[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]



                  


                        EXAMINING DISCRIMINATION
                         IN THE AUTOMOBILE LOAN
                        AND INSURANCE INDUSTRIES

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                              MAY 1, 2019

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-21
                           
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                           
                           
                           
                           
                           
                           
                           



     EXAMINING DISCRIMINATION IN THE AUTOMOBILE LOAN AND INSURANCE 
                               INDUSTRIES
                               
                               
                               
                               
                               
                               
                               



 
                        EXAMINING DISCRIMINATION

                         IN THE AUTOMOBILE LOAN

                        AND INSURANCE INDUSTRIES

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 1, 2019

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-21
                           
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                           





                                 ______
                          

                     U.S. GOVERNMENT PUBLISHING OFFICE 
 37-520 PDF                   WASHINGTON : 2020


                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             PETER T. KING, New York
GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri              BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
BILL FOSTER, Illinois                ANDY BARR, Kentucky
JOYCE BEATTY, Ohio                   SCOTT TIPTON, Colorado
DENNY HECK, Washington               ROGER WILLIAMS, Texas
JUAN VARGAS, California              FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey          TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas              LEE M. ZELDIN, New York
AL LAWSON, Florida                   BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam            ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan              WARREN DAVIDSON, Ohio
KATIE PORTER, California             TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah                    JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York   BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia            LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts      DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
              Subcommittee on Oversight and Investigations

                        AL GREEN, Texas Chairman

JOYCE BEATTY, Ohio                   ANDY BARR, Kentucky, Ranking 
STEPHEN F. LYNCH, Massachusetts          Member
NYDIA M. VELAZQUEZ, New York         BILL POSEY, Florida
ED PERLMUTTER, Colorado              LEE M. ZELDIN, New York, Vice 
RASHIDA TLAIB, Michigan                  Ranking Member
SEAN CASTEN, Illinois                BARRY LOUDERMILK, Georgia
MADELEINE DEAN, Pennsylvania         WARREN DAVIDSON, Ohio
SYLVIA GARCIA, Texas                 JOHN ROSE, Tennessee
DEAN PHILLIPS, Minnesota             BRYAN STEIL, Wisconsin 


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 1, 2019..................................................     1
Appendix:
    May 1, 2019..................................................    41

                               WITNESSES
                         Wednesday, May 1, 2019

Clarke, Kristen, President and Executive Director, Lawyers' 
  Committee for Civil Rights Under Law...........................     9
Cross, Rachel J., Policy Analyst, Frontier Group.................     7
Lynch, James, Chief Actuary, and Senior Vice President, Research 
  and Education, Insurance Information Institute.................    12
Rivera, Joshua, Data and Policy Advisor, Poverty Solutions at the 
  University of Michigan.........................................    11
Van Alst, John W., Attorney, National Consumer Law Center (NCLC), 
  and Director, Working Cars for Working Families, an NCLC 
  Project........................................................     5

                                APPENDIX

Prepared statements:
     Clarke, Kristen,............................................    42
    Cross, Rachel J..............................................    51
    Lynch, James,................................................    57
    Rivera, Joshua...............................................    63
    Van Alst, John,..............................................    74

              Additional Material Submitted for the Record

Green, Hon. Al:
    Written statement of the National Association of Insurance 
      Commissioners..............................................   165
    Written statement of the National Association of Mutual 
      Insurance Companies........................................   167
    Written statement of UnidosUS................................   173
Barr, Hon. Andy:
    Report entitled, ``Fair Lending: Implications for the 
      Indirect Auto Finance Market,'' prepared by Charles River 
      Associates for the American Financial Services Association, 
      dated November 19, 2014....................................   180
    Report of the Insurance Research Council entitled, ``Auto 
      Insurance Affordability: Cost Drivers in Michigan,'' dated 
      April 2019.................................................   323
    Joint insurance trades letter, dated April 29, 2019..........   342
    Written statement of the National Association of Mutual 
      Insurance Companies........................................   343
    Written statement of the National Automobile Dealers 
      Association................................................   349
Beatty, Hon. Joyce:
    Written responses to questions for the record from Joshua 
      Rivera.....................................................   359
Steil, Hon. Bryan:
    Written statement of the American Property Casualty Insurance 
      Association................................................   362
Zeldin, Hon. Lee:
    Written statement of the National Automobile Dealers 
      Association................................................   364


