Auto Insurers Charge Higher Prices to Drivers with Lower Credit Scores

The nation’s two largest auto insurers, State Farm and Allstate, charge moderate-income drivers with poor credit scores much higher prices than comparable drivers with excellent scores, according to new CFA research released earlier this month. Yet, surveys show that, by a greater than two to one ratio, Americans reject insurer use of credit scores in their pricing of state required auto insurance policies.

“It is simply not fair to ask the poor to pay more for auto insurance just because they’re poor,” said CFA Insurance Director J. Robert Hunter, author of the report.  “Lower-income families tend to have lower credit scores just because they have less discretionary income and more insecure jobs.  State legislators and insurance commissioners should follow the lead of those in Hawaii, California, and Massachusetts and prohibit auto insurers from using credit scores in their pricing,” he added.  “That would help ensure equality of opportunity for lower-income drivers who often face more daunting financial challenges than drivers with higher incomes.”

The report summarizes and references more than a decade’s worth of research by state insurance departments and the Federal Trade Commission that shows, without question, a strong positive relation between income and auto insurer credit scores – in general, the higher one’s income, the higher one’s credit scores.  In addition, it analyzes pricing data related to credit scores for the two largest insurers in ten metropolitan areas.  Based on this analysis, the report found a strong relationship between credit scores and annual auto insurance premiums except in Oakland, California where use of credit scores in rate setting is prohibited.

The report also documents survey research showing strong public opposition to this practice.  For example, in a 2009 survey commissioned by the Iowa Insurance Department that asked state residents whether people with poor credit scores should pay a higher auto insurance rate, only 12 percent agreed while 65 percent disagreed.  A 2012 national survey commissioned by the CFA reached a similar finding.  Only 31 percent thought it was fair for insurers to use credit scores in setting auto insurances rates while 67 percent disagreed, with 47 percent of the total sample strongly disagreeing.

“Americans reject auto insurer use of credit scores because they don’t think someone who’s had difficulty paying debts should automatically be charged higher auto insurance premiums,” said CFA Executive Director Stephen Brobeck.  “After all, if drivers don’t pay their insurance premiums, insurers are not obligated to pay claims.”

Brobeck addressed the issue, as well as the results of other CFA research on the availability of affordable auto insurance for low-income drivers, in a presentation at a December meeting of the National Association of Insurance Commissioners Automobile Insurance Study Group.  He urged the insurance commissions to do more to study the issue.

CFPB Arbitration Study Highlights Need for Arbitration Reform

A new study by the Consumer Financial Protection Bureau (CFPB) provides new data on the pervasiveness of a practice that seriously limits consumers’ rights to redress – the inclusion of pre-dispute, binding arbitration clauses in consumer contracts.  The CFPB report found that a large number of consumers are subject to arbitration clauses and that, in the wake of several Supreme Court cases, courts regularly enforce pre-dispute arbitration clauses in consumer (and other) contracts that are not subject to negotiation.

“Mandatory arbitration clauses are hidden in complicated language in many contracts that consumers sign to obtain services or products,” said CFA Legislative Director Rachel Weintraub, in a press statement issued when the CFPB report was released last week.  “These clauses prevent access to the judicial system by forcing people to agree to a private, often secretive, decision making system before a problem has arisen.”

Sen. Al Franken has introduced legislation (S. 878), the Arbitration Fairness Act, that would help to end these abuses by making forced arbitration unenforceable in civil rights, employment, antitrust, and consumer disputes.  CFA joined with a broad coalition of groups in endorsing the legislation in a letter sent this week to members of the Senate Judiciary Committee. “The AFA would restore transparency and access to our civil justice system and preserve important civil rights, employment, antitrust, and consumer protections,” the groups wrote.  They called on Congress “to outlaw forced arbitration for all America’s consumers and workers.”

The following key findings of the CFPB report, which focused on the use of binding arbitration clauses in consumer banking and credit accounts, demonstrate the extent of the practice:

• Credit Cards: 50.2 percent of outstanding credit card loans are subject to mandatory arbitration, with large issuers more likely than smaller issuers to include such provisions.  This number would be 94 percent but for a 2009 antitrust class action settlement which required several large banks to remove arbitration clauses for several years.
• Checking: Checking accounts representing 44 percent of insured deposits at 7.7 percent of banks include arbitration clauses.  As with credit cards, the use of arbitration clauses is concentrated in the largest banks, with the largest 50 banks having 61.5 percent of insured deposits covered by arbitration clauses.
• Prepaid Cards: 81 percent of the prepaid cards examined contained arbitration clauses, though this was a smaller sample than credit cards or checking accounts.

