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: U.S. Dist. Ct. - Middle Dist. of Florida (Ft. Myers Div.) - No. 2:03-cv-326-FtM-29SPC; January 2, 2004. Continue to Next Chapter © 2005 Evan Hendricks and Privacy Times, Inc. All rights reserved. Enroll in Credit Repair About Veracity Credit Consultants Contact Veracity Full Refund Policy Veracity Site Map Privacy Statement Terms of Use bad credit credit creditres

Veracity - Minority Discrimination in Credit Scoring

"thing-oriented" society to a "person- oriented" society. When machines and computers, profit motives and property rights are considered more important than people, the giant triplets of racism, materialism, and militarism are incapable of being conquered. — Rev. Martin Luther King "Beyond Vietnam: A Time To Break Silence" (April 1967) Is there a connection between credit scoring and racial discrimination Clearly, "the jury is still out" on this very important question, but by 2004, all sides were sharpening their arguments and preparing studies to support their viewpoint. For example, in a 2004 study, Missouri Insurance Commissioner Scott Lakin published the first research indicating that credit scores were disproportionately harsher on minorities.²⁴⁶ bad consolidation credit debt

In a 1996 report, Freddie Mac, the giant mortgage underwriter, acknowledged in a report that African-American borrowers were about three times as likely than white borrowers to have high-risk credit scores — defined as FICO scores below 620. Hispanic borrowers were twice as likely as White borrowers to have high-risk scores.²⁴⁷ bad company credit repair

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Kabler, Brent Ph.D., "Insurance-Based Credit Scores: Impact on Minority and Low Income Populations in Missouri, " Missouri Dept. of Insurance Statistics Section, January 2004 ²⁴⁷ "Automated Underwriting: Making Mortgage Lending Simpler and Fairer for America's Families, " Report By Freddie Mac, September 1996 (Herein cited as "Freddie Mac Report") In a footnote, the Freddie Mac was quick not to blame it all on Fair Isaac. "This pattern, while not well understood, seems to reflect less about credit markets and more about the general economic condition of many minority families. African-American and Hispanic households tend to have higher unemployment rates, less job security, and significantly lower levels of wealth. For example, in times of financial difficulty, minority households may be less able to get help from parents or other family members and more likely to fall behind in their payment obligations."²⁴⁸ bad card credit credit

Using Freddie Mac's data from its 1999 National Consumer Credit Survey, Birny Birnbaum, executive director of the Council for Economic Justice in Austin, Texas, compared overall scores to those of minorities. "When combining African-Americans, Hispanics, and Whites into one group, he estimated that: bad car credit loan

• 30% had "bad" credit records bad credit loan mortgage

• 13% had "indeterminate" credit records auto bad credit loan

• 57% had "good" credit records²⁴⁹ bad credit mortgage refinance

For African-Americans he estimated that: bad credit refinance

For Hispanics he estimated that: bad credit mortgage second

• 34% had "bad" credit records bad credit loan student

• 15% had "indeterminate" credit records bad card credit

• 51% had "good" credit records bad credit financing

²⁴⁸ Id

. ²⁴⁹ Birnbaum, Birny, "Insurers' Use of Credit Scoring for Homeowners Insurance In Ohio: A Report For the Ohio Civil Rights Commission, " January 2003 ²⁵⁰ Id. For Whites, in contrast, he estimated that: bad credit home loan mortgage

• 27% of Whites have "bad" credit records bad credit loan people

• 12% of Whites have "indeterminate" records bad card credit credit people

• 61% of Whites have "good" credit records bad credit guaranteed loan

Like SAT Scores

When this author was in college, a group of African-American students invited black and white students to take a multiple-choice test patterned after the Student Achievement Tests (SATs) that have become a rite of passage for high school students preparing to enter college. But the test they gave was heavily weighted with questions about African-American history and culture. After struggling through so many unfamiliar topics, many of the white students would ask, "How am I supposed to know the answer to these questions " The African-American organizers of the event made their point: they who create and give the test, likely will influence who succeeds. bad credit refinancing

