Your Turn: FTC Seeks Comments on Credit-Based Insurance Scores

As part of its efforts to fulfill its obligations under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), the Federal Trade Commission and the Federal Reserve Board have been conducting ongoing studies on the effects of credit-based insurance scores on the availability and affordability of financial products such as credit cards, auto loans, mortgages and property insurance.

With the completion of its study on the effects of credit-based insurance scores on consumers of auto insurance, the Federal Trade Commission now is focusing its attention on the effects of credit-based insurance scores on homeowners insurance. A press release issued today seeks public comment on any evidence the FTC and Board should consider in conducting the study.

It's no secret that credit scores have long been used by the insurance industry to calculate what your premiums are for auto or property insurance. Consumer advocates have argued that basing premium costs on credit scores disproportionately affects minorities in a negative way. According to the FTC, the results of their investigation into the use of credit scores in underwriting auto insurance policies showed a correlation between insurance scores and the likelihood of filing an insurance claim. The FTC also stated that the use of credit information did not result in racial or ethnic discrimination. Insurers claim that more than 50 percent of policyholders have a lower premium because of good credit.

A number of states, however, have introduced legislation to ban the use of credit in homeowners and auto insurance underwriting. Rep. Luis Gutierrez (D- IL) introduced a bill in Congress (H.B. 5633) that would amend the Fair Credit Reporting Act (FCRA) to prohibit auto and homeowners insurance companies from using credit information for underwriting if the FTC concludes insurers’ use of credit information results in racial or ethnic discrimination or represents a proxy for race or ethnicity.

If you would like to comment, click here for instructions. The deadline for comment is June 18, 2008.