Preproposal Inquiry: Use of Credit History (R 2021-07)

Summary

A Preproposal Statement of Inquiry (form CR-101) from the Washington Office of the Insurance Commissioner, Insurance Commissioner Matter R 2021-07, signed by Insurance Commissioner Mike Kreidler and dated June 22, 2021. The subject of possible rule making is a temporary prohibition on use of credit history on some personal lines of insurance, under statutes including RCW 48.19.020. The statement describes emergency proclamations and CARES Act provisions, including Section 4021 of the CARES Act on credit reporting, and states the Commissioner finds that these protections have disrupted credit reporting and made credit-based insurance scoring models unreliable. It says the rulemaking would support an emergency rule filed as WSR 21-07-103. Written comments are due by July 31, 2021.

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Full text

                                                                                           CODE REVISER USE ONLY


                 PREPROPOSAL STATEMENT                                                               THE CODE REV SER
                                                                                              STATE OF WASH IINGTON
                       OF INQUIRY                                                                    FIILED

                                                                                     DATE: Jun,e 22 1, 20211
                         CR-101 (October 2017)                                       TIIME: 110:46 AM
                       (Implements RCW 34.05.310)                                    WSR 2 1-113-131
                    Do NOT use for expedited rule making
Agency: Office of the Insurance Commissioner
Subject of possible rule making: Temporary prohibition on use of credit history on some personal lines


                                                                     Insurance Commissioner Matter R 2021-07

Statutes authorizing the agency to adopt rules on this subject: RCW 48.02.060, 48.18.480, 48.19.020, 48.19.035,
48.19.080



Reasons why rules on this subject may be needed and what they might accomplish: The Commissioner is tasked with
ensuring that insurance rates are not excessive, inadequate, or unfairly discriminatory, and with enacting rules that ensure
the use of credit history and credit history factors in setting insurance premiums is not excessive, inadequate, or unfairly
discriminatory.

Insurance companies which use credit-based insurance scoring claim that credit scoring is a predictive tool to identify risk of
loss from a specific consumer. This credit-based insurance score is then used to determine premiums charged to each
consumer.

On February 29, 2020, the Governor of the State of Washington issued Proclamation 20-05, proclaiming a State of
Emergency throughout the state of Washington as a result of the coronavirus disease 2019 (COVID-19) outbreak in the
United States. On March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) the President of the United
States declared a national emergency concerning the novel coronavirus disease (COVID–19) outbreak in the United States.
Addressing the state of emergency caused by the coronavirus pandemic has required difficult steps that have had a severe
financial impact on large groups within our state.

In part to mitigate the financial impacts of the COVID 19 pandemic to individual households, on March 27, 2020, the
President of the United States signed the CARES Act (P.L. 116-136). Section 4021 of the CARES Act addresses credit
reporting during the pandemic. The CARES Act requires financial institutions to report consumers as current if they were not
previously delinquent or, for consumers that were previously delinquent, not to advance the level of delinquency, for credit
obligations for which the furnisher makes payment accommodations to consumers affected by COVID-19 and the consumer
makes any payments the accommodation requires. Section 4022 of the CARES Act requires certain lenders to offer
forbearance options to borrowers, and imposed a moratorium on foreclosures for certain home loans. In addition, section
3513 of the CARES Act specifically addresses the furnishing of federally-held student loans for which payments are
suspended. This provision results in all non-defaulted federally-held student loans being reported as current.

In addition, the Governor of the State of Washington has issued several emergency proclamations limiting state agencies
from charging late fees and penalties, and placing a moratorium on garnishment actions (Emergency Proclamation 20-49,
and subsequent amendments) and evictions (Emergency Proclamation 20-19, and subsequent amendments). The critical
consumer protections included in these proclamations have also had the effect of preventing creditors from taking actions
that are otherwise reportable on a consumer’s credit history.

The result of the CARES Act is that all credit bureaus are collecting a credit history that is objectively inaccurate for some
consumers and therefore results in an unreliable credit score being assigned to them. Consequently, this untrustworthy credit
score degrades any predicative value that may be found in a consumer’s credit-based insurance score.

The Commissioner finds that the current protections to consumer credit history at the state and federal level have disrupted
the credit reporting process. This disruption has caused credit-based insurance scoring models to be unreliable and therefore
inaccurate when applied to produce a premium amount for an insurance consumer in Washington state. This makes the use
of currently filed credit based insurance scoring models unfairly discriminatory within the meaning of RCW 48.19.020.

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There is evidence that the negative economic impacts of the pandemic have disproportionately fallen on people of color.
Therefore, when the CARES Act protections are eliminated, and negative credit information can be fully reported again, credit
histories for people of color will have been disproportionately eroded by the pandemic.

Remaining consumer credit protections in the CARES Act will expire after the national state of emergency. When the CARES
Act fully expires, a large volume of negative credit corrections will flood consumer credit histories. This flood of negative credit
history has not been accounted for in the current credit scoring models. Without data to demonstrate that the predictive
ability of credit scoring models based on pre-pandemic credit and claims histories is unchanged, the predicative ability of
current credit scoring models cannot be assumed. This will make the use of currently filed credit based insurance scoring
models unfairly discriminatory within the meaning of RCW 48.19.020.

It is impossible to know precisely when the state and federal states of emergency will end. Insurance companies must have
an alternative to the currently unreliable credit scoring models they have in place before the protections of the CARES Act
end. Therefore, it is necessary to immediately implement changes to the use of credit scoring.

The Commissioner is considering this rulemaking to support the effects of the emergency rule, on the same subject and as
filed in WSR 21-07-103, will last for three years after the public health emergency concludes.
Identify other federal and state agencies that regulate this subject and the process coordinating the rule with these
agencies: None



Process for developing new rule (check all that apply):
       ☐ Negotiated rule making
       ☐ Pilot rule making
       ☐ Agency study
       ☒ Other (describe) Submit written comments by July 31, 2021



Interested parties can participate in the decision to adopt the new rule and formulation of the proposed rule before
publication by contacting:
                                                           (If necessary)
Name: David Forte                                          Name:
Address: 302 Sid Snyder Ave., SW, Olympia WA 98504         Address:
Phone: 360-725-7042                                        Phone:
Fax: 360-586-3109                                          Fax:
TTY: 360-586-0241                                          TTY:
Email: rulescoordinator@oic.wa.gov                         Email:
Web site: www.insurance.wa.gov                             Web site:
Other:                                                     Other:
Additional comments:

Date: June 22, 2021                                             Signature:

                                                                                                     ~
                                                                                                ,
Name: Mike Kreidler                                                                                         '
                                                                                                    '
Title: Insurance Commissioner




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