Credit scores have been favorably compared to SAT tests because both systems rate achievement according to where the individual's score falls within the percentile, as compared to the entire group. Credit Scores and SAT tests share another commonality: they reflect the assumptions of a narrow group of Caucasian-Americans who created them and have grown to be a widely accepted standard that touches the lives of millions of Americans. As one observer quipped, "Credit scores are just one more reminder that it's still a White Man's world." bad credit equity home loan

Freddie's 'Seal of Approval'

FICO's defenders, on the other hand, insist the scoring system is both colorblind and the most effective predictor of credit risk. In its 1996 study, for instance, Freddie Mac found that regardless of whether the borrower was white, black or Hispanic, loans to borrowers with scores above 660 performed better than loans for borrowers with scores between 620 and 660, which in turn performed better than loans with FICO scores below 620.²⁵¹ bad credit loan payday

Freddie Mac also cited an August 1996 "Discussion Paper" by Fair Isaac that sought to determine whether minorities were adequately represented in credit bureau data. Fair Isaac found that residents of "high-minority areas" accounted for 7.8 of adults, and for 6.7 percent of consumers with credit reports maintained by the three major CRAs. Fair Isaac conceded that the figures indicated a "slight under-representation of high-minority-area residents" in credit bureau files. But the company said the "data clearly cover a significant number of minority households."²⁵² bad credit repair

Looking at Fair Isaac's data, Freddie Mac said it was satisfied: "The fact that credit-bureau scores are powerful predictors for minority borrowers confirms that they are sufficiently represented."²⁵³ bad credit home loan uk

Freddie Mac and Fair Isaac separately examined whether heavy use of finance companies, as opposed to major banks or other mainstream creditors, push their credit scores into a high-risk category. Fair Isaac "detected little variation in the number of finance company accounts used by consumers regardless of racial composition... (and) Freddie Mac reached a similar conclusion."²⁵⁴ 2nd bad credit mortgage

Freddie Mac noted that more lenders were turning to alternative means for documenting credit history of low-income people, including rent and utility payments and other recurring obligations. ²⁵¹ Freddie Mac Report (see Footnote 2) ²⁵² Fair Isaac and Company, Inc., "Low to Moderate Income and High Minority Area Case Studies, " Discussion Paper, August 1996, as cited in the Freddie Mac Study. bad credit loan unsecured

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Freddie Mac Study ²⁵⁴ Id. It concluded that the system would welcome with open arms those consumers that were willing to conform their behavior to its standards. "Fortunately, consumers are able to go from no credit history to an acceptable one relatively quickly, in perhaps one or two years. To do this, they need to open and use several credit accounts and make timely payments without running up large balances."²⁵⁵ bad consolidation credit loan

Insurance Scoring and Discrimination

Throughout 2003 and into 2004, the debate intensified over the alleged discriminatory effects of insurance scoring. As one insurance industry official recently said, "We live in a racist society. Scoring is not at fault; it simply reflects what's there, whether we like it or not." But before more closely examining the Missouri research, it is useful to examine, albeit briefly, the evolution of one insurer's practices and how that insurer historically discriminated against minorities. bad credit home loan new

The 'Negro' Factor

For nearly 100 years, the Metropolitan Life Insurance Company had a policy of selling sub-standard insurance policies to "Negroes" and other non-whites.²⁵⁶ Some of these policies were known as "burial" policies, as they were touted as a means for poor people to have enough money to pay for a decent burial. MetLife agents would go door-to-door to collect weekly premiums. In some cases, the premiums exceeded the policy's payoff. bad business credit loan

