receive a free credit score on an annual basis. Would the American Insurance Association support such legislation? Mr. Snyder. I think we would. We are interested in having both transparency in the process as well as accuracy in credit scoring. I have not checked with my other colleagues in that industry. Perhaps they have a view of that. I certainly think anything that makes the process more transparent as the Congress has done recently is something worthy of very serious consideration. Mr. Hinojosa. I am glad to hear you say that. Mr. McRaith, do lenders or insurance lenders pay for the credit reports they obtain from the credit reporting agencies? Mr. McRaith. Insurance companies typically will contract with a vendor that will provide or develop the insurance score on which the underwriting decisions and pricing are determined by that insurance company. Some of the larger companies have their own independent proprietary insurance scoring formula. Mr. Hinojosa. I see. Mr. Chairman, with that, I yield back. Chairman Gutierrez. The gentleman yields back. Mr. Neugebauer? Mr. Neugebauer. Thank you, Mr. Chairman. I want to go back to one of the things that seems to be a common theme, and I do not want to put words in people's mouth, but that the credit scores are used in part of the underwriting process. What is not standardized is some companies put more weight on that credit score than others. If I am a company and I am competing for business, if I am overly penalizing people for their credit scores and using that as a higher rate, I am probably losing business because I would say I would be pricing myself out of the market. Is that a reasonable assumption? Mr. Snyder. Yes, sir; that is. Mr. Neugebauer. Basically, the checks and balances of how that information is being used is in the marketplace today; right? Mr. Snyder. Yes, there are many checks and balances in the marketplace, and the additional check and balance of detailed regulation at the State level. Mr. McRaith. I would add, Congressman, that the companies pursued the profitable risks, and if in fact credit-based insurance scores identify prospectively less profitable risks, the pricing might be geared towards reducing the likelihood of that less profitable risk from enrolling with that company. Mr. Neugebauer. Which is probably prudent business, wouldn't you say? Mr. McRaith. I would say that is the business judgment of the company; absolutely. Mr. Neugebauer. What we want is these companies--I do not want to do business with an insurance company that is broke. Do you? Mr. McRaith. No, that is exactly right. We want financially strong companies able to deliver on the promises they make to consumers. Mr. Neugebauer. I think one of my colleagues asked the question and I want to rephrase it just a little bit, is it fair to say that because of the underwriting tools, credit report being one of them, and other information, that people can actually effectively lower their insurance costs by good behavior? Mr. Snyder. Yes, absolutely. The system very much rewards that behavior, not only on the road but in terms of responsible management of credit. Mr. Neugebauer. Mr. Wilson, any reflection on that? Mr. Wilson. I would agree. You do have the opportunity to modify your profile, your risk profile, and therefore become a better risk. Mr. Neugebauer. We have gotten into the business around here it seems like that we kind of are trying to get government to pick the winners and losers. We do it with legislation that hand-ties a process that works and rewards good behavior where people who pay their bills, drive safely, demonstrate certain characteristics that they are responsible, and they get to reap the benefit from that. It seems to me if we go in and sterilize that system, basically it becomes harder to determine who is the higher risk or the more profitable, so what happens is in order for a company to counteract that, I guess they just raise everybody's rates. Would that be a fair assumption? Mr. McRaith. I think it would in fact pricing, Congressman. As I mentioned in my opening statement, we see homeowner insurance companies, for example, offering insurance in neighborhoods where previously it would have been very difficult for them to price a homeowner policy. Having said that, actuarial justification is not in and of itself a sufficient reason to allow a rating factor to be used. In our examples over time, I will not bore you with it right now, actuarially justified factors that Congress or the States later determine should be prohibited. Mr. Neugebauer. Should we be careful as we go down that road? Mr. McRaith. I think those are the public policy questions, of course, that Congress and the State legislatures answer every day. Mr. Neugebauer. One of the things that I think about is I know there are different insurance products, for example, they ask you if you are a smoker. If you are not a smoker, there is a discount. There must be a reason actuarially that non-smokers get a discount. Would you agree with that? Mr. McRaith. Absolutely. The one example that I recall, Congressman, is several years ago, there were life insurance companies charging higher premiums to African-American enrollees because their life expectancy was shorter. The country and States determined that was inappropriate. I am not disagreeing with you. I think we want companies to be accurately pricing their products and financially strong. All I am pointing out is that actuarial justification in and of itself is not sufficient. Chairman Gutierrez. The time of the gentleman has expired. The gentlelady from New York is recognized for 5 minutes. Mrs. McCarthy of New York. Thank you, Mr. Chairman. I thank you for having this hearing. I thank the panelists for their information. We know that some individuals do not have traditional credit reports. Some have alternative reports that are created by items such as rental payments and utilities, to create a credit history. Those kinds of reports typically are different than a traditional credit report in underwriting. For all of you, the current economic downturn has resulted in financial struggles for many of our constituents. As a result, they have seen their credit reports negatively impacted, even though they have had a good history from the past. How could this affect an individual's ability to renew their insurance? I will throw that out to all of you. Mr. Snyder. Thank you. Lending scores and insurance scores are very different. We have included some materials in our statement from FICO, which is one of the major modelers, indicating they have not seen an overall pattern of insurance scores declining. It is because of the different make-up of the scores. You have heard no doubt and read newspaper articles about lending scores. That has not been the case with insurance scores. They continue to be very stable over time, and they continue to reflect differences in risk. Insurers also have the ability to adjust their rating tier so that if you have an overall decline in the economy, you can understand that across-the-board, so you have not had the impact on insurance scores that has occurred with regard to lending scores that you might otherwise assume would be occurring. Mrs. McCarthy of New York. Just a follow-up question, so many homes have actually de-valued in their worth, and yet they are continuing with basically--I just thought of this when you were speaking. My homeowner's insurance basically has gone up even though my home value has gone down. Are you seeing a trend like that across the Nation? Mr. McRaith. Congresswoman, we have seen homeowner insurance premiums increase. We perceive that not to be a reflection of the value of the house necessarily, more a reflection of the economic challenges. Investment portfolios of insurance companies, of course, did not provide the return they had been seeing over the years, and as a result, we expect premiums increased for many companies to reflect the decrease in portfolio return. Mrs. McCarthy of New York. It has nothing to do with basically--to rebuild the home would be lower, but you are still paying a higher price. Mr. McRaith. Right. In fact, one question that I have heard with some frequency is, since construction costs are less now because construction workers are generally less expensive, why is the cost of my premium not declining as well? Again, the premiums are not necessarily tied to the value of the home or the cost of replacing that home. They are connected with that but not directly and solely connected with that. I would also add in terms of the question that you asked Mr. Snyder earlier, we do have that concern and have explored that question. For example, many credit card limits decreased through no act or fault of the consumer as a result of our recent financial challenges nationally. That affects the credit ratio for that individual consumer. Does that then affect the insurance score? That remains to be an open question and we have heard conclusions on both sides of that question. However, our effort, as I mentioned earlier, is to provide Congress with more fact-based information and reply to some of those questions, and we expect to have that survey done by the end of this year. Mrs. McCarthy of New York. Thank you. Mr. Wilson? Mr. Wilson. Yes. I guess I would note that we also track information on our insurance applicants' scores, and while we have seen some adverse changes as an example, a slight increase in delinquency rates and in some cases, as Mr. McRaith mentioned, a reduction in the limits on credit cards, we have also seen some positive changes. We have seen fewer inquiries, fewer recent account openings. We have also seen many consumers are actually paying down their revolving indebtedness. That, I think, has tempered the changes in the scores. Chairman Gutierrez. The time of the gentlelady has expired. Mr. Royce, you are recognized for 5 minutes, sir. Mr. Royce. Thank you, Mr. Chairman. Instead of dealing in the abstract, I would like to focus on a few facts here. I come from California. In California, we continually rank among the highest rates for auto insurance in the country. A study just came out, again, California is in the top five, as we always are. Despite the fact that many safe drivers in California have decades of driving experience and clean driving records, they are also paying the highest insurance premiums in the Nation. My home State also happens to ban the use of credit scores for insurance. I was going to ask Mr. Snyder, is there a correlation between the fact that the insurance rates are so high and the banning of credit scores? Mr. Snyder. We think there is. California has an unique and incredibly restricted rating system. According to economist David Appel, that cost California consumers $10 billion throughout the 1990's because loss costs, which we were pleased to participate in, for example, through highway safety, anti- fraud measures declined dramatically. The entire State played a role in that, and we were there to support it. Because the regulatory system was so rigid, companies were not able to respond as rapidly as they would in a free market to those declining costs, and the difference calculated just during one decade was the cost to California consumers of about $10 billion. We think there are huge subsidies within the system as a result of that strict rating regime that is in place. We also think it would fail any cost/benefit analysis and is grossly inefficient--a totally unique system with major negatives about it. Mr. Royce. It seems that the essence of this issue when you get down to it is whether or not a credit score has a predictive value when it comes to auto insurance scoring. I know study after study, and I think you mentioned the FTC study, they all conclude that a credit score has a strong predictive value and is a net benefit to the market. The result, I think, in that study, said the use of credit scores produce a situation where 59 percent of policyholders pay less as a result of that use. What happens when we remove this risk indicator? Is there a viable alternative out there to credit scores that you can think of that is as good? Mr. Snyder. Right now, no. That was actually confirmed in the FTC study. The fear would be if you eliminated an individual objective factor like credit scores, they