It is no secret that a huge wealth gap exists in this country, and it is divided along color lines. African Americans earn only 62 cents for every dollar earned by whites, and Latinos earn only 70 cents. Even more disturbing is the divide in assets. African American families own less than seven cents for every dollar in wealth owned by white families, while Latino households own less than nine cents for every dollar of white wealth. These huge disparities in income and wealth are due to a historical legacy of racism, redlining and segregation. Unfortunately, the racial wealth gap is not closing. Indeed, the policies and practices of both the government and the business sector have widened that gap in the last decade.
One of the practices that has reinforced and exacerbated the racial wealth gap is credit scoring. Study after study has shown credit scoring disfavors African Americans and Latinos, and that these communities have lower credit scores as a group. Credit scoring’s disparate impact is alarming because this solitary number is being used in a growing number of economic transactions not just granting of credit, but utility service, apartment rentals and even employment decisions. Credit scores are also being used to decide whether to issue home or auto insurance and at what cost, which is the focus of this report.
The difficult issue is that while credit scoring has a disparate impact, it has been shown to be predictive in the credit context. In the insurance context, companies claim that it is also predictive in forecasting which consumers will have higher loss ratios. Thus, credit scoring may be a useful tool for businesses, but one that discriminates. The issue for our society is whether we permit the use of this tool knowing that it not only hurts minorities, but also that the disparate impact of this tool reflects centuries of discrimination, exclusion, and exploitation of minority groups.
CONTENTS
EXECUTIVE SUMMARY
I. INTRODUCTION
- A. What is Credit Scoring?
B. Uses of Credit Scoring
II. INSURANCE SCORING
- A. Criticisms of Insurance Scoring
B. Consumer Awareness of Insurance Scoring
C. Elements of an Insurance Score
D. Examples Of Consumers Hurt By Insurance Scoring
III. INSURANCE CREDIT SCORING MAY BE LINKED TO BILLIONS IN INCREASED PROFITABILITY TO INSURERS
IV. CREDIT SCORING AND DISCRIMINATION
- A. General Credit Scoring Studies
B. Insurance Scoring Studies of Race & Scores
C. A Less Discriminatory Alternative
V. LEGAL STATUS OF INSURANCE SCORING
- A. State Insurance Laws
B. Discrimination Challenges to Insurance Credit Scoring
C. Disparate Treatment
VI. REVERSE SOCIAL ENGINEERING THROUGH CREDIT SCORING
VII. POLICY RECOMMENDATIONS
APPENDIX A