²⁵⁵ Id

. ²⁵⁶ The following information about MetLife is from the opinion and order of U.S. District Judge Harold Baer, Jr., in Karl Thompson, et al. v. Metropolitan Life Insurance Co.: USDC - Southern District of New York — 00 civ. 5071; June 21, 2001. Christa Collins was co-counsel on the case; she currently is partner at James, Hoyer, Smiljanich & Newcomer, in Tampa, Florida. The Insurance Library in New York City is also a useful resource. bad credit lender mortgage

In its manual entitled, "Instructions To Agents, " dated June 1940, MetLife advised agents, "In designating race, state the race definitely; for example: White; colored; Indian; Mexican; Hawaii; Porto Rican (sic); West Indian; etc. Colored includes not only the Negro, but the Mulatto and all other persons having colored blood. Only persons of pure Caucasian blood are designated as white; all other races should be designated by their proper term or distinction." ²⁵⁷ bad credit home loan mobile

As blatant discrimination became less acceptable, MetLife found other ways to continue its practice of selling sub-standard policies to African-Americans and other non-whites. One approach was to classify policyholders by job classification. Since blacks typically were the only ones who worked as "porters, " or "black boots, " this approach temporarily succeeded at separating whites and non-whites. bad cash credit loan

A 1964 memo showed that MetLife could distinguish between blacks and whites by classifying them by neighborhood, sometimes called "geo-coding, " other times, "red-lining." "This memo and attached map identified 108 neighborhoods in Manhattan that had 'the least favorable population and housing characteristics, ' including the Lower East Side; south of 14th Street; in east and central Harlem; and in the lower parts of Washington Heights, '" wrote Judge Harold Baer, Jr., in his 2001 order.²⁵⁸ bad credit loan private

Judge Baer quoted from the 1964 memo to underscore MetLife's preoccupation with race. "About two-fifths of the residents in these areas are nonwhites and an additional one-fifth are Puerto Rican. ²⁵⁷ Id. ²⁵⁸ Id. This compares with one-fourth nonwhite and one-eighth Puerto Rican for Manhattan as a whole, " said the memo.²⁵⁹ As time passed, MetLife needed to delve more into personal details of applicants to continue its discriminatory practices. This trend was reflected in the "Mercantile" reports, which were the product of questionnaires only required of non-whites. Some of the questions included: bad card credit debt

Number of rooms in the home Number of persons living in the home, including lodgers Does home contain toilet facilities Running water Is the home in good repair Clean Does the applicant or premium-payer associate with criminals or gamblers such as those in the policy number game Does the applicant or premium-payer get into fights Have the applicant's or premium payer's drinking habits been criticized ²⁶⁰ bad business credit loan small

MetLife believed that blacks had higher mortality rates than whites, even though some experts said the company's actuarial tables were flawed. A 1950 memo showed that MetLife was concerned that some state anti-discrimination laws might be unfair to whites: "Since the laws of several states do not allow us to take race into account in appraising an applicant for insurance, we have had to adopt other means of avoiding unfair discrimination against white policyholders in the cost of their insurance."²⁶¹ bad bankruptcy car credit loan

Allstate In California

In the previous chapter on automobile insurance, we noted how California Insurance Commissioner John Garamendi consistently voiced concerns about the use of credit scoring. ²⁵⁹ The memo was authored by "Paul H. Jacobsen Ph.D.". ²⁶⁰ Thompson, et al. v. Metropolitan Life, op cit. ²⁶¹ Id. In 2002, he brought a formal action against Allstate for its use of credit scoring in homeowners insurance. Garamendi charged that Allstate's proprietary score "in underwriting or tier placements results in excessive, inadequate, unfairly discriminatory, or unreasonable rates." His department made the move after an Allstate motion for a rate increase confirmed that the company was using credit scores in rating homeowner policies.²⁶² bad credit instant loan