would be forced to go back to larger risk classifications or more reliance on larger risk classifications in the past, such as territory and other factors like that. I think what the FTC concluded is there was not another factor out there that was able to assure the same predictiveness as we currently have. I think that would be the fear, that we would have a system less accurate, actually less fair, and one relying on larger classifications rather than on the more individual risk classification. Mr. Royce. The FTC concludes that risk-based pricing benefits the majority of market participants. The observation I would make is that if there is a flaw in the marketplace in terms of anti-competitive pricing or the availability of insurance, we should look at the fragmented antiquated regulatory model that exists in the United States that is unlike that anywhere else in the world, where we have this regulatory model overseeing the industry where we have 50 different markets instead of one national market, and I think recent estimates put that cost of the fragmented State-based system at $14 billion in higher premiums every year for consumers. If we could focus instead on enhancing competition, instead of unnecessarily limiting tools in the marketplace, it would be much better for the consumer, although I am sure many of our elected State insurance commissioners would have to find other things to focus on. It would certainly move us into a national market for insurance. It would certainly not only reduce the costs but produce a much more competitive industry, especially when you look at what Europe is doing right now as it goes to one market for all of Europe for insurance. Chairman Gutierrez. The time of the gentleman has expired. Mr. Royce. Thank you, Mr. Chairman. Chairman Gutierrez. You are very welcome. Congressman Baca, you are recognized for 5 minutes, sir. Mr. Baca. Thank you very much, Mr. Chairman. I thank you and the ranking member for your leadership on this issue which is important to a lot of us, especially as we represent diverse groups of individuals within our communities. I am concerned from both aspects that it impacts everyone but also how it impacts many minorities as we look at the credit rating. I heard a lot of you talk about it when Congressman Moore said we needed more financial literacy. The problem is on this literacy, where does it go and what kind of outreach are we doing in making sure that when we target it, the different diversities, that they are actually aware of the credit scores that they are going to get, and if they get it, when do they know they are getting a credit score? Right now, as we look at its impact, it is not only on the automobile but also as we look at the health bill that is coming before us. Maybe any one of you three can explain that, and since no one has clearly explained the casual connection between credit scores and insurance risks, are customers at least made aware of the credit scores that are used when they purchase that coverage? Is there an adjustment during any period of time to their rates they are getting because they may have improved or something may not have been accurate during that period of time that the credit report went out, but yet you underwrote your insurance policy or health coverage, which means they are paying a higher premium. Another question: I am going to try to get all my questions in all at once. What effect does it have on our seniors? A lot of our seniors right now, when you look at their credit ratings, a lot of them get their checks once a month, there are adjustments in there, and then the ratings are there. Do we have any studies on the impact on a lot of our seniors? What are their rates compared to someone elses? How are we doing it in terms of geographical areas on the credit scores? People who live within certain geographical areas get a higher score versus individuals who do not live in those geographical areas, based on the high risk? Therefore, their premiums are a lot higher, yet their income does not change, but they are being impacted. When does the insurance company review the credit scores, after the initial purpose, or do they make adjustments in the ratings at one period or another, so this way the rates can also be lowered? If there are two individuals who get a credit score, husband and wife, say one or the other gets a higher score than the other. How is it underwritten, based on whom? The higher score or the lower score, or is there an adjustment in between? All three of you can tackle all of these questions. Mr. McRaith. I will do my best to answer them quickly. Congressman, first of all, in terms of financial literacy, the States are committed to improving the literacy of consumers. Mr. Baca. States are committed, but do we know that they are really doing that? In a lot of minority areas, do they really know they have gotten a credit score based on their automobile or their health bill that will be coming up right now because we are saying we want to make it affordable, but ``affordable'' means you have to have a good score as well. If you do not have a good score, you are going to be paying a higher premium on that health coverage. Mr. McRaith. We absolutely have to do it better than we are doing it right now. I think this hearing illustrates all the reasons for that. I would point out I am not sure knowledge of the impact of a credit score affects whether someone is able to pay their medical expenses. Literacy is one component. It is not necessarily going to put the dollars in someone's pocket to help them pay during a difficult time in their lives. Mr. Baca. No, but if a score is given, that means their premiums are higher. That makes a big difference based on if you have a fixed income as a senior, that impacts me, because today I have to decide whether I pay for groceries, pay my rent or pay for my insurance policy. Mr. McRaith. That is exactly right. That gets to your last question, the impact on seniors and other people with fixed incomes. We also hear from the disabled community, of course. They are on fixed incomes. Under Illinois law and under many States' laws, individuals who do not have credit records are to be treated as ``neutral.'' What exactly ``neutral'' means varies from State to State. It largely means they do not get a benefit of a great credit history and they do not get penalized for having a negative credit history. By and large, that is how people on fixed incomes are treated. Mr. Baca. But that is not a standardized process or procedure that is used in other States. It is only in Illinois. Mr. McRaith. No, that is generally the practice across the country, not in every State, but it is generally the practice. In terms of geography and credit scores, I believe different studies have shown that different parts of your district, for example, will generally have higher credit scores. Again, we have heard today higher credit scores result in lower insurance premiums. Chairman Gutierrez. The time of the gentleman has expired. Congressman Hensarling, you are recognized for 5 minutes, sir. Mr. Hensarling. That was quick, Mr. Chairman. Chairman Gutierrez. A triangle has three corners. Five minutes has those many seconds, unfortunately. Mr. Hensarling. Thank you, Mr. Chairman. I did not know we would be getting a geometry lesson here as well. I will beg the forgiveness of our witnesses. I missed your testimony trying to straddle two meetings. I am one of the Republican appointees to the President's Fiscal Responsibility Commission. We have our work cut out for us. I was attending some of those proceedings. We may cover some ground that has already been covered and I apologize to you about that. I guess the central question I have with regards to the use of credit scores in insurance ratings, clearly, there are those who feel this is predictive. Otherwise, I do not understand why they would be using it, but particularly as I look at the incredibly high unemployment rate that remains in our country, how important is it to small insurers and small businesses that they be able to use credit-based insurance scores? In your dealings in the marketplace, again, your observation, how important is it to small businesses and small insurers? Why don't we start with you, Mr. Snyder? Mr. Snyder. I think it is very important. I think the use of credit-based insurance scores in the personal lines of insurance has proven to be very important for the market. It has allowed a degree of objective and individually tailored decision making that more accurately assesses risk than was possible before. The risk assessment is good in and of itself because how else would you price an insurance product but to reflect the risk within that product, and the danger of moving away from that, I think we have seen perhaps too much of in other sectors. Secondly, it has had an overall positive availability impact on the market for personal lines. That would be true if you are an individual. In commercial lines, credit information has long been used because everyone understands that one of the first things that is reduced is maintenance of critical equipment and other things like that, and that leads to safety issues, which in turn leads to increased insurance risks. I think it is important up and down the line in terms of assessing for risk and then pricing for risk. Mr. Hensarling. How many years of history do we have now to observe as far as the use of credit scores in our credit-based insurance scores? Mr. Snyder. In personal lines, about 15 years or so. Mr. McRaith. 1993. Mr. Hensarling. Thank you. It is a fairly substantial time period. Mr. McRaith? Mr. McRaith. Just to build on Mr. Snyder's comment, Illinois has more insurance companies competing for personal lines insurance than any other State. We have seen some of those smaller companies able to compete because of their ability to accurately price. They state the reason they can accurately price is the credit-based insurance scores. Mr. Hensarling. I personally have not seen it, has not come across my desk, have there been any studies that would indicate kind of the overall economic impact that is derived from credit-based insurance scores? Is there something like that out there that has crossed your desks? Mr. Snyder. There is some data. Professor Powell may have some data which we can provide to you. He testified previously before Congress last session. We have a report that proves the reverse, which is we have very good data about California where credit-based insurance scores have not been permitted, that loss costs went down dramatically, but because of the absence of free market pricing, the prices that were actually charged in the market lagged the downturn in loss costs, because companies simply could not go through the very elaborate process that you have to go through there. I think there is strong evidence-- Mr. Hensarling. What happened in California? Mr. Snyder. What happened in California is that you have a situation with massive cross subsidies, a very inefficient system with a huge overhead cost, and for many years and I think now, overall prices that would be lower if the free market were permitted. Mr. Hensarling. If we were to somehow restrict the use of credit scores in insurance pricing, what you see in California, would you predict might spread nationwide? Mr. Snyder. I think that is right. Chairman Gutierrez. The time of the gentleman has expired. Congresswoman Waters is recognized for 5 minutes. Ms. Waters. Thank you very much, Mr. Chairman. I was just going over some information with my staff. I want to thank you for holding this hearing. I wish that we could get at some of the information that is so desperately needed to try and understand how decisions are made to determine insurance rates, and what is taken into consideration. From everything that I can gather, there may be 500 different variables that are taken into consideration. We just do not know and understand what that is all about. I am told that all kinds of studies are done, including studies about your Zodiac sign. Let me just raise the question: How many variables are taken into consideration by members of the Association for determining insurance rates? I will address that question to Mr. David Snyder, who is the vice president and associate general counsel