[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




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                 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



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