                        EXAMINING DISCRIMINATION

                         IN THE AUTOMOBILE LOAN

                        AND INSURANCE INDUSTRIES

                              ----------                              


                         Wednesday, May 1, 2019

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Al Green 
[chairman of the subcommittee] presiding.
    Members present: Representatives Green, Beatty, Tlaib, 
Garcia of Texas; Barr, Posey, Zeldin, Loudermilk, Davidson, 
Rose, and Steil.
    Ex officio present: Representatives Waters and McHenry.
    Also present: Representative Budd.
    Chairman Green. Good morning, everyone.
    The Oversight and Investigations Subcommittee will come to 
order.
    The title of today's subcommittee hearing is, ``Examining 
Discrimination in the Automobile Loan and Insurance 
Industries.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of the subcommittee may participate in today's 
hearing for the purposes of making an opening statement and 
questioning the witnesses. Mr. Budd appears to be here; I ask 
unanimous consent that he be allowed to participate. Without 
objection, it is so ordered.
    Today's hearing, as I indicated, is styled, ``Examining 
Discrimination in the Automobile Loan and Insurance 
Industries'', and it is long overdue.
    I now recognize myself for 5 minutes to give an opening 
statement.
    This hearing is long overdue. The empirical evidence has 
shown that non-white vehicle buyers who were more qualified 
than white buyers received costlier loans 62.5 percent of the 
time, according to a 2018 study by the National Fair Housing 
Alliance. African-American males pay more for dealer markups 
than white males, and these dealer markups, which are unrelated 
to credit risk, allow for predatory pricing and invidious 
discrimination.
    A 2015 Consumer Federation of America (CFA) study found 
that a driver living in a predominantly African-American 
neighborhood can expect to pay insurance premiums that are on 
average 70 percent more than similarly situated drivers in 
neighborhoods where African Americans are in the minority.
    A 2017 CFA study found that most auto insurers charge 
middle-aged women higher rates than men. In Houston Texas, 
women with perfect driving records pay on average $75 more than 
men with the same record, at the same address, with the same 
vehicle.
    At $1.26 trillion, auto loans are the third largest 
household debt category, after mortgage loans and student 
loans. What once was considered a luxury is now a necessity as 
evidenced by the fact that nearly every American household has 
at least one car.
    Let me summarize by saying this: I said that this hearing 
was long overdue and it is because the empirical evidence that 
I have cited--which is but a scintilla of what is available--
seems to overwhelmingly indicate that certain persons pay more 
than others for the same product, and these bits of evidence 
have been called to our attention by way of advocacy groups and 
persons who are intellectuals, scholarly persons, and they use 
a method called Testing. And using this Testing, this empirical 
evidence seems to be valid; it seems to indicate that there are 
problems that we have to address.
    The purpose of this hearing is not only to expose the 
empirical evidence but also to address or conclude in some way 
that there are means by which we can address the problems that 
will be called to our attention.
    I am grateful that we have witnesses here who can give us 
the additional information that we will need to draw our 
conclusions, but I also want to close with this: I think that 
we owe it to ourselves as a country to make sure every person 
is treated fairly when making an automobile purchase. We have 
the ability and the power and the authority in Congress to do 
this. The question is, do we have the will to make a difference 
for people who are in need of a car, who are probably not 
making as much money as Members of Congress but who dearly need 
the opportunity to have this necessity so that they can get to 
and from their jobs. And my hope is that we will be able to 
achieve that fairness through this hearing.
    With this said, I am going to reserve the balance of my 
time for Chairwoman Waters.
    I will now yield to the ranking member of the subcommittee, 
Mr. Barr.
    Mr. Barr. Thank you, Chairman Green.
    And I want to start by acknowledging our Subcommittee 
Chairman, Al Green, for convening this hearing. Thank you, Mr. 
Chairman, especially for all your efforts over the course of 
your congressional career and working to combat discrimination, 
race discrimination which is to be commended, and I am pleased 