for the American Insurance Association. Mr. Snyder. Thank you, Ms. Waters. That will differ from insurer to insurer. There are dozens of variables that are considered. Many different credit variables, as well as other variables, such as prior loss experience. In automobile insurance, make and model of car. In homeowner's insurance, prior loss experience, proximity to a fire station, and on and on. The whole effort is to try to combine these factors, to be as accurate as possible in predicting future risk of loss and therefore, pricing for it. Ms. Waters. Do you think it would be helpful to set some standards so that people can have a good understanding about what is taken into consideration no matter what insurance company you go to, rather than having all of these variables that are not identified in any insurance policy that I know of, to tell people how the decision was made? Should we have some standards? Mr. Snyder. There are general legal standards, but to encourage competition in the market, the models and the variables are all subject to insurance commissioner review on a State by State basis. That is the system that has been followed, general legal standards, and then allowing the companies to innovate and experiment, and subject to both legal standards and actuarial standards. Ms. Waters. Have members of your Association done their own studies? There is not one, two, three, four or five studies every year done by the Association or do they all do different studies? Mr. Snyder. For anti-trust reasons, the Association cannot discuss how individual companies do their business. I am very aware they are constantly reviewing their data, constantly reviewing their factors, constantly subject to insurance commissioner review on their models and programs and the factors used in them. Ms. Waters. What is the difference between defending the fact that they all use variables unknown and different for competitive purposes and the question that I just asked about the studies? Do you know something about that? You can talk about that but you cannot talk about the studies. What is the difference? Mr. Snyder. I can talk about generally from published reports what the companies have said in the media, but they do not share with us-- Ms. Waters. Any of the companies using the Zodiac study? Mr. Snyder. Excuse me? Ms. Waters. Are any of the companies in your Association using the Zodiac study? Mr. Snyder. Using which study, ma'am? I am sorry. Ms. Waters. Zodiac. Mr. Snyder. Zodiac study? Ms. Waters. Yes. Are you aware of that? Mr. Snyder. I am not aware of it. Ms. Waters. Never heard of it? Mr. Snyder. I have not. Ms. Waters. Thank you. Do you believe that given the way decisions are made by insurance companies to charge or to not insure--is the Association satisfied that your companies in the Association are acting in the best interest of the consumers? Mr. Snyder. Yes, so far as we know. Ms. Waters. Do you know of any changes that you would recommend that should be taking place to have them do a better job of acting on behalf of the consumers? Mr. Snyder. The answer is I cannot recommend to them how they do their business. Ms. Waters. Can you recommend to us? Mr. Snyder. What we do support is reasonable regulation and their ability to innovate and compete in the market. Ms. Waters. Mr. McRaith, you represent the National Association of Insurance Commissioners. You must hear from commissioners all over the country about the problems they have with whatever regulation they may be responsible for in their States. Have you heard any of your commissioners complaining about loops or gaps in their oversight responsibilities-- Chairman Gutierrez. The time of the gentlelady has expired. Ms. Waters. --that could be closed? Chairman Gutierrez. Answer the question. Ten seconds, please, Mr. McRaith. Mr. McRaith. As you would expect, Congresswoman, there is a wide variety of viewpoints among regulators across the country on the use of credit-based insurance scores. Chairman Gutierrez. Mr. Green, you are recognized for 5 minutes, sir. Mr. Green. Thank you, Mr. Chairman. Thank you to the witnesses. Let's first review some intelligence that I have received. The intelligence indicates that credit-based insurance scores are not, ``n-o-t,'' held out as being predictive of an individual's likelihood to have an automobile accident or experience damage to their home. True or false? Mr. Wilson. Right. Scores are-- Mr. Green. If you would, just true or false. If this is true, would you kindly raise your hand, please? [No response.] Mr. Green. Nobody agrees this is true? Mr. McRaith. I am sorry. The question is? Mr. Green. I will read it again. Credit-based insurance scores are not, ``n-o-t,'' held out as being predictive of an individual's likelihood to have an automobile accident or experience damage to their home. Is this true? Mr. Snyder. They are predictive of making a claim. Mr. Green. Is it true that they do not predict that a person is likely to have an accident? Mr. Wilson. Models perform for groups of individuals rather than for individuals. Mr. Green. Do you know whether it is predictive of whether a person will have an accident? I am not hearing you say yes or no. I do not know. Mr. Snyder. It is predictive of having an accident and making a claim; yes. Mr. Green. A credit score can predict whether a person will have an accident? Mr. McRaith. It is my understanding, Congressman, that a credit score indicates a likelihood of submitting a claim. Mr. Green. I am not there yet. I am talking about the likelihood of having an accident, which I thought was going to be the easy question, by the way. Let me ask again: Will a credit score predict whether a person will have an accident? Mr. McRaith. I have not seen any study that indicates that to be true. Mr. Green. Your answer is yes or no? Mr. McRaith. I would love to answer your question, Congressman. I simply do not know whether that is true or not. Mr. Green. You do not know whether a credit score will predict the likelihood of having an accident? Mr. McRaith. You have probably read-- Mr. Green. Let's move on. Let's go to Mr. Snyder. Mr. Snyder, do you know the answer? Is it yes, no, or you do not know? Mr. Snyder. My answer would be the same as Director McRaith, which is the studies indicate the greater likelihood of submitting a claim. Mr. Green. I am not there yet. I want to talk about accidents. Do credit scores predict whether people will have accidents? Mr. Snyder. They predict insurance risks including accidents and claims. Mr. Green. They predict accidents? Okay. Let's go to Mr. Wilson. Do they predict accidents, Mr. Wilson? Mr. Wilson. They are correlated with accidents. Mr. Green. Credit scores will predict whether a person is going to have an accident? Mr. Snyder. It measures-- Mr. Green. Excuse me. Mr. Wilson has the floor right now. I am sorry. Mr. Wilson. I would agree it measures the likelihood. Models perform for groups of individuals. Mr. Green. Credit scores predict the likelihood of a person having an accident? That seems to be where you all are. Mr. McRaith. I cannot agree with that. I do not know that is true. What I know is it indicates the likelihood of a claim to an insurance company. Mr. Green. If this is what you believe, I see what the problem is. This is a real problem for us. If you believe that a credit score is likely to predict that a person is going to have an accident, what is the correlation between the credit score and the likelihood of an accident? My thought was you would all say no, it is not likely to predict this, that it is likely to predict whether a person will file a claim. That is what I thought you would say. Now you have completely revamped my thinking, given that you seem to think that a credit score can predict whether a person will have an accident. Mr. Wilson, I will give you one more chance. Are you sure that a credit score can predict the likelihood of having an accident? Mr. Wilson. For an individual? Mr. Green. Yes. Mr. Wilson. Again, models perform for-- Mr. Green. Is your answer yes or no? Sometimes when you finish, I do not know whether you said yes or no. Maybe your answer is, ``I do not know.'' Mr. Wilson. I do not think I know. Mr. Green. Okay. You do not know. Let's go to our next expert, Mr. Snyder. Again? Mr. Snyder. It predicts the likelihood of having a claim and you are not going to have a claim for certain types of auto policies unless you are in an accident. Mr. Green. Does it predict the likelihood of having an accident, is the question. Mr. Snyder. It predicts a likelihood of accident involvement. Mr. Green. You are not going to answer the question. It is a simple question. Is it likely to predict that you are going to have an accident? Here is what my intelligence tells me. It is likely to predict that you will file a claim. That is what it is likely to predict. That seems kind of reasonable when you think about it. If that is the case and it predicts whether you are likely to file a claim, then the question becomes this, or maybe the statement is this, that the fact that one is likely to use one's credit--pardon me--one's insurance, if you have an accident, then that says to me you have a lot of people who are poor, who can barely pay for their insurance. They have an accident. I can tell you without having a study that they are likely to use their insurance, and they are likely to want to take advantage of something they paid for. Chairman Gutierrez. The time of the gentleman has expired. Mr. Green. Thank you, Mr. Chairman. I yield back. Chairman Gutierrez. Mr. Cleaver, you are recognized for 5 minutes, sir. Mr. Cleaver. Thank you, Mr. Chairman. I am interested in the extraordinary life circumstances and whether or not the three of you agree that extraordinary life circumstances should be taken into consideration with regard to an individual's credit score. Mr. McRaith. Yes. Mr. Wilson. Yes. Mr. Cleaver. It does not exist. Who is taking that into consideration? Mr. McRaith. Certain State laws require that a company, an insurance company, consider an extraordinary life event if the insured, the policyholder, reports and submits that to the insurance company. Mr. Cleaver. California and Hawaii. Mr. McRaith. California and Hawaii prohibit the use of credit-based insurance scores. Some States, like Illinois, for example, require that the insurance company review and consider an extraordinary life event. Some States require that the insurance company actually make a reasonable exception to the rate due to an extraordinary life circumstance. Mr. Cleaver. That is where I am. That is where I am going. Mr. Snyder. Sir, the National Conference of Insurance Legislators recently amended its law to include specific provisions on extraordinary life circumstances. This was done fairly recently. Some States have already enacted it this past legislative session and it is something we support for all States. Mr. Cleaver. All of you support that? Mr. Wilson. Yes. Mr. Cleaver. I have a friend who is in the hospital now suffering from cancer. Last summer, he ate a cheeseburger. I have concluded that cheeseburgers cause cancer. I know someone who had two automobile accidents, so therefore, automobile accidents cause bad credit. Point out the illogic in that. Either one, the hamburgers or the accidents. Mr. McRaith. Congressman, as a Chicago Cubs fan, I think it is true the Cubs have not won the World Series since Theodore Roosevelt was President. Until he comes back, we are not expecting a victory. Mr. Cleaver. Yes. I agree. We are in the age of deniers. We will deny everything. On a credit score, and this goes back to Mr. Watt's questions earlier, in my hometown, Kansas City, Missouri, some of us protested years ago because the newspaper, in the real estate section, in identifying the location, would always say, ``East of Trust.'' Trust in Kansas City has been unfortunately and painfully the Mason-Dixon line separating the African-American and Latino communities from the majority community. They eventually stopped doing that because they realized that they were sending subliminal information, maybe not even so subliminal. On a credit score, is not the address of the individual listed? Mr. Wilson. It is on the credit report. It is not used in scoring. Mr. Cleaver. You just made the point I am trying to make. It is on