“The CFPB’s preliminary findings show how pervasive arbitration clauses are in contracts that consumers must sign to obtain a service or product, particularly at large financial institutions,” stated CFA Policy and Research Advocate Michael Best.  “They have become standard provisions in these contracts.”

The CFPB also found that ninety percent of the time arbitration clauses prevent consumers from filing a class action lawsuit. “When individual harms are small but the harm impacts many people, class actions are often the only way to hold a company responsible for the harm they caused,” Weintraub added.  “The consequence of the vast proliferation of arbitration clauses is that consumers have no remedy, companies are immune from accountability, and companies have no incentives to end their misconduct or improve their products or services.”

FCC Urged to Toughen Protections against “Cramming”

In a comment letter submitted last month to the Federal Communications Commission (FCC), CFA joined in six other organizations in calling on the agency to take regulatory action to better protect wireline and wireless telephone users from cramming fraud.  Cramming is the unauthorized placement of charges on telephone bills, a growing problem that is estimated to cost Americans hundreds of millions of dollars annually.

“These are typically small charges, but because they usually recur every month, they can add up to big profits for the crammers and big losses for consumers,” said CFA Consumer Protection Director Susan Grant. “The FCC needs to get tougher to deter this scam and protect consumers.”

Noting that voluntary industry practices to address the problem have not been effective, the groups called on FCC to consider a variety of approaches to strengthening anti-cramming protections.  And they urged the agency to reach out to stakeholders from industry, government, and the public interest community to solicit recommendations for additional actions.

“Wireless cramming is clearly a threat to millions of American consumers,” they wrote.  “There is abundant evidence in the public record that existing efforts to address it – voluntary industry guidelines combined with federal and state enforcement – are insufficient to control the growth of this fraud.  We strongly believe that only through regulatory intervention will consumers be effectively protected from cramming fraud,” they concluded.

CFA Calls on President to Appoint Public Health Expert to Key USDA Post

Following the resignation of Dr. Elisabeth Hagen as Under Secretary for Food Safety earlier this month, CFA called on the President to appoint a successor with strong public health credentials and a record of serving the public interest.  Since the position was created in 1994, “three presidents have recognized the value of having a public health expert in this position and have appointed well qualified individuals,” said Chris Waldrop, Director of CFA’s Food Policy Institute, in a press statement emphasizing the importance of the appointment.

The Office of Under Secretary for Food Safety is the federal government’s highest ranking food safety official and was created by Congress in 1994 to address recurring charges of conflict-of-interest between the U.S. Department of Agriculture’s marketing and promotion activities and its public health regulatory functions. Under the law, the Under Secretary of Food Safety must have specialized training or significant experience in food safety or public health programs.

“In the past many Americans thought USDA was not an appropriate place for a program whose primary function is one of protecting public health,” Waldrop said. “The frequency of such charges has diminished and will likely continue to do so if the Obama Administration maintains the tradition of appointing highly qualified individuals.”  To meet that standard, the Under Secretary “must have a strong commitment to protecting public health, be knowledgeable about the policies and programs carried out by the Food Safety and Inspection Service, offer a record of working effectively to find new ways to reduce foodborne illness and understand the program’s role is to protect the public not be another voice advocating for industry.

“Meat and poultry inspection is an important public health program.  It needs and the American people deserve a highly qualified, experienced public health expert as its leader,” he said.

CFA Issues Tips for Consumers Contacted by Debt Collectors

Earlier this month CFA issued a series of tips to help consumers guard against fraudulent debt collectors, understand their rights under the federal Fair Debt Collection Practices Act, and protect themselves if they are sued.

Last year alone, the Federal Trade Commission brought four lawsuits against fraudulent collectors who collected millions of dollars in “phantom” debt that did not exist or was not owed to these collectors.  Consumers were intimidated into paying over $15 million dollars by illegal threats of immediate arrest and disclosure of debts to employers.

“With the rapid increase in fraudulent debt collection, it is essential that consumers know how to protect themselves,” said CFA Senior Financial Services Advocate Laura Udis in a press statement releasing the tips.  “CFA’s easy-to-understand guide outlines consumer’s rights and how to exercise them,” she added.  “Knowing your rights is the best way to insure fair collection processes and to keep from paying debts you don’t owe.”