to participate in this hearing. I welcome all of our witnesses; 
all of your work and efforts are a great value to our committee 
and we thank you for being here today.
    Obviously, race discrimination is abhorrent and it should 
not be tolerated in auto lending or the insurance industries or 
any industry. There is anecdotal evidence of auto lenders 
charging different rates based on a borrower's race so we are 
here to understand today how the industry has changed, how it 
prices risk without discriminating on the basis of race, and 
what needs to be done to make sure that everyone is treated 
fairly regardless of race.
    This committee has spent considerable time examining 
discrimination in auto lending and we take this issue very 
seriously. The committee has investigated and released several 
reports on this matter in the past and our work is ongoing.
    Studies purporting to show widespread discrimination in 
auto lending have routinely proven flawed, for example a 2013 
report by the Consumer Financial Protection Bureau (CFPB) 
contended that dealer-assisted auto financing has a ``disparate 
impact on the price of credit for consumers in protected 
classes.'' As it turned out, the CFPB's methodology for 
counting African Americans was off by 41 percent, among many 
other problems.
    The committee's investigation of the matter found that the 
CFPB knew its methods were deeply flawed and prone to 
significant error, according to internal documents, but the 
CFPB released its study anyway.
    To be clear, racial discrimination in auto lending is 
illegal, as it should be. We must ensure that the industry does 
not move backwards and we need to base that work on accurate 
data and reliable findings. States continue to be the most 
effective regulators of the auto lending industry as has been 
the case for almost a century. This was certainly true in 2010 
when the Dodd-Frank Act was enacted. Section 1029 of the Dodd-
Frank Act specifically excluded auto dealers from the CFPB's 
jurisdiction; it was obvious then as it is now that States were 
best positioned to ensure that consumers are protected.
    We will also examine the auto insurance industry. The 
United States has the largest and most competitive market for 
auto insurance in the world. Like auto lending, the auto 
insurance industry is regulated at the State level. In fact, 
these are two of the most heavily regulated industries in the 
entire financial services portfolio. The price for auto 
insurance varies throughout the country depending on a litany 
of variables, and the competitive nature of this industry has 
led to more affordable prices for consumers.
    As with so many other things, the key to lower prices is 
free markets. We need look no further than Illinois to 
understand why; in Illinois, an inadvertent lapse in 
regulations allowed a flood of insurance companies to enter the 
market, that competition drove down prices for consumers, and 
the Illinois Legislature chose not to enact new rate 
regulations.
    It is not just competition that affects the price of 
insurance, State laws greatly affect prices as well. In 2019, 
Michigan was ranked as the State with the highest insurance 
premiums. The high prices in Michigan reflect decisions by the 
State Legislature and the insurance commissioner; Michigan's 
No-Fault Insurance Law provides for potentially unlimited 
lifetime medical assistance for people involved in accidents 
and this law leads to abuse of the legal system and fraud.
    Insurance experts have drawn a direct correlation between 
the No-Fault Insurance Laws and Michigan's high rates.
    Unlawful discrimination in setting insurance rates is 
inexcusable and it is already prohibited at the Federal and 
State level. In addition, industry standards forbid the use of 
certain factors such as race when determining rates. Those in 
the industry have worked to create a system where the insurance 
credit-ratings are purposely blind to the race of an applicant.
    I look forward to working with the chairman to ensure that 
discrimination does not occur in auto lending or insurance, but 
I also do not want to eliminate risk-based pricing in a way 
that could increase premiums for most drivers.
    Thank you. And I yield back.
    Chairman Green. Thank you.
    And the Chair will now yield 1 minute to the Chair of the 
full Financial Services Committee, the Honorable Maxine Waters.
    Chairwoman Waters. Thank you very much, Mr. Chairman.
    Buying a car is a significant purchase for many Americans 
and should be a fair and transparent transaction, free of 
discrimination. Unfortunately, this is not the case for persons 
of color.
    The National Fair Housing Alliance, in a test of auto 