the report. Mr. Watt was saying can that be a proxy, a substitute. I am saying if it is on the score, is it not also logical that it gives some additional information about the individual? Mr. McRaith. Yes. Mr. Cleaver. Thank you. Mr. Snyder? Mr. Snyder. As the gentleman indicated, the address is not included in the score that we use. Mr. Cleaver. Yes, I said that at the beginning. The gentleman said it, but I said that at the beginning. The question was and I apologize, is it not very likely that is some additional information that is being given about the individual, more than the numbers? Mr. Wilson. Many-- Mr. Cleaver. No, I want Mr. Snyder to answer, please. Excuse me. Mr. Snyder. Certainly no demographic information. No other information than the number. Mr. Cleaver. You just said the address is on there. Mr. Snyder. I heard the gentleman say it was not. Mr. Cleaver. It is not? That is unbelievable. You are saying-- Chairman Gutierrez. The time of the gentleman has expired. Ms. Kilroy, you are recognized for 5 minutes. Ms. Kilroy. Thank you, Mr. Chairman. Chairman Gutierrez. You are very welcome. Ms. Kilroy. Thanks again to the witnesses for their input here this morning. I wanted to bring up an issue that a constituent and friend and actually former Member of Congress brought up to me, Robert Samansky, who spent a great deal of his personal time over the last 6 months working with my staff and our committee staff to understand and analyze the way credit-based insurance scores are being used and explained to insurance consumers. He was not able to be here with us this morning. I am going to follow up, Mr. Wilson, with some written questions for you regarding his specific circumstances. I hope you will be able to provide me with some answers. Thank you for that. There is a disparity between his overall excellent credit record and his Choice Point credit-based insurance score. I have looked at his materials. I do not understand it. Could you explain to me how someone with an exemplary overall credit score could end up with a mediocre credit-based insurance score? Mr. Wilson. Sure. One of the key considerations is the target that is being modeled. A credit score for financial purposes is generally targeting the likelihood or the odds of someone going delinquent on a loan payment in the next 2 years. The bank has a pool of loans. They know who has gone delinquent and who has not gone delinquent. They model for that. The credit characteristics that are most correlated with loan delinquency come into that model. By contrast, an insurance company is going to look at loss ratio for a pool of policyholders. They will use the correlation between the credit factors and the observed loss ratio to produce a rank ordering. Because the target is different, the credit characteristics and their weights are different. Ms. Kilroy. What kind of-- Mr. McRaith. Congresswoman, to answer your question more directly, if your friend is older than a certain age, he is likely to see his premiums increase. A credit-based insurance score is not solely based on credit. There are many other factors that are considered as well, including the age of the driver. Ms. Kilroy. When Mr. Wilson suggested earlier that age was not taken into account? Mr. Wilson. Age is not used in our scores. Ms. Kilroy. It does come into play later on, is that what you are saying? Mr. Wilson. Yes. Ms. Kilroy. The answer that he got from his insurance company was it was based on his credit score and they gave him some reason codes, again, I have to say I do not see the correlation. You mentioned earlier you wanted to be transparent and we want to get behind some of the rhetoric on credit-based insurance scores. I am still kind of stuck here. It is pretty opaque to me. There is a lot of rhetoric out there in terms of how this happens. Mr. McRaith. Yes, I would agree, Congresswoman. I would say it is possible that both sides can be right, that credit scores--credit-based insurance scores are predictive. It is also possible that they might have a disparate impact on racial and ethnic minorities. Both of those could be true. Ms. Kilroy. You mentioned earlier, Mr. McRaith, about the large number of medical bankruptcies in this country, and that is certainly true. My bill is really not focused on that really significant problem. My bill is focused very narrowly on people who actually paid their medical debt. They might have had some confusion with the large number of bills. Let me give you another example of a lawyer in my community. Her daughter was in a significant accident. They life-flighted her to a hospital. She had a grocery bag full of bills as a result. She worked with her insurance company and paid everything off and never heard anything again until years later, about 5 years later, she went to get a loan to do an addition on her home and discovered her credit score was dinged because of a $100 co-pay on that medical life flight that they had never billed her for, that the municipality had never billed her for, but somehow it had gone to collection. That collection effort never came to her. Mr. McRaith. Those are real problems that people and families all over the country face every day. The States, I think, are trying to impose some requirement that insurance companies acknowledge that exceptional, extraordinary life event. Ms. Kilroy. Even if it is not an exceptional, extraordinary life event, if somebody has paid their medical debt, do you think it is reasonable to have that disparaging comment removed from their credit score? Mr. McRaith. In my opinion, I think it is reasonable to have it removed. I think it is unreasonable for it to remain. Ms. Kilroy. Thank you very much. Chairman Gutierrez. The time of the gentlelady has expired. I thank you all very, very much. We have a second panel, and I thank the first panel. I am being a little biased, I thank Mr. McRaith from Illinois. Thank you for all the fine work you do for the citizens of Illinois. Thank you for your testimony. We are going to go quickly to the second panel, in which we will continue to show the fairness of the Democrats. We had two industry people and one person for the consumer. Now we are going to have two industry and two consumer witnesses. Thank you. We would ask everybody to please end their conversations and have a seat. We are going to introduce these wonderful witnesses and go to our second panel. The second panel consists of four witnesses: Ms. Chi Chi Wu, staff attorney, National Consumer Law Center; Mr. Mark Rukavina, executive director, The Access Project; Mr. Stuart K. Pratt, president and CEO of Consumer Data Industry Association--and someone who knows his way around here; and Ms. Anne Fortney, partner, Hudson Cook LLP, another person who knows her way here. You are all welcome. We are going to give 5 minutes to Ms. Chi Chi Wu. Please, you have 5 minutes. STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL CONSUMER LAW CENTER Ms. Wu. Mr. Chairman, Representative Hensarling, and members of the subcommittee, thank you very much for inviting me here today. I am testifying on behalf of the low-income clients of the National Consumer Law Center. And, Mr. Chairman, thank you for holding this hearing about the use of credit reports in areas beyond lending, such as employment and insurance. And we also thank you for inviting us to speak about the need to fix a scrivener's error in the Fair Credit Reporting Act. The use of credit reports in employment is a growing practice, with nearly half of employers involved in it. It's a practice that is harmful and unfair to American workers. For that reason, we strongly support H.R. 3149, and we thank Chairman Gutierrez and Congressman Steve Cohen for introducing it. This bill would restrict the use of credit reports in employment to only those positions for which it is truly warranted, such as those requiring national security or FDIC- mandated clearance. We oppose the unfettered use of credit histories and support H.R. 3149 for a number of reasons. The first and foremost is the profound absurdity of the practice. Considering credit histories in hiring creates a vicious Catch-22 for job applicants. A worker loses her job, and is likely to fall behind on her bills due to lack of income. She can't rebuild her credit history if she doesn't have a job, and she can't get a job if she has bad credit. Commentators have called this a financial death spiral, as unemployment leads to worse credit records, which, in turn, make it harder for the worker to get a job. Second, the use of credit histories in hiring discriminates against African-American and Latino job applicants. We have heard how study after study has documented, as a group, these groups have lower credit scores, including the FTC study that did find the disparities in credit scoring. These are groups that have been disproportionately affected by predatory credit practices, such as the marketing of subprime mortgages and auto loans and, as a result, have suffered higher foreclosure rates, all of which have damaged their credit histories. The Equal Employment Opportunity Commission has expressed concerns over the use of credit histories in employment, and recently sued one company over the practice. Third, there is no evidence that credit history predicts job performance. The sole study on this issue has concluded there isn't even a correlation. Even industry representatives have admitted, ``At this point we don't have any research to show any statistical correlation between what's in somebody's credit report and their job performance, or likelihood to commit fraud.'' Finally, as we have testified here before, the consumer reporting system suffers from high rates of inaccuracy, rates that are unacceptable for purposes as important as employment. And the estimates range from 3 percent, which is the industry estimate, to 12 percent, from the FTC studies, to 37 percent in an online survey. In an environment with 10 percent unemployment, a 3 percent error rate in credit reports affects 6 million American workers, and it's not acceptable. And, remember, a consumer who has an error in her credit report, and is able to fix it--which is very difficult--can reapply for credit. But very few employers are going to voluntarily hold up a hiring process for one or more months to allow an applicant to correct an error in the credit report. The issue at stake is whether workers are fairly judged on their ability to perform a job, or whether they're discriminated against because of their credit history. Oregon recently signed a bill into law restricting this practice. Other States are considering it, and Congress should do the same and pass H.R. 3149. The second issue I want to talk about is a scrivener's error. The amendments of 2003 may have inadvertently deprived consumers of a 30-year-old pre-existing right they had to enforce the FCRA's adverse action notice requirement. This is the notice given when credit or insurance or employment is denied, based on an unfavorable credit report. That was intended to limit the remedies for a totally new notice--the risk-based pricing notice--at 1681m(h). However, due to ambiguous drafting, a number of courts have interpreted this limitation to apply to the entirety of section 1681m of the FCRA, including the pre-existing adverse action notice. Congress can easily and should fix the scrivener's error, because it was never part of the legislative bargain struck by FACTA. In fact, FACTA's legislative history indicates that Congress had absolutely no intention of abolishing any private enforcement of the adverse action notice requirement, and an uncodified section specifically states that nothing in FACTA ``shall be construed to affect any liability under section 616 or 617 of the Fair Credit Reporting Act''--that is the private enforcement provisions--``that existed on the day before the date of the enactment of this act.'' And there is more evidence that Congress didn't intentionally abolish the private enforcement. If it had done so, the banking and credit industry would have trumpeted that change. In fact, the industry has never made that claim, with only the American Banker noting that FACTA perhaps inadvertently eliminated the existing right of consumers and State officials to sue for violations of the adverse action provisions. Even 4 years