Rules on Credit Scoring Adopted in Texas
The Texas Department of Insurance announced it adopted initial rules regarding the use of credit scoring by insurers in Texas. TDI said these rules, along with the statutory provisions in Senate Bill 14, are among the strongest in the country regulating the use of credit scoring.
Under the new rules, companies using credit information must provide a disclosure statement to the consumer once an insurance application is received. The disclosure notifies potential policyholders if credit scoring will be used in rate setting and describes the consumer’s rights and protections.
For example, if a consumer lives on a cash economy and has very little credit history, the consumer will be notified that the absence of a credit history may not be a negative factor in terms of rate setting. The disclosure form identifies each of the statutory prohibitions contained in SB 14. Similar protections will exist for people with past-due medical collection accounts and extraordinary life events. Additional disclosure is required by SB 14 to state how credit scoring was used.
The disclosure also explains the consumer’s right to appeal an adverse ruling that results in higher rates or other adverse actions. The company must provide a contact telephone number which the consumer can call to dispute inaccurate or prohibited information. TDI also has a toll-free number for consumers to use when they believe an unjustified adverse action has been taken.
“I am very proud of these rules and Senate Bill 14,” Texas Insurance Commissioner Jose Montemayor said. “They represent some of the strongest, if not the strongest, consumer protections related to the use of credit scoring in the country. The Legislature took historic steps in addressing our need for a modern rating law and they deserve an enormous amount of credit for doing what is best for Texas.”
The rules require insurers to justify the rate charges as a result of credit scoring when used with other rating variables. However, in December 2003, TDI will propose amended rules addressing those limits as more information becomes available. Montemayor said he expects insurers to provide actuarial proof justifying their use of credit scoring and that each point of variation must be proven up. Failure to provide adequate proof will result in an insurer being prohibited from using credit scoring.
“Going forward, I will propose an amendment to these rules to set further limitations and to establish variances to prevent unnecessary rate increases,” Montemayor said. “This is new territory for TDI and, after the last public hearing, I felt there was not enough data to justify either extreme. The rules adopted today are only the first step in a process that will bring about fair rates to every Texan and ensure availability of insurance to the broad spectrum of risks.”
SB 14 made provisions for the use of credit scoring by the insurance industry but mandated that the Texas Insurance Commissioner regulate its use. Texas insurers using credit scoring filed their credit scoring models with TDI in September. By law, those models are open to the public. TDI has already released these models under open records requests to the media and consumer groups.
For more information on the credit scoring rules, visit the TDI Web site at http://www.tdi.state.tx.us
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