lending discrimination, found that nearly two-thirds of 
minority loan applicants received higher-cost financing options 
from automobile dealers than less-qualified white applicants.
    Last Congress, Republicans impeded enforcement of fair 
lending laws, making discrimination potentially worse. They 
used the Congressional Review Act to rescind the Consumer 
Financial Protection Bureau's much-needed guidance to indirect 
auto lenders on how to comply with the Equal Credit Opportunity 
Act.
    Discrimination also exists in the auto insurance industry. 
For example, the Consumer Federation of America found that auto 
insurers charged women and persons living in predominantly 
African-American communities disproportionately higher 
premiums. These types of practices warrant congressional 
scrutiny, analysis, and ultimately legislation.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    Chairman Green. The gentlelady yields back.
    The Chair now recognizes the ranking member of the Full 
Committee, the Honorable Mr. McHenry.
    Mr. McHenry. Thank you, Chairman Green. And thank you for 
your leadership, especially on this topic.
    And thank you to Ranking Member Barr, as well, for his 
leadership.
    So let me be clear, there is no place for discrimination, 
period. The idea that lenders or insurers would charge a 
different rate based on skin color, ethnicity, or gender is 
contrary to everything that we stand for as a society.
    To have this discussion, we must have the most accurate 
statistics available. As Congressman Barr outlined, the CFPB 
used an algorithm that attempted to identify the race of 
borrowers based simply on their name and address. I don't have 
to look any further than my own community to see the failure of 
that practice, seeing as there are two families named McHenry 
in my hometown, and our race and ethnicity is different. So a 
name does not do justice nor does a zip code simply do justice 
to an understanding of race.
    As it turns out, the CFPB later acknowledged that algorithm 
had a 20 percent error rate. And then an independent analysis 
of it said that it could be as high as 40 percent. Both the 
lending and insurance industries, which are the focus of 
today's hearing, are regulated at the State level. So I wanted 
to understand if there any limitations on the States taking 
appropriate action to make sure that this does not happen.
    So with that, thank you, Mr. Green.
    Chairman Green. The gentleman yields back.
    We now welcome our witnesses: Mr. John Van Alst, an 
attorney at the National Consumer Law Center, and the director 
of Working Cars for Working Families, an NCLC project; Ms. 
Rachel J. Cross, a policy analyst at Frontier Group; Ms. 
Kristen Clarke, president and executive director of Lawyers' 
Committee for Civil Rights Under Law; and Mr. Joshua Rivera--
Ms. Tlaib, a member of this committee, is from Michigan, so she 
will say more about Mr. Rivera.
    Ms. Tlaib. Oh, are you recognizing me, Mr. Chairman?
    Chairman Green. Yes.
    Ms. Tlaib. Thank you so much.
    I just want to thank so much Mr. Rivera, who co-authored, 
``Auto Insurance and Economic Mobility in Michigan,'' but I 
also want my colleagues to know our emphasis and advocacy 
around non-driving factors, which go beyond just race-based 
kind of discrimination.
    I am so thankful for the leadership of Ranking Member Barr, 
Chairman Green, and our incredible Chairwoman Maxine Waters for 
making this a very important critical issue to talk about the 
fact that we are increasingly using non-driving factors, people 
who become widowed, retired, and so forth are being considered 
as factors against car rates.
    Thank you so much, Mr. Chairman.
    Chairman Green. Thank you for your remarks.
    Moving on, the final witness will be Mr. James Lynch, the 
senior vice president of research and education at the 
Insurance Information Institute.
    I would like to welcome and thank you all for being here. 
The witnesses will each be recognized for 5 minutes to give an 
oral presentation of their testimony. And without objection, 
the witnesses' written statements will be made a part of the 
record. Once the witnesses have finished presenting their 
testimony, each member of the subcommittee will have 5 minutes 
within which to ask questions.
    On your table, and this is directed to the witnesses, you 
will see three lights: the green light means that you may go; 
the yellow light is the indicator that you have 1 minute left 
and you are running out of time; and the red light of course 
means that you are out of time. The microphones are very 
sensitive so please make sure you speak directly into them.
    With that, Mr. Van Alst, you are now recognized for 5 
minutes.

