Redlining bad credit

January 23, 2003

Homeowner insurers ding slackers, consumer advocates scream foul

By Susan Romero
Inman News Freatures

The insurance industry doesn't think much of folks who have bad credit. Homeowners who pay their bills late face higher homeowner's insurance premiums. Consumer advocates call it redlining.

Maryland and Hawaii prohibit underwriters from considering an applicant's credit score while California bans insurers from using credit scores to determine risk for auto insurance, but not homeowner's insurance. The state is working on establishing stronger guidelines and is involved in litigation with Allstate over the matter.

The hardening insurance market has brought insurers' use of credit scores into the spotlight. Insurers are limiting the number of new policies, cutting coverage and raising premiums and those trends are making it more difficult for home buyers to obtain the insurance they need to close their home purchase transaction. One consumer advocate believes insurers could "undermine the strength of the real estate markets."

Consumers aren't lining up at state departments of insurance to complain about being denied insurance based on information contained in their credit report. But it's generally agreed that credit scores determine how much homeowners pay for such insurance. Those who have spotted credit histories pay more not only for insurance, but also for their mortgage. Higher costs can preclude some individuals and families from being able to purchase a home.

Douglas Heller, senior advocate for the California-based Foundation of Tax Payer and Consumer Rights, a nonprofit organization headed by consumer advocate Harvey Rosenfield, said the use of credit scores disproportionately affects low-income home buyers and is a discriminatory practice that should be banned.

He said the practice is akin to ZIP code redlining schemes the insurance industry once used allegedly to deny coverage to people in impoverished neighborhoods.

"(The insurance industry) has selected a scheme that objectifies (a) racist good-old-boys system," he said.

Cate Paolino, counsel for the American Insurance Association, a property-and-casualty insurance trade organization, said credit scores are a longstanding valid and fair insurance underwriting criteria.

"(Credit scoring has been) used for decades in commercial lines and for some very good reasons. Beginning in the mid-'90s, a correlation between credit scoring and insurance risk started to become known," she said.

Paolino said insurers consider the homeowner's payment history and whether it includes collections activity, bankruptcies or the like. The homeowner's income isn't taken into consideration.

The AIA's Web site contains a pamphlet that explains how insurers use credit scores and states that a consumer's credit history "says a lot about how responsible" he or she is.

The argument is that a person who's sloppy about paying bills probably is sloppy in other ways and consequently would be more prone to risk and more likely to file an insurance claim.

Paolino said homeowners should pay their bills on time to obtain the best premium rates on homeowner's insurance.

But Heller said there is no relationship between credit scores and risk.

"Whether I open a credit account and pay it on time has no relationship to whether wind is going to knock some shingles off my house or I'm going to drive into another car," he said.

He said the taxpayers' organization is concerned about credit scoring because it has a disproportionate impact on low-income people, minorities and people in urban centers who don't have access to banking and financial infrastructure.

"State by state we need to ban the practice (of using credit scores to assess homeowner's insurance risk) because it has no relationship to the insurance product. All it does is hurt consumers," said Heller.

Copyright: Inman News Service

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