later, in a hearing before the full committee, my fellow testifiers today declined to claim that FACTA had intentionally abolished this private remedy. Now, despite the clear legislative history, several dozen courts have, unfortunately, held that FACTA abolished this private remedy, depriving hundreds of consumers of their rights. We think that the documented cases are perhaps only the tip of the iceberg, so we assume that customers' damage has-- Chairman Gutierrez. The time of the gentlelady has expired. Ms. Wu. We thank you for the opportunity to testify, and look forward to your questions. [The prepared statement of Ms. Wu can be found on page 186 of the appendix.] Chairman Gutierrez. Let me describe it once again. You get the green light at 5 minutes to start. When you get to the yellow light, you have a minute. Time yourself. Mr. Mark Rukavina, you are recognized for 5 minutes, sir. STATEMENT OF MARK RUKAVINA, EXECUTIVE DIRECTOR, THE ACCESS PROJECT Mr. Rukavina. Chairman Gutierrez, Ranking Member Hensarling, and members of the subcommittee, I thank you for the opportunity to address the committee today. My name is Mark Rukavina, and I am executive director of the Access Project. We work nationally on health care issues, and have since 1998. And our research played an instrumental role in revealing the problem of medical debt. Medical debt is money owed for any type of medical service or product. That money may be owed directly to the provider of the service, or to an agent of the provider, such as a collection agency. In my testimony today, I would like to discuss the use of medical debt in assessing one's creditworthiness. And more detailed information is found in my written testimony. First, some background on medical debt. Data gathered by the Commonwealth Fund found that during 2007, the most recent year for which data are available: 49 million working-aged Americans and 7 million elderly adults had medical debt or medical bills that they were paying off over time; and 28 million working-aged adults were contacted by collection agencies for medical bills. What makes medical bills unique? Few Americans understand that nearly two-thirds of the people who have medical debt had insurance at the time of the incident for which they owe money. While insurance provides protection, patients still have out- of-pocket obligations that they must pay. Americans are often confused by their health insurance coverage. One national study found that nearly 40 percent of Americans did not understand their medical bills or the explanation of benefits. They did not know what service they were supposed to pay for, the amount they owed, or whether that amount was correct. Nearly one-third let a medical bill go to collection, and one in six did not know whether they should pay their health care provider or their insurance company. Given this, it is not surprising when claims that are not promptly paid get sent to collection. The confusion regarding medical claims payment also carries over to credit reports. Many Americans mistakenly believe that unpaid medical bills have no influence over a credit score. The lack of clarity may stem from statements made by industry representatives. Testimony from the previous panel was an example of this. However, in recent testimony before this committee, a VantageScore representative said that their score does not factor medical debt into the calculation of a consumer's credit score. Following that hearing, a letter was sent to the committee to clarify that this only applies when that medical debt is reported directly by a health care provider. They also clarified that they include all collection accounts, including those related to medical debt, when calculating a credit score. Given this, it is important to understand how most medical data appear on people's reports. According to Experian, data provided directly by medical providers accounts for only 7/ 100ths of one percent of the data that they gather. TransUnion states that medical debts are not typically reported unless they become delinquent and are assigned to collections. So, here are the facts. Forty percent of Americans are confused by medical bills. Consumers and some credit scoring agencies appear confused as to whether medical data are used in calculating credit scores. Medical data can only drag down one's score. I say this because medical debts that are paid off directly to providers aren't used in calculating one's score. Medical accounts are only included on credit reports if they are deemed delinquent and sent to collection. This system is stacked against consumers, and penalizes those who experience illness. Even when proper action is taken, and one pays off a medical bill, the Fair Credit Reporting Act allows for this bill to remain on a person's report for up to 7 years. This leads me to question the predicted value of medical accounts, which has also been questioned by some of those in the financial service industry. Some lenders disregard them when reviewing loan applications. A study published in the Federal Reserve Bulletin found that nearly one-third of Americans with a credit file have a collection account on their credit report. The study found that more than half of the accounts in collection are medical accounts. It went on to state that, ``some credit evaluators report that they remove collection accounts related to medical services from credit evaluations because such accounts often involve disputes with insurance companies over liability for the accounts or because the account may not indicate future performance on loans.'' It is estimated that in 2008, Americans spent $277 billion in out-of-pocket costs. This resulted from millions of invoiced medical bills. Millions of Americans had bills sent to collection as the result of a lengthy insurance claim adjudication process or confusion due to numerous bills generated from one visit to a hospital. Those who paid their bills in full are often very surprised when they learn that despite such actions, the bills continue to plague them and peg them as poor credit risks. Such data errors harm consumers, and these inaccuracies in credit reports slow America's economic recovery. H.R. 3421 addresses this problem, it corrects these errors on credit reports. Specifically, it would require-- Chairman Gutierrez. The time of the gentleman has expired. Mr. Rukavina. --that only those medical accounts that have been paid or fully settled be removed from a credit report within a certain period of time. [The prepared statement of Mr. Rukavina can be found on page 137 of the appendix.] Chairman Gutierrez. Thank you. Mr. Rukavina. Thank you. Chairman Gutierrez. Mr. Pratt, you are recognized for 5 minutes. STATEMENT OF STUART K. PRATT, PRESIDENT AND CEO, CONSUMER DATA INDUSTRY ASSOCIATION Mr. Pratt. Chairman Gutierrez, Ranking Member Hensarling, and members of the subcommittee, thank you for this opportunity to testify. I will highlight just a few points in my oral remarks. First, preserving a full and complete credit history is imperative. A central pillar of the credit reporting system is that it is full-file. And this means the database contains both positive and negative information about a consumer's management of his or her debts. The FCRA balances this fundamental idea that all accurate and predictive data is available for risk management, with the requirement that data that is considered adverse be deleted, generally, within 7 years. Congress recognized that a system that allows for the accumulation of payment history spanning decades is inherently fair for consumers. Because there is a positive payment history, any adverse data resulting from hardship or even mismanagement is set into this context. Credit reports are the bridge of data for us, as consumers, in an impersonal marketplace. Credit reports tell our story, a story of hard work, good values, and even times of trial. Credit reports are the basis for building fair and unbiased risk management tools, such as credit scores. Credit scores remove the risk of bias and mere opinion. Race and gender, for example, are no longer barriers to accessing loans and other services. It is for these reasons that we remain very concerned with H.R. 3149's proposal that the 7-year period for reporting paid medical debts reported by collection agencies be changed to a 30-day period. Consider the following: Maintaining stability of the system of data is essential. We all understand, better than ever, the importance of safe and sound underwriting. Removing accurate predictive data is not the right step. It's not the right direction. Some may misunderstand the nature of the 7-year period. It does not begin on the date of the final payment or settlement. This seven-year period is running throughout the period of time that the account is on the file prior to payment. Data is regularly evaluated for predictive qualities. Prematurely removing even a paid debt which was delinquent removes even the possibility of considering how these data help ensure fair and also safe and sound decisions. We support the FCRA's current approach to adverse data. We urge the committee to consult with users of data about the consequences of deleting any data, since it isn't merely an issue for the consumer reporting agency, but ultimately it's an issue for users who manage risk. Let me now turn to the uses of credit reports for employment. While credit scores are not provided by our members for employment purposes, credit reports are used, and this permissible purpose should be maintained. H.R. 3149 proposes to place a significant limitation on the use of credit reports. We understand the desire to ensure consumers are getting jobs they need during this period of high unemployment. But it is our view that credit histories do not serve as an impediment. Following are some important points to consider: First, employers' use of any criterion for employment is highly regulated. Employers must determine whether or not the use of a credit history is appropriate for a given position. The FCRA, in fact, requires the employer to certify that it will not use data in violation of any applicable Federal or State equal employment opportunity law or regulation. The Society for Human Resources Management surveyed its members. They found, for example, that their members use credit checks for positions that have fiduciary or financial responsibilities, for executive positions, CFOs, or for positions where employees have access to a customer's assets, corporate secrets, and technology platforms, including access to sensitive personal information. And I think these uses make sense. While media counts might lead readers to think differently, background screening products only include a credit check in about 15 percent of the cases. In other words, 85 percent of the time, a credit report is not used in the employment decision. The Association of Certified Fraud Examiners, however, has reviewed occupational fraud, and it found two top red flags exhibited by perpetrators of fraud were: living beyond one's means; and experiencing financial difficulties. Finally, there seems to be a view that credit checks serve as a final yes or no for an employer. This is not the case. Employers use applications, testing, interviews, resume data, and many other data points. The credit check is used where it makes sense. Preserving this appropriate use under the current law is the right policy outcome. Thank you for this opportunity to testify, and we look forward to your questions. [The prepared statement of Mr. Pratt can be found on page 115 of the appendix.] Chairman Gutierrez. Ms. Fortney? STATEMENT OF ANNE P. FORTNEY, PARTNER, HUDSON COOK, LLP Ms. Fortney. Thank you. I am Anne Fortney, a partner in the Washington, D.C., office of the Hudson Cook law firm. I appreciate the opportunity to appear before you again today. My testimony draws on many years of consumer protection practice in both the private and the public sectors, including service at the Federal Trade Commission. I believe my depth of experience enables me to comment upon legislation from the perspective of consumers, as well as the consumer financial services industry. I am aware that credit information is used as a factor in predicting risk other than consumers' default on credit obligations, such as when it is