STATEMENT OF JOHN W. VAN ALST, ATTORNEY, NATIONAL CONSUMER LAW 
CENTER (NCLC), AND DIRECTOR, WORKING CARS FOR WORKING FAMILIES, 
                        AN NCLC PROJECT

    Mr. Van Alst. Chairman Green, Ranking Member Barr, and 
distinguished members of the subcommittee, thank you for 
inviting me here today to discuss discrimination in cars.
    I am an attorney with the National Consumer Law Center 
where I work with Legal Services attorneys, government 
attorneys, and private attorneys across the country, all of 
whom help low-income families with issues with cars and car 
finance.
    I also direct NCLC's Working Cars for Working Families 
project which works to ensure that families get a fair deal 
when buying and financing a car, and that the lack of a car 
does not stand in the way of a family's ability to become 
economically successful.
    A car can provide physical mobility but also economic 
mobility, allowing families to get to work, live in more 
affordable housing, and take advantage of educational 
opportunities.
    While cars can be a tool to help escape poverty, they are 
very expensive. In 2018, the average used car price exceeded 
$20,000, and for a consumer with subprime credit, monthly 
payments were over $400 and the average interest rate was over 
16 percent. But for some consumers, buying, financing, and 
using a car can be even more expensive because of their race 
and ethnicity. Some are charged hundreds and even thousands of 
dollars more in interest rate markups. These are discretionary 
increases that the dealer makes to the interest rates which 
have already been objectively set based on the consumer's 
credit risk.
    In 12 cases that the NCLC co-counseled between 1998 and 
2007, we coded millions of transactions for race based upon 
driver's license data. Within each credit tier, dealers marked 
up African Americans' interest rates almost twice as often as 
whites. And when African Americans rates were marked up, the 
markups were on average almost double those charged to whites.
    And the disparities don't stop at financing. Some consumers 
are more likely to be pressured to buy add-on products such as 
service contracts, and GAP. They are then charged more for 
these same products they are pressured to buy.
    In 2017, we examined a data set of millions of add-on 
transactions and found that Hispanic car-buyers were charged 
higher markups for add-ons at both the State and dealer level.
    These disparities make cars more expensive for some races 
and ethnic groups. They unnecessarily increase the cost of a 
car and increase the chance of default. In some cases, these 
higher costs keep families from getting a car at all. This 
contributes to disparities we see across the country in terms 
of access to cars.
    For families at or below the Federal Poverty Guidelines, 13 
percent of white households lack access to a car compared to 31 
percent of African-American households and 20 percent of 
Hispanic households.
    Many of the disparities we will discuss here today are only 
possible because the market for cars and especially car-
financing used cars is opaque and inconsistent.
    Dealers have tremendous discretion to charge consumers 
different prices and the price setting takes place in a back 
room where dealers have to decide quickly how far they can push 
the consumer, and no one knows what anyone else pays for the 
car, the financing or the add-ons.
    A more consistent and transparent marketplace would not 
only benefit consumers of color, but everyone including dealers 
and finance entities that want to compete fairly and openly on 
price and quality on a level playing field.
    Towards this goal, we must ban dealer interest-rate 
markups, amend the Equal Credit Opportunity Act to enable data 
collection, prohibit discrimination in the pricing of goods and 
services in addition to discrimination in financing, increase 
enforcement of the Equal Credit Opportunity Act; and increase 
enforcement of general protections against general abuses in 
the sale or financing of cars.
    Given the evidence we have seen in discrimination in 
financing and other parts of the sale transaction, it is likely 
that many other abuses from yo-yo sales, to failure to pay off 
existing liens, are more likely to affect people of color.
    I commend the subcommittee for holding today's hearing on 
such an important topic and we stand ready to work with this 
subcommittee and other interested parties in bringing 
consistency, transparency, and fairness to the auto market. 
Thank you.
    [The prepared statement of Mr. Van Alst can be found on 
page 74 of the appendix.]
    Chairman Green. Thank you. We will next hear from Rachel J. 
Cross. You have 5 minutes.

