Credit Scoring Checklist

To:

Persons Interested in the Use of Credit Information and Insurance Scores

in Personal Insurance

From: John Morrison, Montana State Auditor, Commissioner for Insurance

Date: June 1, 2005

Re:

Advisory Memorandum

New Credit History and Insurance Score Legislation; SB 311

The 2005 Montana Legislature has enacted the Montana Use of Credit

Information in Personal Insurance Act, which gives the Montana Department of

Insurance the authority to regulate the use of credit information for personal

insurance so that consumers are afforded certain protections with respect to the

use of credit information. The new law goes into effect on October 1, 2005.

“Credit information” is defined as any credit-related information derived from a

credit report, found on a credit report itself or provided on an application for

personal insurance. “Personal Insurance” means private passenger automobile,

homeowners, motorcycle, mobile homeowners and noncommercial dwelling fire

insurance policies and boat, personal watercraft, snowmobile and recreational

vehicle policies. “Insurance Score” is defined as a number or rating that is

derived from an algorithm, computer application, model or other process that is

based in whole or in part of credit information for the purposes of predicting the

future loss exposure of an applicant or insured.

Insurers that use credit information to underwrite or rate risks shall file their

scoring models or other scoring processes with the Commissioner. A third party

may file scoring models on behalf of insurers. These filings will be considered a

trade secret

s

based in whole or in part of credit information for the purposes of predicting the

future loss exposure of an applicant or insured.

Insurers that use credit information to underwrite or rate risks shall file their

scoring models or other scoring processes with the Commissioner. A third party

may file scoring models on behalf of insurers. These filings will be considered a

trade secret.

The credit information or insurance scoring model may not utilize the

following factors in a negative manner for underwriting or rating:

• Income, gender, address, zip code, ethnic group, religion, marital status or

nationality of the consumer;

• Credit inquiries not initiated by the consumer or inquiries requested by the

consumer for the consumer’s own credit information;

• Inquiries relating to insurance coverage;

• Collection accounts with a medical industry code;

• Multiple-lender inquiries from the automobile or home mortgage lending

industry and made within 30 days of one another unless only one inquiry is

considered;

• Number of credit inquiries;

• A consumer’s use of a particular type of credit card, charge card, or debit card

or the number of credit cards obtained by a consumer;

• A loan if information from the credit report indicates the loan is for the

purchase of an automobile or a personal residence. However, an insurer may

consider the bill payment history of any loan, the total number of loans, or

both;

• A consumer’s total available line of credit or total debt. However, an insurer

may consider the consumer’s bill payment history on the debt or the total

amount of outstanding debt if the outstanding debt exceeds the total line of

credit.

The insurer shall, on written request from an applicant or an insured,

provide exceptions for a consumer whose credit report has been directly

affected by an extraordinary event

able line of credit or total debt. However, an insurer

may consider the consumer’s bill payment history on the debt or the total

amount of outstanding debt if the outstanding debt exceeds the total line of

credit.

The insurer shall, on written request from an applicant or an insured,

provide exceptions for a consumer whose credit report has been directly

affected by an extraordinary event. An “extraordinary event” is defined as

expenses related to a catastrophic injury or illness, temporary loss of

employment, death of an immediate family member or theft of identity. An

insurer may:

• Require reasonable written and independently verifiable documentation of the

event and the effect of the event on the consumer’s credit before granting an

exception. An insurer is not required to consider repeated extraordinary

events the insurer previously considered;

• Consider granting an exception to a consumer for an extraordinary event not

included in the aforementioned definition;

• Not be considered to be out of compliance with its filed rules and rates as a

result of granting an extraordinary event exception.

An insurer that uses credit information to underwrite or rate risks may not:

• Deny, cancel or not renew a policy on the basis of credit without consideration

of any other applicable underwriting factor independent of credit;

• Base an insured’s renewal rates for personal insurance upon credit without

consideration of any other applicable factor independent of credit;

• Take an adverse action against a consumer because the consumer does not

have a credit card account without consideration of any other applicable

factor independent of credit;

• Take an adverse action against a consumer based on credit unless the

insurer obtains and uses a credit report issued or an insurance score

calculated within 90 days from the date that the policy is first written or

renewed

an adverse action against a consumer because the consumer does not

have a credit card account without consideration of any other applicable

factor independent of credit;

• Take an adverse action against a consumer based on credit unless the

insurer obtains and uses a credit report issued or an insurance score

calculated within 90 days from the date that the policy is first written or

renewed.