used in insurance and employment purposes. Credit information is used in conjunction with other empirical information for these purposes, because it has been proven to be a reliable tool in predicting risk. While some may question the use of credit histories in employment situations, there are times when that information is essential to a prospective employer or licensor. In fact, to protect consumers, many States require credit information in evaluating applicants for mortgage loan originator licenses. As the Fair Credit Reporting Act recognizes, it is critical that consumer reports used for employment decisions be accurate. To that end, the law requires notice to a consumer before any adverse action based on a consumer report is taken. As a result, an employment decision is not made until the consumer is alerted to negative information in the report, and has the opportunity to correct any inaccurate information. A consumer will also receive notice if the consumer report information formed a basis for the denial of employment, or for another decision that affects the consumer, once employed. My previous testimony before this subcommittee addressed the use of medical debt collection information in credit histories. As others have testified, this information is a predictive characteristic in credit scoring systems. For that reason, its use benefits consumers, as well as creditors and others that rely upon that information. In 2003, Congress enacted FCRA subsection 615(h)(8), which eliminated a consumer's private right of action for all violations occurring under section 615. Since then, litigants across the country have argued about whether Congress intended to eliminate this private right of action, or whether there was a so-called scrivener's error that led to this result. Some critics complain that there was no legislative history evidencing the congressional intent to achieve this result. However, the lack of legislative history is irrelevant. Because of the haste with which Congress deliberated and enacted the amendments to the FCRA at the end of 2003, there is a dearth of legislative history on any of the provisions. Moreover, some claim that the placement of the private right of action exclusion within this subsection is indicative of the congressional intent to limit its application to that particular subsection. However, that claim is not supported by anything in the legislative record. At this point in time, rather than trying to discern what Congress may or may not have intended more than 6 years ago, I believe the appropriate inquiry is whether Congress should now reinstate a private right of action. Based upon my experience with the FCRA, and my participation as an expert witness in class action litigation arising under this subsection, I do not believe that there is any measurable benefit for consumers in reinstating a private right of action for its violations. There is no indication that consumer report users routinely fail to comply with the section 615 adverse action notice requirements since the elimination of the private right of action. The National Consumer Law Center's written testimony mentions 44 cases in which it claims to have alleged consumer reports users' failure to give an adverse action notice. In fact, virtually all those cases involved a different allegation, usually that creditors gave consumers a notice, as required, but the notice was not clear and conspicuous. In other words, the section 615 claim in those cases was that, although consumers received the proper notice, it was not in the proper type size. The courts rightly saw those claims as blatant attempts to extract huge statutory damages in class action suits where there was no consumer harm. There is no indication that the Federal agency or State attorneys general administrative enforcement of section 615 is inadequate. At the same time, as described in my written statement, history shows that the only persons who stand to benefit from the reinstatement of a private right of action under section 615 are those lawyers who can pursue class action litigation, unless Congress also implements appropriate limits on class action liability. Otherwise, consumers will ultimately be the ones who bear the cost of litigation in the form of increased credit and insurance rates. Thank you for the opportunity to testify. I will be glad to answer your questions. [The prepared statement of Ms. Fortney can be found on page 67 of the appendix.] Chairman Gutierrez. I thank the gentlelady for being with us once again here. We are going to go right into the questions. First, I would like to ask unanimous consent that Mr. Cohen of Tennessee be allowed to sit in at this hearing, and when his turn comes, be allowed to ask questions. Hearing no objection, it is so ordered. And we welcome Mr. Cohen here, to this hearing. So, Mr. Pratt, large amounts of debt and living beyond your means, huh? So I guess Madoff would have done really well. He would be like your stellar candidate, right? Multi-millionaires like Mr. Skilling at Enron, all of--I mean I can go through-- Bolski? I guess they would all be just fine. But someone who is poor--in other words, if you're poor, you're likely to live beyond your means, right? Mr. Pratt. [No response.] Chairman Gutierrez. It's tough. So you're likely to have a propensity to be a criminal, right? No? What did you say? You said that you were going to judge people's character, right? You judge people's character, given your credit scores, right? It's a judgement of people's character and their integrity. Do you really think you can judge people's character and integrity, that you have the right to do that, or the ability to do that, to judge people's character? Do you feel comfortable doing that? Mr. Pratt. If I could respond-- Chairman Gutierrez. Yes, I'm waiting. Mr. Pratt. Thank you, sir. Two things. No, somebody who is poor is not inherently somebody with bad character. As a big brother with Big Brothers and Sisters, I worked with a mother who-- Chairman Gutierrez. One of your-- Mr. Pratt. --had three jobs, Congressman, and who worked very hard and paid her bills, and-- Chairman Gutierrez. Excuse me. One of your members is Experian, one of the big three credit bureaus. And it touts ``employment insight'' reports as providing insight into ``an applicant's integrity and responsibility towards his or her financial obligation.'' An applicant's integrity. It's easy to see a potential employer rejecting an applicant with negative credit information in his or her credit report, particularly when it is sold as providing insight into an applicant's integrity. So-- Mr. Pratt. This-- Chairman Gutierrez. --one of your members is actually judging people's integrity based on credit information? Mr. Pratt. No, to the contrary. An employer uses lots of different data to make a final hiring decision. Chairman Gutierrez. No, but they-- Mr. Pratt. And it's possible-- Chairman Gutierrez. They will use one of your clients in order-- Mr. Pratt. They could-- Chairman Gutierrez. --to get that information. Mr. Pratt. They could use-- Chairman Gutierrez. Okay. Is it or is it not true that Experian touts, ``employment insight,'' and they are one of the members of your group? Mr. Pratt. Yes, they are. Yes, sir. Chairman Gutierrez. And I picked it right out of their information. It says, ``into an applicant's integrity and responsibility towards his or her financial obligation.'' Integrity and responsibility in character. You know, I find it astonishing that someone could predict or claim to predict, especially working men and women, their integrity and their responsibility is based on that. Ms. Chi Chi Wu, let me just ask you a question. You talked about a spiral. Could you talk about, ``I have bad credit, therefore I am denied a job?'' Tell me how that works. Ms. Wu. Well, it's very simple, and it's actually exactly as you described it in your opening statement. If you lose your job, you're not going to be able to pay your bills. You're going to fall behind on your credit card bills, maybe your mortgage, maybe your auto loan. Then you try to get a job. A potential employer runs a credit check and denies you a job. If you have bad credit, you can't get the job. And without income, you can't fix or improve your credit. So, it's just a vicious Catch-22. And it's societal, as well. That affects your ability to both build assets, your children's--what you could pass down to your children, and there are racial disparities. You know, the evidence cited that certain minority groups have lower credit scores, as a group. That--if credit scores are supposed to be an accurate translation of credit reports, what the industry claims it does, then you're talking about a huge disparate impact on these groups. And, you know, people don't start off at the same places. So a poor person who loses their job is less likely to have the assets to repay those bills than someone with more means and maybe a little savings when they lose their job. So it just makes things worse. Chairman Gutierrez. Thank you. I just want to make sure that we have from Mr. Pratt's testimony--I have it here, you introduced it to us--``The Association of Certified Fraud Examiners reviewed occupational fraud between early 2006 and early 2008, and found that the top 2 red flag warnings exhibited by perpetrators leading up to the fraud were instances where the fraudster was living beyond his or her financial means--present in 39 percent of all cases with the median loss of $250,000--or experienced financial difficulties--present in 35 percent.'' So, if you have a financial difficulty, and if you get sick, as has already been testified, most of the financial difficulties, the majority of financial difficulties, can be related to illness and lack of health care insurance, then you are probably going to be a thief. And your integrity is going to be questioned, and you get to do that. And I just think-- Mr. Pratt. To the-- Chairman Gutierrez. I don't have any more time. My time has expired. Mr. Hensarling, you are recognized for 5 minutes, sir. Mr. Hensarling. Thank you, Mr. Chairman. Mr. Pratt, if you would like to respond to the chairman's comments, I will give you that opportunity. Mr. Pratt. Thank you. A couple of things. First of all, credit scores are not used--I just want to make that clear--I understand the credit history is used, but not credit scores. So that's an irrelevant discussion. Credit scores are not used in employment. An employer wants to know, when they look at a credit report, what caused the problem in the credit report. Employers are smart, and they want to hire good people. That's why they use resumes, and that's why they use other types of tests of your qualifications. And that's why a credit report is not a single determining factor in whether or not you get the job. And if you show some financial distress over the last couple of years, employers are smart enough, because it's a credit history, which shows the full history of your hard work. It shows, by that band of difficulty is correlating very closely with the circumstances we have had in this country, with unemployment. So, an employer is not going to simply flip that application aside, particularly when they have a qualified person. The other very important point--and I keep coming back to this--is credit reports are not being used across the whole spectrum for every kind of job. If you're stocking a shelf, a credit report is probably not being used. If you're entering the construction trades, a credit report is probably not being used. It's being used, based on the surveys from the Society for Human Resources Management, as you would expect, if you are a CFO, and you have fiduciary responsibilities, if you have access to cash, a small business owner may want to know that. And, by the way, small business owners are some of the ones who do want to use a credit history as part of the review process. But that's why they have interviews, Mr. Hensarling. They have interviews to learn more about why you are qualified for the job, and why you should be the one hired for the job. Mr. Hensarling. But, Mr. Pratt, ultimately it is your clients who decide how they wish to use this information. You are simply observing in the marketplace that most will use it as a part of an interview process. I have to