August 16, 2006
Legislators Learn About Credit Reporting and Scoring
By Andy Spears
Tennessee Senate Democratic Caucus for NCSL
NASHVILLE – How Americans use credit can affect their mortgages, their insurance rates and even the status of their job applications. More than four billion pieces of data are entered into credit records every month. Amid growing concern that consumers might not understand the credit reporting system and how the data is used, state legislators and legislative staff at the National Conference of State Legislatures' 2006 Annual Meeting received a primer on these issues at a session called "Credit Reporting and Scoring 101."
Panelists for the session were:
- Eric Ellman, vice president and counsel for state government and federal regulatory affairs at the Consumer Data Industry Association;
- North Dakota Representative George Keiser, who represented the National Conference of Insurance Legislators (NCOIL);
- Ken Markison, with the legal and regulatory compliance division of the Mortgage Bankers Association; and
- Edmund Mierzwinski, consumer protection director at the National Association of State PIRGs.
Ellman, representing the credit bureaus, illuminated the work of the credit reporting industry, focused on the challenges faced by the industries and the success of federal legislation such as the Fair Credit Reporting Act. Ellman assured the audience that credit reports are in fact reliable for granting credit and cited evidence provided by the Federal Trade Commission to support his claim.
Keiser briefly explained the underwriting process to explain how insurance premium rates are set. He believes that policymakers should not interfere with sound underwriting, as the result is a cost that gets passed on to consumers.
Markison, of the Mortgage Bankers Association, discussed how mortgage lenders use credit scores in lending decisions. He indicated that risk-based pricing has increased the number of consumers who are able to afford a home. In the past, according to Markison, many consumers were shut out of home ownership because of a lack of financing options. Because of better, more accurate credit scoring, new financing options have been developed and consumers at all income levels may find appropriate home financing options. The bottom line, according to Markison, is that the mortgage industry uses credit scoring to assess repayment risk. Once risk is established, the interest rate, type of loan, and other mortgage factors can be determined.
Mierzwinski criticized federal preemption of state regulation of use of credit scoring and other financial issues. He argued that states should retain control and continue to be allowed to have more stringent regulation in the financing industry. He called federal regulation industry-friendly and typically weak.
Mierzwinski sided with consumers when he advocated a ban on the practice of insurance companies using credit reports to determine rates or eligibility. He said there is no proven actuarial relationship between a customer’s credit history and his or her insurance record.
But Representative Keiser disagreed. Keiser advocated adoption of NCOIL model legislation on this issue. Keiser suggested that the NCOIL model legislation represents an improvement in states where there is no regulation on the use of credit scoring for insurance purposes. Meanwhile, Mierzwinski said any “non-ban” bill was simply not good enough and would not provide adequate protection for consumers.
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This summary is provided for information purposes only. NCSL does not endorse any views it contains.
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