In possibly the first order of its kind, Administrative Law Judge Lisa Williams ordered Allstate to reveal its scoring algorithms to prove they were not discriminatory or unreasonable. Soon thereafter, Allstate settled, agreeing to stop using credit scores in setting homeowners insurance. It also agreed it would not try to re-introduce credit scoring unless it first revealed its credit scoring methodologies with the department. bad credit equity loan

Allstate said the debate on the use of credit scoring, which it referred to as "insurance financial stability" in underwriting, "would best be served in a public policy forum such as the legislature, or a formal rulemaking by the department, rather than in the context of a rate hearing."²⁶³ bad credit georgia home loan

In a subsequent filing, Garamendi charged that Allstate's use of credit scoring, or "insurance financial stability (IFS), " in auto insurance, violated California insurance law. ²⁶² Order Adopting Proposed Decision, In The Matter of a Rate Application by Allstate Insurance Company, Calif. Dept. of Insurance, No. PA02026201; Admin. Law Judge Lisa Williams, April 25, 2003 ²⁶³ Id. application bad card credit

Noting that IFS was used to "predict the likelihood of future losses" based upon credit reports, the complaint said that Allstate's credit scoring program used a "scorecard approach where a consumer credit report's value for a particular attribute or combination of attributes receives a score. The total score for the credit report is then an aggregation of all the individual attribute scores."²⁶⁴ bad credit home loan va

"The use of an aggregate score, such as that generated by [Allstate's] IFS program, which combines various credit characteristics that may or may not have a direct substantial relationship to loss exposure, developed without disclosure of the components... does not allow the [Calif. Dept. of Insurance] to determine compliance with the applicable statutes and regulations, " the complaint alleged. bad credit home loa

The complaint also charged that Allstate "failed to maintain reasonable records and has failed to make available information regarding the IFS program to the Commissioner so that a determination can be made whether its use of the IFS program complies with the California Insurance Code." bad car credit loan new

The case was pending at the time this book went to press. The Allstate Class Action A pending credit score-discrimination lawsuit charged that, "Over the years Allstate has employed various artifices to conceal its discriminatory conduct. Initially, Allstate established geographical districts to identify and target non-Caucasian neighborhoods for the purpose of charging the non-Caucasian residents of these districts higher premiums because of their race."²⁶⁵ bad credit home loan really

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Fifth Amended Notice of Noncompliance Pursuant to CIC 51858, In the Matter of the Rates, Rating Plans, or Rating Systems of Allstate Insurance Company et al., Calif. Dept. of Insurance, File No.NC01017552 bad credit fix

²⁶⁵ Jose C. DeHoyos v. Allstate Corp., et al.

: U.S. District Court for the Western Dist. Of Texas; class action complaint filed Nov. 2, 2001. In the early 1990's, however, Allstate began "making extensive use of credit reports to assess 'financial stability'" so it could continue its racially discriminating practices under a more objective veneer, the lawsuit charged.²⁶⁶ bad credit down home loan

Next came credit scoring. "In recent years Allstate has intensified its use of credit scoring through development of the Insurance Financial Stability score and the Strategic Risk Management system. Allstate designed each of these artifices for the purpose of using them as a pretext to discourage sales to non-Caucasians and to charge non-Caucasians higher premiums." bad credit lender

Jose DeHoyos and Eva Perez-DeHoyos, Mexican-Americans living in Texas, had maintained good driving records since 1984, the year they took out auto and homeowners insurance policies with Allstate. They also had good credit histories. But in July 2001, Allstate said their premiums for both their homeowners and automobile policies were being substantially increased. When the DeHoyos asked why, they were informed that Allstate's new use of Insurance Financial Stability Scores caused the increase in their premiums. bad buy car credit

Four other plaintiffs, African-Americans and other non-Caucasians from Texas or Florida, recounted similar experiences. The complaint indicated that a major motivating factor for Allstate was to use credit scoring to identify "High Lifetime Value" customers (i.e. the kind that have more money and the greatest potential to buy additional policies). bad bank credit loan personal

