Tlaib bill would prohibit use of credit scores to set car insurance rates

Melissa Nann Burke
The Detroit News
Rep. Rashida Tlaib

Washington — New legislation introduced in Congress by freshman Rep. Rashida Tlaib would block insurers from factoring in a consumer's credit history when setting auto rates.

Tlaib, a Democrat, says credit history or scores have nothing to do with how people drive, and results in discrimination against low-income consumers. 

"It's a new form of red-lining. If you have a low credit score, you're low-income, if you're financially burdened, does that make you less of a safe driver? No," Tlaib said. 

"It's just unfair. Most of my most of my neighbors and residents, they don't have access to credit, and they shouldn't be punished for being poor."

Tlaib represents parts of Detroit, which has the highest auto insurance rates in the nation, but says the issue is one of fairness that resonates with her colleagues from around the country.

She already has 25 co-sponsors for her bill but will be fighting the insurance lobby, which opposes the legislation as "well-intentioned" but flawed. 

"This bill would make underwriting less accurate and could lead to an increase in premiums for auto insurance policyholders,” said Jimi Grande, senior vice president of government affairs for the National Association of Mutual Insurance Companies.

The trade association also argued that Congress should respect state's role in regulating the insurance industry, "rather than imposing a needlessly broad and counterproductive ban on this useful underwriting metric."

But while the states regulate insurance, Congress oversees the credit bureaus, Tlaib noted. "This is just one small part that I can do on the federal level," she said. 

Her bill, HR 1756, would prohibit the three credit bureaus from providing consumer reports or consumer information "to any person for use in making any decision to underwrite or rate auto insurance."

It also prohibits the use of consumer information for auto insurance underwriting or rating of any consumer in connection with an auto insurance transaction.

In a letter to colleagues seeking their support, Tlaib wrote that the use of credit histories places an "undue burden on low-income communities."

"Historically marginalized populations have already had less access to wealth and credit-building opportunities and the continued use of credit histories to set auto insurance pricing compounds racial discrimination and exacerbates wealth inequality," Tlaib wrote. 

She said California Rep. Maxine Waters, who chairs the House Financial Services Committee, is "extremely supportive" of her bill. 

A practice dating to the 1990s, auto insurers use credit scores to help estimate which customers will file a claim. 

Credit-based insurance scores are a "measure of how a person manages his or her financial affairs," the Insurance Information Institute says on its website

"Combined with factors such as geographical area, previous crashes, age and gender, insurance scores enable auto insurers to price more accurately, so that people less likely to file a claim pay less for their insurance than people who are more likely to file a claim." 

The industry says actuarial studies have long found a correlation between credit-based insurance scores and the likelihood of filing a claim. 

Jeff Brewer, vice president of public affairs for the American Property Casualty Insurance Association, said he agrees that Michigan's high insurance costs need to be fixed. 

But he said the state's high costs are due to Michigan's unique requirement that drivers purchase unlimited lifetime medical benefits and not because of the use of credit-based insurance scores.

Brewer pointed to recent testimony in Lansing by Detroit Mayor Duggan, who said lawsuit abuses, lack of consumer choice, and high medical costs are driving the cost of insurance.

"APCIA will continue to work with all stakeholders to address Michigan’s broken no-fault system," Brewer said in a statement. 

Research by the magazine Consumer Reports in 2015 found that a driver's credit history could have more of an impact on a premium price than any other factor, including a conviction for drunken driving. 

An analysis based on a nationwide survey of auto insurance quotes found that adult single drivers in Michigan with "good" credit scores and clean driving records were charged $403 more on average for auto coverage than they would if they had an "excellent" score.

Chuck Bell, programs director for Consumer Reports' advocacy division, said the auto insurance industry has never established a causal link between an individual's credit and driving ability.

"In our view, credit scores reflect a lot more about a consumer's personal economic circumstances, including many economic challenges that may be beyond their control," Bell said.

"Therefore, we don't think it's a valid factor to use for calculating prices and for underwriting decisions as to whether they'll even take you on as a customer."

Bell noted that credit reports and history were originally developed for credit-granting purposes, such as extending an offer for a credit card or mortgage, and not for determining auto insurance rates. 

Three states currently prohibit the use of credit scoring to set pricing for auto insurance: California, Massachusetts and Hawaii.

In those states, insurers base pricing on other factors, such as a customer's driving record, years of experience and miles driven per year.