  STATEMENT OF RACHEL J. CROSS, POLICY ANALYST, FRONTIER GROUP

    Ms. Cross. Thank you for the opportunity to appear before 
you today to discuss the state of U.S. auto lending. I am a 
policy analyst with Frontier Group and I am also testifying on 
behalf of the U.S. PIRG, the Public Interest Research Group 
with whom we co-authored our recent report, ``Driving into 
Debt,'' which examines how auto lending has changed since the 
Great Recession and what this means for consumers.
    In much of the country, owning a car is a virtual 
necessity. It is how many of us get to work, to school, to the 
grocery store and doctor; a car, in short, is the price of 
admission to living a full and productive life, but owning a 
car is also expensive and has driven millions of households to 
take on debt. Right now, Americans owe more for our cars than 
we ever have before; outstanding auto debt is over $1.2 
trillion, and since the end of 2009 that amount has increased 
by over 50 percent.
    But it is not just that the overall auto debt has reached 
historic levels; the number of Americans who owe for their cars 
is also the highest in U.S. history and consumers are at risk, 
delinquencies are rising, the percentage of auto debt that is 
seriously delinquent, meaning 90 days late at least or more, is 
the highest it has been since 2012 and it is still rising. More 
than 7 million Americans have missed at least 3 monthly car 
payments.
    These numbers are concerning on their own, but what makes 
them deeply troubling is that they are happening in a strong 
U.S. economy, something important has been happening in the 
auto credit market. The lending practices since the recession 
that have boosted auto sales have come at a cost, the increased 
risk of financial instability for millions of American 
households.
    There are a few key steps that have gotten us to the point 
that we are at now. In the aftermath of the 2008 financial 
crash, investors and lenders alike noticed that auto debt 
performed relatively well compared to other securities during 
the recession and this sparked more interest in bringing more 
borrowers into the auto credit market and lenders of all types 
did so.
    First, they loosened standards for prospective borrowers. 
We found in our report that auto debt has risen across all 
income levels but it has risen the fastest among those with the 
lowest incomes. Since 2009, borrowing by residents of low-
income neighborhoods has increased nearly twice as quickly as 
borrowing by residents of the highest-income neighborhoods. 
Lending in the sub-prime market followed a similar trajectory.
    Lenders have used other tools to bring borrowers in the 
marketplace, including the lengthening of loan terms. Extending 
a loan term brings down that monthly payment, which is an 
important measure for determining affordability particularly 
for lower-income consumers, but it also means that the consumer 
will pay more over the life of the loan due to interest 
payments, and will spend more time underwater or owing more for 
their car, and that is even worse.
    Consumers with a 6-year loan are twice as likely to default 
as others with a 5-year loan, and those borrowers are also more 
likely to have a poor credit history, lower income, and to pay 
higher interest rates than other borrowers.
    In 2017, 42 percent of all loans generated had terms of 6 
years or more. This period also saw the rise of more outright 
abusive and predatory tactics in one specific part of the auto 
credit market: dealer financing.
    A direct loan that a consumer gets directly from a 
financial institution like a bank or credit union is, generally 
speaking, a safer bet for consumers. Indirect lending, however, 
is when the consumer finances through a dealership, where the 
dealer is a creditor, assigns the loan to another financial 
institution, and often has the consumer sign a retail 
installment sales contract. Dealer-arranged financing has 
weaker regulations and oversight than direct loans, enabling a 
number of abusive and predatory tactics.
    One area of abuse is excessive interest rates. When a 
dealer sells its financed contract to another lender, they are 
able to mark up that interest rate and pocket the difference as 
profit.
    Having consumers sign a retail installment sales contract 
also allows the dealer to charge an interest rate that can 
sometimes exceed State usury limits. In one example, a package 
of securities that Santander Bank was selling to investors was 
found to have 57 percent of all loans generated in the State of 
New York to be carrying interest rates that are so high, they 
would have been illegal if they had been from direct loans 
between a consumer and a bank. But because they were dealer-
financed and indirect loans, it was legal.
    There has also been evidence of lenders failing to verify 
the income of borrowers, and even car salesmen inflating the 
consumer's income to ensure that they qualify for financing 
even if they ultimately cannot afford it. In key respects, auto 
lending in the last decade has been a Groundhog-Day repeat of 
the exact same practices that brought us to the 2008 market 
crash.
    Dealer-arranged financing has also enabled discriminatory 
pricing. Since its creation, the Consumer Financial Protection 
Bureau has investigated a number of large captive finance 
groups that provide indirect financing for charging borrowers 
of color higher interest rates than similarly situated white 
borrowers. These include some of the largest indirect lending 
firms in the nation like Toyota Motor Credit. These policies 
led to many African-American borrowers paying $200 more on 
average for financing.
    The CFPB investigations have repeatedly found that lenders 
giving dealers the ability and incentive to mark up interest 
rates enables this kind of discrimination. However, since the 
congressional repeal of the CFPB's Indirect Auto Guidance and 
changes in leadership, we have seen a lack of will to continue 
protecting consumers as they deserve.
    These are only a few examples of the way that dealer 
financing threatens the financial well-being of Americans. The 
entire list of threats that consumers, in particular the most 
vulnerable amongst us face, is appalling, and that so little 
action has been taken to stop these predatory behaviors is even 
more appalling.
    Thank you.
    [The prepared statement of Ms. Cross can be found on page 
51 of the appendix.]
    Chairman Green. We will now hear from Kristen Clarke. You 
are recognized for 5 minutes.

