Phony Credit-Score ‘Emergency’
The “emergency” was just ideologically driven nonsense — basically, a consumer-activist attack on people with good credit. Fortunately, a judge recently rejected this ploy, although Kreidler continues to pursue his ban through other means.
Insurance companies often use a credit-based score as one factor in determining homeowner and automobile rates because they are a reliable predictor of claims. As the Federal Trade Commission found, such scores “are predictive of the number of claims consumers file” and are “likely to make the price of insurance better match the risk of loss posed by the consumer.”
It’s not hard to understand the connection. Although insurance-based scores differ somewhat from those issued by credit agencies, they are a valuable predictor of consumers’ risk. People with high scores — whether they are wealthy or poor — tend to manage their resources carefully. People who live on the edge are not usually the most responsible homeowners or drivers.
Kreidler, however, made a novel argument. Because of federally mandated mortgage forbearance and state-based moratoria on evictions and wage garnishments, he argued that credit scores no longer accurately reflected people’s actual credit-worthiness because they “disrupted the credit-reporting process.”
When these coronavirus protections expire, “a large volume of negative credit corrections will flood consumer credit histories,” he claimed in his rulemaking, and this makes “credit-based insurance scoring models unfairly discriminatory” — especially for people of color. The argument seemed plausible, but the evidence suggests otherwise.
“[T]he national average FICO score increased by seven points in 2020, the largest annual improvement in at least a decade,” according to testimony to the insurance commissioner in July from the Consumer Data Industry Association. Consumers actually have been reducing their credit-card debt and the number of subprime scores is falling.
The COVID-19 economic restrictions imposed hardships, but many Americans reacted by spending less money, boosting their savings and paying down debts. There’s no evidence of a credit disruption — and nothing requiring the passage of an emergency rule that upends Washington’s insurance rating system.
Fortunately, Thurston County Superior Court Judge Mary Sue Wilson made this obvious point when she overturned the ruling last month: “Without the insurance commissioner emphasizing or saying this was a problem until the emergency rule was enacted, the court finds that the record is simply insufficient to support a finding of good cause.”
In other words, the insurance commissioner simply used the coronavirus crisis to enact a policy that he had long advocated but failed to achieve through normal channels. Many elected officials enacted legitimate emergency rules related to mask-wearing and public gatherings, but others went further. They weren’t about to let a good crisis go to waste.
Progressives are taking aim at credit scores in general, claiming that they are racially biased. That’s nonsense. “This proposal is just a means of income redistribution that punishes people who have acted responsibly and rewards those who haven’t been quite so responsible,” I argued earlier in my American Spectator column. Expect this campaign to spread, as lefties target the use of credit for lending and other purposes.
Kreidler’s allegations of discrimination didn’t bolster his case. Credit scores may never legally use race, gender, or ethnicity, so how are they racist? As the Center Square news site reported, that FTC study found that insurance-based credit scoring accurately predicts “insurance risk within racial and ethnic minority groups” and such within-group findings are “inconsistent with the theory that scores are solely a proxy for race and ethnicity.”
In reality, the ban punishes minorities who have been fastidious about their credit in order to reward people of all backgrounds who haven’t been so careful. The Washington Legislature had proposed Senate Bill 5010 to limit the use of credit scores to calculate insurance rates, but that bill died. Kreidler opposed the bill because it froze, rather than banned, the use of scores — an odd position if there were an actual emergency.
In response to the court ruling, Kreidler said he will now seek a permanent rulemaking. That’s a better plan given that emergency actions “exceed the statutory authority of the commissioner,” according to a statement from insurance industry groups. But any ban is misguided, in that it raises rates for consumers who have behaved most responsibly.
Since the emergency rule was in effect, insurance companies lowered rates on poor credit risks, but they increased rates on 1 million higher-credit customers. “[P]eople with low credit scores will celebrate a rate drop, and consumers with high credit scores should prepare for a rate increase. Senior citizens should expect to pay at least 20 percent more,” per a report in KOMO News.
Ironically, the Washington state AARP, which is supposed to defend the interests of retired people, supported legislation banning credit scoring in insurance despite the obvious ill effects that will have on the state’s senior citizens.
Thanks to Judge Wilson’s decision, Washington residents will at least have a chance to debate the far-reaching financial impact of the proposal as it gets a more thorough vetting. But those rate increases remind us that there never was an emergency — only the effort by a progressive insurance commissioner to exploit the pandemic to impose a bad rule without any debate.
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