In court, Allstate argued that 1930s-era law²⁶⁷ barring federal involvement in insurance issues prevented plaintiffs from suing under federal civil rights laws. But a federal court in the Western District of Texas disagreed, allowing the suit to go forward. bad credit home loan purchase

²⁶⁶ Id

. ²⁶⁷ McCarran-Ferguson Act, 15 U.S.C. 1012(b) On September 3, 2003, in a 2-1 opinion, a three-member panel of the U.S. Court of Appeals for the Firth Circuit also rejected Allstate's argument, stating, "Every circuit that has considered the question has determined that federal anti-discrimination laws may be applied in an insurance context, even where the state insurance agencies have mechanisms in place to regulate discriminatory practices."²⁶⁸ bad credit loan motorcycle

The Missouri Study

Missouri law prohibits sole reliance on credit scoring to determine whether to issue a policy. However, there are no limits on price increases that can be imposed due to credit scores so long as such increases can be actuarially justified. Accordingly, auto insurers use credit scores widely. To understand how minority populations were affected, the Missouri Insurance Department collected scoring data on 330, 000 applicants from the top-20 auto insurers. bad credit help home loan

The study found a major gap between "all-minority" and "no-minority" neighborhoods. The average credit score in the "all-minority" neighborhood fell within the 18.4 percentile, meaning the average score was in the lowest one-fifth of Missouri residents. Meanwhile, average credit scores in the "no-minority" neighborhoods were in the 57.3 percentile (close to the top two-fifths) — a gap of 38.9 points.²⁶⁹ arizona bad credit home loan

Even after eliminating a broad array of socioeconomic variables, such as income, educational attainment, marital status and unemployment rates, the relationship between below-average credit scores and minority concentration in a ZIP Code remained. bad credit home loan motor

"Indeed, minority concentration proved to be the single most reliable predictor of credit scores, " it said.^{270 268} Jose C. DeHoyos v. Allstate Corp., et al.: 345 F.3d 290 (5th Cir.) Dissent by Judge Edith Jones. The Fifth Circuit rejected Allstate's en banc appeal, raising the possibility of an appeal to the U.S. Supreme Ct. ²⁶⁹ Kabler, op cit. ²⁷⁰ Id. auto bad credit financing

Moreover, the study examined the percentage of minority and white policyholders in the lowest three-fifths of credit score ranges and found that minorities were over-represented in this worst credit score group by 26.2 percentage points.²⁷¹ bad car credit loan used

In response, Missouri Governor Bob Holden said he would introduce legislation to ban the use of credit scoring in auto or homeowners insurance. "The concern is that credit scoring is unfairly penalizing low income citizens with inflated insurance prices, with much of the burden falling on African-Americans and Hispanics. This places unnecessary obstacles in the way of many people and many communities that are struggling to move forward." bad credit ct home loan

Holden expressed concerns about credit scoring techniques, indicating they are secretive, not well understood by the public, and they may not be an accurate indicator of a person's financial responsibility. bad credit diego mortgage san

Scott Lakin, director of the Missouri Insurance Department, said that Missouri would head a national study of credit scoring that will test whether similar patterns exist in other states. Ten states already had signed up for the project; another ten have expressed interest in joining the effort.²⁷² bad credit mortgage people

Maryland & Industry Differ

The Maryland Insurance Administration subsequently criticized the study, as "inconclusive, " partly because insurers don't collect data about race. Joe Thesing, Missouri manager for the National Association of Mutual Insurance Companies (NAMIC), said the Missouri study was based on "faulty methodology." "Most professional researchers think ZIP codes are far too large for accurate analysis, " he said. The study also failed to focus on actual purchasers of insurance and claims experience, he said, adding, "All previous evidence indicates that insurance scoring actually allows companies to insure more people at a lower cost."²⁷³ bad credit down home loan no