admit I have had a number of different jobs, everything from bussing tables to serving in Congress. And every job I had to go through a job interview. The one for Congress was particularly grueling and took a year. Mr. Pratt. Right. Mr. Hensarling. So, what you're saying is, this may be part of a hiring decision. I must admit, as I listen to this debate--and it is a little bit like Groundhog Day--I suppose a lot of these issues get recycled--but I continue to be struck by the mindset that Americans need congressional approval in deciding what the criteria is they're going to use to make a hiring decision. I continue to be struck at this current that is anti- freedom that says that you have to have congressional approval in your decision to offer credit. You know, I have read the Constitution, and I don't see where there is a constitutional right to force my neighbor to lend me money. I do not see that in the Constitution. Again, and so what I see here, in my opinion--and I know the proponents--I don't question anybody's motives or intentions, I know their intentions are good. But at the end of the day, what I see, frankly, are efforts to censor credit files. This is a form of government censorship, to tell Americans that there is information that their Congress will disallow them to have because they're not trusted with that information, and that somehow it is the responsibility and the burden of the small business person or the guy who is trying to do a little store credit in the furniture store in Mineola, Texas, that somehow they have to justify to the government their exercise of freedom, as opposed to their government justifying restricting their freedom. You know, the default position ought to be freedom. And so I simply don't understand this current of thought. Ms. Wu, you talk about having a discriminatory impact in hiring decisions. But if there are two people who are applying for a job, and if the employer wishes to use a credit score as the decision-making factor and you deny him that, and the person who had the bad credit score, be it his fault, somebody else's fault, nobody's fault, but if you deny that opportunity, why aren't you discriminating against the person who had the good credit record? And he is denied the job, and yet you would somehow deny that information from going into the file and essentially de facto discriminating against the person with the good credit record. How do you justify that? Ms. Wu. I mean, employers don't have unfettered discretion to have all the criteria they want. We do have equal employment opportunity laws. And one of those is that-- Mr. Hensarling. And is the Obama Administration not enforcing those? Ms. Wu. And the practices that have a disparate impact are prohibited. And we think that the use of credit histories-- Mr. Hensarling. Is the Obama Administration enforcing those laws or not? Ms. Wu. The Equal Opportunity-- Chairman Gutierrez. The time of the gentleman has expired. Ms. Wu. --Commission is looking into this. Chairman Gutierrez. Thank you. Mr. Green, you are recognized. Mr. Green. Thank you, Mr. Chairman. I would like to associate myself with the comments of the Chair. And I would also like to ask this panel the same question that I asked a previous panel, with reference to whether or not one's credit score is predictive of one's likelihood to have an accident. We will start with Ms. Wu. Ms. Wu. I don't think one's credit score has anything to do with whether one is likely to have-- Mr. Green. Do you know of any study based on empirical evidence that supports this claim? Ms. Wu. Not that I am aware of. I am not an insurance expert, but not-- Mr. Green. All right. Well, let's go to the next person, please. Mr. Rukavina. I am not an expert in this area. I am not aware of any studies that indicate that there is a correlation. Mr. Green. The next, please? Mr. Pratt. I would be happy to provide you an answer in writing. Mr. Green. Thank you very much. I look forward to your answer in writing. But as for now, do you know of any studies that indicate that one's credit score is predictive of one's likelihood to have an accident? Mr. Pratt. I have staff who have read those studies. I personally have not. So I really truly need to-- Mr. Green. I appreciate-- Mr. Pratt. --at least do the right thing and consult with them first. That's all. Mr. Green. Thank you. Ma'am? Ms. Fortney. I am not an expert in this area, but I have worked with insurance companies. I know that an insurance score, which often includes a credit score component--is likely to predict the likelihood that somebody will file a claim, which means it's likely to predict they will have an accident. Mr. Green. Well, let's examine that statement. The likelihood that you will file a claim is indicative of the likelihood that you will have an accident? Ms. Fortney. Well, yes. Mr. Green. How is that? Ms. Fortney. Well-- Mr. Green. An accident. Ms. Fortney. I am talking about an accident. And the question is, when there is an accident, the insurance company learns about it because a claim is filed. What the insurance company is trying to predict is the likelihood that a claim will be filed. That's what they're insuring against. Mr. Green. I understand. But your indication is that the likelihood of filing a claim is indicative of how I drive, whether I am going to have good driving habits, whether I am going to stop at stop signs, whether I am going to speed, whether I am going to drive recklessly. The likelihood that I will file a claim is indicative of how I will drive? Ms. Fortney. What I said is that if you don't have an accident, you won't file a claim. Mr. Green. Oh. Well, I understand. But see, what I can extrapolate from what you are saying is this: The likelihood of filing a claim is based upon the likelihood of your having had an accident, that there is some correlation between the accident and the claim. But my question goes to the likely--being--predicting whether or not you will have the accident itself. That's the question. Can one's credit score predict whether one will have an accident? Ms. Fortney. I think we disagree. I think it's the same thing. Mr. Green. Well, okay. I don't see the logic in what you say. I will accept what you say, but I am hoping that you can help me with some logic, as opposed to just a statement. Because it's easy to say things, but where it the logic to support the notion that one's credit score is predictive of whether one will have an accident? I don't see it. And I am asking for empirical evidence. Do you have empirical evidence to support this premise? Let's not go to the claims, because if your bills are behind, if you have poor credit and your bills are behind, you haven't managed your affairs well, you have an accident. There is a good likelihood you will use your insurance. So that means there is a good likelihood that you will file a claim. But does it predict that you will have the accident that causes you to file the claim? That's the question. Ms. Fortney. Well, again, I don't know of any studies on that point. What I said, however, is that the insurance companies are pricing according to the likelihood you will file a claim after having had an accident. That is how credit-- Mr. Green. Well, let's examine that. These will be my last seconds. The likelihood that you are going to file a claim. So, do the insurance companies want people who have accidents to--do they want to do business with them? Simply because you will now file a claim, you had an accident--that's what insurance is for, to be there when you have the accident--so if you--there is a likelihood that you're going to file a claim, even though you may not be at fault, then there is some means by which you are viewed as negative, and therefore, you will pay more? Ms. Fortney. The nature of insurance is that people who pose a higher risk of whatever they're insuring against--in this case, claims--will pay more. Mr. Green. But they are insuring against now the filing of claims. You see, it's not the accident. We have escaped the accident. You have--thin lines of distinction have to be made. So now we are saying that they don't want to insure you simply because you filed the claim. Not because you had the accident, because you're likely to file a claim. I see that my time has expired, Mr. Chairman. I yield back. Chairman Gutierrez. The gentleman yields back. The gentlelady from California. Ms. Waters. Thank you very much, Mr. Chairman. I have no questions. I simply want to thank this panel for being here, and to say that I am focused on working with you and your legislation. We know who the insurance companies are. We know what they do. And for the commissioners who are in bed with them, we just need some laws that are going to deal with this issue. I yield my time back to you. Thank you. Chairman Gutierrez. I thank the gentlelady. I guess the claim--because I think when we go back through the record, we are going to find that even the insurance representatives keep going back to the likelihood of filing a claim. I have a feeling that I think I know the answer to that, and that is if you make more money, you are probably less likely to file a claim. That is to say, let's say you have insurance on your house. You burn something, right? Cause some damage. You are probably more likely to just take care of it yourself, given your extra income and your income status than filing a claim, because you do not want your insurance premiums to increase. Somebody bangs into your car. You are likely to take care of it. You are less likely to take care of it and file a claim if you make less money. It is really about the likelihood of a claim, I think, more. We are going to delve into this. Given the fact--I think Mr. Green--they keep using the words ``likelihood of claim.'' Not likelihood of having an accident, the likelihood of filing a claim. I think we have to look at that. I would like to say our purpose here is not to deny people access to information, but correct information, accurate information, information that truly reflects who they are. I want people to get good information but I do not want people to get bad information. I think we do have a responsibility. As a matter of fact, the Equal Opportunity Commission has gone and said that using information from credit reports for employment is discriminatory. They are leading actions against that. People are doing that. It is interesting that Mr. Pratt represents three of the people who do the credit industry, and here are the credit bureaus. Equifax decided last year to stop selling it. They said no, we are not going to do that any more. Do you know why, Mr. Pratt, they decided to stop selling it for employment purposes? Mr. Pratt. I am not aware they have. Chairman Gutierrez. You should ask them and come back and let us know. Again, I do not know. We are going to ask them because it says, ``Equifax is no longer selling credit reports for employment screening.'' It says, ``used to determine eligibility, and while it is perfectly legal under the Fair Credit Reporting, the company seems to have proactively decided that selling reports to employers was not worth the trouble.'' In other words, they see trouble on the horizon with this, probably due to discriminatory actions that might or might not take place. We are going to ask them as part of our process. We are going to ask them to come here. I think it is an interesting question. If there are three credit bureaus and one of them does not want to go through the trouble, I would like to know what the ``trouble'' is. It is not about denying people information. It is just correct information. I would encourage everyone here on this panel and anyone listening, since through Congress and a law which we on this side of the aisle advocated, you now get your credit report once a year. It does not give you your credit score, only the credit report. The credit score is still a little more murky, but you get your credit report. Listen, go get one. When you see the mistakes that are in your credit, that is what we want. It is almost as though we depart from the premise that the credit bureaus are somehow, I do not know, omnipotent, they do not create any errors or mistakes. I would like to just ask one last question and that is I want to go back very, very quickly to Mr. Rukavina. They told us earlier