An insurer that uses credit information to underwrite or rate risks may not

consider the absence of credit information or an inability to calculate

insurance score in underwriting or rating unless the insurer does one of

the following:

• Treats the consumer as otherwise approved by the Commissioner if the

insurer presents information that the absence or inability relates to the risk for

the insurer;

• Treats the consumer as if the consumer had neutral credit;

• Excludes the use of credit and uses only other underwriting criteria.

An insurer that uses credit information to underwrite or rate risks may not

use credit information unless not later than every 36 months following the

last time that insurer obtained current credit information for the insured,

the insured recalculates the insurance score or obtains an updated credit

report. Regardless, the insurer:

• At annual renewal shall reunderwrite and rerate the policy based upon a

current credit report or insurance score, if requested by the consumer or

the consumer’s agent

ater than every 36 months following the

last time that insurer obtained current credit information for the insured,

the insured recalculates the insurance score or obtains an updated credit

report. Regardless, the insurer:

• At annual renewal shall reunderwrite and rerate the policy based upon a

current credit report or insurance score, if requested by the consumer or

the consumer’s agent. An insurer does not need to recalculate the

insurance score or obtain a credit report more than once in a 12 month

period;

• Has the discretion to obtain the current credit information upon any

renewal before the 36 months provided for;

• May but does not have to obtain current credit information for the insured

if the insurer is treating the consumer as approved by the Commissioner,

the insured is in the most favorably priced tier of the insurer within a group

of affiliated insurers, credit was not used when the policy was initially

written or the insurer reevaluates the insured beginning not later than 36

months after inceptions and at similar succeeding times based upon

factors other than credit.

If the credit information of an insured was incorrect or incomplete and if

the insurer receives notice of that the insurer shall:

• Reunderwrite and rerate the consumer within 30 days of receiving the

notice;

• Make any adjustments necessary consistent with its underwriting and

rating guidelines;

• Refund to the insured the amount of any overpayment calculated back to

the shorter of either the last 12 months of coverage or the actual policy

period.

If an insurer utilizes credit information in underwriting or rating a consumer

the insurer shall disclose either on the application or a the time the

application is taken that it may obtain credit information in connection with

the application. The disclosure must be written or in the same medium as

the application

orter of either the last 12 months of coverage or the actual policy

period.

If an insurer utilizes credit information in underwriting or rating a consumer

the insurer shall disclose either on the application or a the time the

application is taken that it may obtain credit information in connection with

the application. The disclosure must be written or in the same medium as

the application. The insurer does not have to provide the disclosure upon

renewal if the consumer has been previously provided a disclosure

statement. The use of the following disclosure statement constitutes

compliance:

• In connection with this application for insurance, we may review your

credit report or obtain or use a credit-based insurance score based on the

information contained in that credit report. We may use a third party in

connection with the development of your insurance score.

An adverse action means the denial, nonrenewal or cancellation of

coverage, an increase in any charge for coverage, failure to give an

otherwise available credit-related discount or a reduction or any other

adverse or unfavorable change in the terms of coverage or the amount of

coverage. If an insurer takes an adverse action based upon credit

information the insurer shall:

• Provide notification to the consumer in accordance with the requirements

of the federal Fair Credit Reporting Act;

• Provide notification to the consumer explaining the reason for the adverse

action;

• Provide reasons that are clear and specific language that a person can

identify the basis for the insurer’s decision to take adverse action;

• Provide notification that includes up to four factors that were the primary

influences of the adverse action. The use of generalized terms such as

“poor credit history”, “poor credit rating”, or “poor insurance score”, will not

suffice. Standardized credit explanations provided by consumer reporting

agencies or other third-party vendors comply

he insurer’s decision to take adverse action;

• Provide notification that includes up to four factors that were the primary

influences of the adverse action. The use of generalized terms such as

“poor credit history”, “poor credit rating”, or “poor insurance score”, will not

suffice. Standardized credit explanations provided by consumer reporting

agencies or other third-party vendors comply.

Violations of this Act may result in the following possible penalties:

• An action for insurance fraud pursuant to Title 33, Chapter 1, Part 13,

MCA;

• A cease and desist order;

• Administrative fines up to $25,000 per violation for any violation of this act.

Information may be obtained at http://sao.mt.gov; or call 1-800-332-6148

[444-2040 in Helena].

The complete text of the bill may be obtained at http://leg.mt.gov [go to

2005 Bills, and look up SB 311].

The scoring models or other scoring processes must be filed with the

Commissioner. Filing may begin July 1, 2005 but all models must be filed

no later than September 30, 2005 to meet the October 1, 2005

implementation. The filing must include a letter describing how it

complies with the Act