Veracity - Thin Files: No Credit or Low Credit The Color of Credit Scores Special Challenges Opting Out Impermissable Access Damage & Damages The 2003 FACTA Battle Missing Credit Limits Conclusion Credit Scores and Credit Reports, by Evan Hendricks

Chapter 17 Special Challenges When it comes to identity theft or credit report accuracy, some groups face special challenges. In this chapter, we'll briefly examine emerging issues for minorities and other people with little or no documented credit history, Spanish-speakers, students, divorcees, filers for bankruptcy, and the elderly. bad company credit mortgage

Minorities

Among some of America's largest minority populations, including African-Americans and Hispanic, there traditionally has been a "low-trust" level in the banking system. According to one survey, as recently as 2003, 87% of African-Americans believed that lending institutions discriminated against borrowers, and 42% had no relationship with a bank. Similarly, 40% of Hispanics had no relation with a bank, according to this financial survey. In terms of credit reports, this translates into what's known as "thin files." If a consumer doesn't have credit or there is insufficient activity in his or her credit report, a credit score cannot be generated. bad credit home loan michigan

The survey estimated that 30% of the Hispanic U.S. population and 20% of the Asian population lacked a credit score. Overall, 26% of the U.S. population lacked a credit score. A study by the University of North Carolina's Center For Community Capitalism found that 22% of Hispanics had no credit score.²⁷⁴ bad credit home loan pa

"Thin Files" mean that millions of people, who quite possibly are financially responsible, face difficulties in buying a home or getting a car loan because their payment history is not documented by the credit bureaus. bad computer credit financing

The irony is that the financial services industry sees the traditionally underserved minority populations as one of the better opportunities for growth. Minorities accounted for nearly 40% of home ownership growth from 1994 to 2000 and will contribute 64% of household growth over the next 10 years, with 67% being first-time homebuyers, and 33% being renters. One out of ten Americans was born in another country. It is projected that the number of all immigrant homeowners will increase to 6.8 million people by 2010. bad credit mortgage second uk

A Response To 'Thin Files'

Many people who do not have credit scores actually have credit histories, but they are not documented by Equifax, Experian, and Trans Union, the "Big 3" consumer reporting agencies (CRAs). Those payment histories can include payments for rent, utilities, and phone service. Seeking to serve the underserved, Michael Nathans in 2004 launched a new kind of credit bureau, "Pay Rent, Build Credit, Inc." The service allows renters and others to register at its Web site²⁷⁵ so that their on-time rent and other payments are recorded and the renter is able to build a credit history. bad credit let mortgage

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Stegman, Michael A., et al., "Automated Underwriting: Getting to 'Yes' for More Low-Income Applicants, " presented at the 2001 Conference For Housing Opportunity ²⁷⁵ www.payrentbuildcredit.com Nathans told the Washington Post's Kenneth Harney that when his Maryland-based bureau became fully operational, it would be seen as a "supplement" to standard credit reports, allowing creditors to "fill in the blanks, " and permit the data to be factored into credit scoring models.²⁷⁶ bad credit get home loan

CitiMortgage signed a three-year contract with Nathans' company. "We see this as very important in providing mortgages to customers with nontraditional credit, " CitiMortgage's Jeffery Polkinghorne told the Post's Michelle Singletary.²⁷⁷ angeles bad credit los

Only time will tell whether Nathans' ambitious plan will accomplish its goals. The company will be subject to the Fair Credit Reporting Act. Spanish The Hispanic population in the United States is extremely diverse.²⁷⁸ The majority are fluent in English. But for a significant percentage of Latinos in the U.S., Spanish is their first language. For example, in 2000, of the 7.8 million Latino students enrolled in U.S. public schools, 3.6 million were Spanish-speaking students enrolled in "English Language Learners" (ELL) programs. Thus, the National Council of La Raza estimates that 46% of Latino students are ELLs.²⁷⁹ The parents of these children presumably consider Spanish their first language. bad credit home loan non owner

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