that if I am sick, that it is put in my credit report but does not have an impact on my credit score. Just elaborate very quickly on that. Mr. Rukavina. It is my understanding that collection accounts go into the credit history portion of a credit score and that following a hearing before this subcommittee, it was clarified that medical accounts in collection are used as a factor in determining credit scores. What is confusing to me as a consumer and wearing my policy hat is why medical accounts are treated differently based on who furnishes the data to the consumer reporting agencies. I am curious as to whether other data are treated in a similar fashion, depending on who furnishes it. Chairman Gutierrez. I thank you. Ms. Kilroy, you are recognized for 5 minutes. Ms. Kilroy. Thank you, Mr. Chairman. Thank you to the panelists. Ms. Fortney, you stated that you believed that medical debt is predictive in determining an individual's credit worth? Ms. Fortney. I believe I said medical debt collection information. It is my understanding that is the information that is used in credit scoring, as witnesses testified at the last hearing. Ms. Kilroy. Witnesses when they testified at the last hearing--I ask unanimous consent to enter into the record a May 3rd letter from VantageScore to me. You believe it is appropriate that we consider medical debt differently depending on where the information is coming from? Is that what you are telling us? Ms. Fortney. No. What I am saying is in credit scoring systems, as I recall, I think it was the witness from Fair Isaac that testified, in a credit scoring system, the credit scoring models they have developed, they used collection information including medical debt collection information in the development of those models because that information has been found to be predictive in the models that are predicting credit risk. Ms. Kilroy. You disagree with VantageScore which stated categorically that, ``We do not believe medical debt will contribute to predictive performance?'' Ms. Fortney. I have not seen that letter. I would like to see it before I comment on it. Ms. Kilroy. Would you agree or disagree with the statement? Ms. Fortney. What is that statement again? Ms. Kilroy. Do you agree or disagree that medical debt will contribute to predictive performance? Ms. Fortney. What I understand and what I have said is we are talking about collection information. That statement refers to medical debt alone without discussing whether that medical debt information is limited to collection information. Ms. Kilroy. Mr. Rukavina, you talked about the confusion and inconsistency in medical debt reporting. You have taken a look, as I understand, at some medical debt studies. Have you seen when taking a look at or talking to either lenders or others an impact that medical debt, including paid medical debt, may have on a person's ability to obtain, say, a home loan? Mr. Rukavina. We have talked with people from the lending industry who have been confused by the credit scores of individuals, that they feel are quite good credit risks, and when they look at the credit report, find there are oftentimes several either zero balance medical accounts that are in collection or medical accounts that have a very small balance in collection. This to us, based on our experience, indicates oftentimes not a problem in terms of credit, but a problem regarding the health care billing system and frankly, the insurance adjudication process. These bills are then sent to collection and we have been told by some in the collection industry that a significant number of people whom they contact pay off those bills promptly. We believe they are doing the right thing by paying their bills, which is advised by those in the credit scoring industry, that is something people should do. We believe they are doing that. In spite of those bills having a zero balance, they continue to drag down people's credit scores. We have worked with some in the industry who have run people's credit history through a credit score simulator and have found that by removing medical trade lines in collection, people's credit scores have increased by 50 to 100 points. These are for medical accounts that have a zero balance due. Ms. Kilroy. Would you agree that hurting people's credit scores with paid medical debt for the 7-year period could have an adverse effect on America's economic recovery and people's ability to get a loan, buy a car, buy a house? Mr. Rukavina. I would absolutely agree. Ms. Kilroy. Thank you. I yield back. Chairman Gutierrez. The gentlelady yields back. We have an unanimous consent request. Mr. Hensarling. Thank you, Mr. Chairman. I ask unanimous consent that a statement by the Independent Insurance Agents and Brokers of America be entered into the record. Chairman Gutierrez. Without objection, it is so ordered. The insurance agents apparently got to both of us. Mr. Cohen, you are recognized for 5 minutes. Mr. Cohen. Thank you, Mr. Chairman. I appreciate you allowing me to participate in this panel and for your co- sponsorship of the bill that we have introduced on credit reports, which I think is extremely important. First, I would like to ask Mr. Pratt and Ms. Fortney if you can help us. It has been reported that at a recent legislative hearing in Oregon, TransUnion Director of State Government Relations Eric Rosenberg said, ``At this point, we do not have any research to show any statistical correlation between what is in somebody's credit report and their job performance or their likelihood to commit fraud.'' Are you all familiar with that statement? Mr. Pratt. I am. Mr. Cohen. Do you concur or not concur? Mr. Pratt. I do not because-- Mr. Cohen. Do you have statistical or empirical evidence? Mr. Pratt. I would be happy to keep going. I do not because we really need the employers here. It is the employers who make the decision as to when to make a decision based on-- Mr. Cohen. Thank you, sir. I got an answer and I have heard it before. You do not have any data to discredit Mr. Rosenberg, and Mr. Rosenberg does not have anything to support any reports or any information to support the credit reports. We are kind of going in a circle, kind of a Catch-22, just like the persons-- Mr. Pratt. Not really, because it is similar to asking us whether a creditor effectively uses a credit report for a lending decision. You have to have the creditor here in order to answer that question because they are the one that is going to be able to explain how they use the data, whether they include medical debts or do not include medical debts. I think that is very important. Mr. Cohen. Mr. Pratt, I have a limited amount of time, and I am not going to go through this because the question was statistical correlation and there is none. Let me ask you this. Would you agree--Mr. Hensarling said we should have freedom and this works against freedom. At one time, that same argument was used about discrimination laws on race and gender and other areas, disability. Would you agree that we should have laws that do not allow for discrimination based on race and gender? Would you agree with that? Mr. Pratt. We have those laws. Mr. Cohen. You agree they should be on the books; right? Mr. Pratt. Those laws are on the books. Mr. Cohen. Do you agree they are good things? Mr. Pratt. And they work well. Mr. Cohen. You agree they are good things? Mr. Pratt. Sure. Mr. Cohen. And if something operates in practice to make it de facto or in its application a racial barrier and a racial discrimination, then we should cure that as well, should we not, sir? Mr. Pratt. If that is proven. Mr. Cohen. Yes, sir. Is it a fact that because of Jim Crow laws and slavery and years and years of oppression against African Americans, would you agree that it is more likely that African Americans would have less opportunities to have inherited wealth and accumulate inherited wealth from property or previous jobs or stocks or other bonds and investments of ancestors who might have owned land or had cotton companies or shipping companies or whatever, that they would be less likely to have accumulated wealth that could help them through hard times? Would you agree that is a fact? Do you think African Americans have equal amounts of wealth stored up, even though they were slaves for 400 years and suffered under Jim Crow for 100 years subsequent to that, Mr. Pratt, would you agree with that or disagree? Mr. Pratt. I just do not know. Mr. Cohen. Obviously, you do not know. I will tell you it is a fact. Anybody would know it is a fact. We had 400 years of slavery and 100 years of Jim Crow as distinguished from another group who had property, who owned slaves, who sold slaves, who had discriminatory practices where they could have advantages and they could get credit and they could get loans. They owned the insurance companies and the banks and the credit bureaus, so they had the wealth. When they lose their job or they have a difficult financial time, they have mama or daddy or grand-daddy's money to fall back on. Their credit scores are good. Yet when you look at the credit scores, you say that credit score indicates whether they do good work and have hard values. I submit to you good work and hard values is not a constant. If you have money to fall back on, resources, because of family wealth, you submit that shows because your credit report is good that you have good work habits and hard values, that credit history equals hard work. That is not necessarily true. Credit history shows you have family sometimes and you have support from years and years of opportunity that was denied others, and the fact is the Equal Employment Opportunity Commission has sued certain people over the practice of using credit reports because they believe it has an effect, it is a racial barrier, and there are racial disparities, and it should be pursued. I think it should be, too. I think what you are talking about is a world where all is equal. If you do statistics, Ms. Fortney, you are great on statistics, I think you were thinking about fraud and not accidents. Mr. Green was talking about accidents. There is no way to predict accidents. Maybe a few people might not file claims because they can afford it. You are submitting people who have bad histories might commit fraud, have an accident, which really is not an accident, so they can make a report and get some money. I think that is what you are alluding to. Mr. Hensarling talking about discriminating against the person who does not have a good credit rating, you do not discriminate against him, you let that person, he or she operate against the other person on an equal basis, and the employer can choose them on who can do the best job. Mr. Pratt, you said a lot of jobs do not use credit reports. If that is the case, would you agree that maybe we should pass a bill to make sure that those jobs that you concur where they do not use credit reports now, like skills, etc., that there should not be the permission to use credit reports? Could you sit down with us and come up with those particular industries? Chairman Gutierrez. Answer the question and then we will finish up. Mr. Pratt. I think the laws today respond directly. We cannot discriminate. We cannot unintentionally discriminate. I think the way the FCRA works today, employers know they have responsibilities to decide when it is appropriate to use a credit report. I do not think I have seen enough to know precisely when to choose yes or no. Chairman Gutierrez. The time of the gentleman has expired. Thank you, Mr. Pratt. Mr. Cohen. Thank you, Mr. Chairman. Chairman Gutierrez. Congresswoman Kilroy, you have a couple of documents for which you would like unanimous consent to be entered into the record? Ms. Kilroy. Yes. Letters of support. Chairman Gutierrez. We have letters of support. Without objection, it is so ordered. I want to thank the witnesses and the members for their participation in this hearing. The Chair notes that some members may have additional questions for the witnesses which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to the witnesses and to place their responses in the record. This subcommittee meeting is now adjourned. [Whereupon, at 12:58 p.m., the hearing was adjourned.] A P P E N D I X May 12, 2010 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]