STATEMENT OF KRISTEN CLARKE, PRESIDENT AND EXECUTIVE DIRECTOR, 
         LAWYERS' COMMITTEE FOR CIVIL RIGHTS UNDER LAW

    Ms. Clarke. Chairman Green, Ranking Member Barr, and 
members of the subcommittee, my name is Kristen Clarke and I am 
president and executive director of the Lawyers' Committee for 
Civil Rights Under Law. Thank you for the opportunity to 
testify today about the discrimination in the automobile loan 
industry.
    The Lawyers' Committee is a national non-partisan civil 
rights organization created at the request of President John F. 
Kennedy to activate the private bar in the fight against 
discrimination, and for over 55 years we have been on the 
frontlines of our nation's fight for justice in the areas of 
economic justice, voting rights, fair housing, criminal 
justice, education, hate crimes, and more.
    We know that eliminating lending discrimination, root and 
branch, particularly across the auto industry must stand as a 
core civil rights priority today.
    Discriminatory auto lending poses grave financial danger to 
African-American, Latino, and other vulnerable consumers; 
increasingly, lenders are taking advantage of a highly 
unregulated and unmonitored market to promote discriminatory 
and predatory practices. We thank this committee for sounding 
an alarm about this and undertaking careful fact-finding to 
identify a remedial response.
    All Americans need reliable transportation to access jobs 
and schools, as has been noted, and we know that communities of 
color that are deprived of economic investment often lack 
effective public transportation, those who can't rely on public 
transportation often need an affordable loan to finance the 
purchase of a car and to help them build good credit.
    As the third largest source of outstanding household debt 
after mortgages and student loans, car loans and their impact 
on communities of color warrant greater scrutiny.
    There is a stark racial wealth divide in our country today. 
A typical white family has $140,000 in wealth, while a typical 
African-American family has just over $3,400. Abusive, 
predatory automobile lending and lack of access to equitable 
financial services contribute to and exacerbate this racial 
wealth gap.
    Widespread racial discrimination in the market is not new 
and has been well documented over the past 30 years. African 
Americans and other consumers of color face discrimination in 
various ways when purchasing and financing a car. They are 
often charged higher prices, higher interest rates, and more 
expensive insurance rates on the basis of their race or 
ethnicity, and they are also targeted for predatory sales and 
repossession schemes.
    Racial bias also seeps into the industry by way of 
discretionary dealer markups and often indirect auto lenders 
fail to have controls in place to prevent discretionary markup-
pricing disparities resulting from car dealers' racial bias, 
resulting in people of color being burdened with more expensive 
loans than white consumers.
    While much lending discrimination can be identified through 
statistics, there is also evidence of intentional 
discrimination throughout the industry. In 2014 the Justice 
Department secured settlements with Auto Fare and Southeastern 
Auto Corp in North Carolina for engaging in reverse redlining. 
The dealerships targeted black consumers with unfair and 
predatory credit practices and the dealership operator 
expressed his view that African-American customers have fewer 
credit options, making them more likely to accept predatory 
contracts.
    A recent 2018 study by the National Fair Housing Alliance 
used matched-pair testing in Virginia that showed that almost 
63 percent of the time, borrowers of color received costlier 
loans even though they were more qualified than their white 
counterparts.
    Under this Administration, the Justice Department has 
retreated from Fair Lending enforcement against dealers, not 
surprisingly after the rollback of the critical 2013 CFPB 
Guidance we saw several lenders who had previously implemented 
flat-fee models, revert back to discretionary dealer-rate 
programs.
    What must be done? We ask Congress to enact robust 
legislation to increase protections for borrowers of color by 
prohibiting or significantly limiting discretionary dealer 
markups. We need more oversight over the Justice Department and 
the CFPB to understand why their enforcement activity has come 
to a grinding halt. And finally we need more transparency and 
data collection to help us get to better understand that the 
extent of discrimination across the auto lending industry.
    Thank you.
    [The prepared statement of Ms. Clarke can be found on page 
42 of the appendix.]
    Chairman Green. Thank you.
    Mr. Joshua Rivera, you are now recognized for 5 minutes.

 STATEMENT OF JOSHUA RIVERA, DATA AND POLICY ADVISOR, POVERTY 
            SOLUTIONS AT THE UNIVERSITY OF MICHIGAN

    Mr. Rivera. Chairman Green, Ranking Member Barr, and 
distinguished members of the subcommittee, thank you for 
inviting me to testify today. I appreciate the opportunity to 
discuss auto insurance and affordability and the 
disproportionate impact of certain rate-setting practices on 
low-income and minority drivers.
    Our team at Poverty Solutions first got the idea to 
research auto insurance directly from Detroit residents; to our 
surprise, in conversation after conversation with local 
stakeholders, the issue of auto insurance just kept coming up 
as a major poverty issue.
    When we started to look at the data what we found stunned 
us. Michigan has the most expensive automobile insurance in the 
U.S., with an estimated annual premium in 2018 of $2,610, 
almost double the national average. And with an average annual 
premium of $5,414, Detroiters fac the most expensive car 
insurance rates in the country.
    The sticker shock prompted us to research how the State got 
here in the first place. The resulting policy brief, ``Auto 
Insurance and Economic Mobility in Michigan: A Cycle of 
Poverty,'' documents the problems and offers potential 
solutions for auto insurance reform in Michigan. I have 
included a copy of the policy brief with my written testimony 
for the record.
    Michigan is not alone in facing rising auto insurance 
rates. In 2018, 184 million U.S. drivers, or nearly 4 out of 
every 5 drivers, faced a rate increase. In addition to 
Michigan, Louisiana, Rhode Island, and Florida also faced 
annual average premiums that are above $2,000. The U.S. 
Treasury Department's Federal Insurance Office deems auto 
insurance unaffordable in areas where premiums exceed 2 percent 
of a zip code's median household-income.
    Using recent data, we found that auto insurance rates 
represent more than 2 percent of median household-income in 97 
percent of Michigan's zip codes, yet the burden is 
substantially greater for lower-income and minority 
communities.
    In places like Flint, rates eat up between 8 and 24 percent 
of residents' pre-tax income and we also found that rural 
communities were especially hit hard by high rates; this 
matters because these communities deal with particularly poor 
roads and they have to drive longer distances for employment, 
which makes affordable transportation matter just that much 
more.
    These costs make it harder for people to move up the 
economic ladder especially for low-income families, locked out 
of the auto insurance market by a lack of affordable coverage 
options. Take the case of a family where the household head is 
above the age of 65 and relies on Social Security as a primary 
source of income: in 2018, the maximum monthly Social Security 
benefit was $2,788 a month, and it would take nearly 2 months' 
worth of Social Security benefits to cover the annual cost of 
insurance in Detroit.
    Why are rates so high? There are many factors at play, from 
broader economic trends to rising health care costs and 
differences in State regulatory practices, yet one reason why 
rates vary so considerably between drivers is that insurance 
companies use non-driving characteristics such as gender, zip 
code, and credit scores to set premiums for customers. It is 
reasonable to ask whether the use of non-driving factors in 
setting premiums is unfair and whether there is potential for 
discrimination in rate setting.
    Of these factors, credit scores are by far the biggest cost 
drivers for consumers, with rates more than doubling for those 
of poor versus excellent credit, thus a single mother in 
Detroit with a perfect driving record but bad credit could be 
charged one of the highest auto insurance premiums in the 
entire country.
    What can be done? While numerous policy--to reduce auto 
rates, are typically from the purview of States, Congress has 
expressed interest in curtailing rate-setting practices at the 
Federal level. In our report we called on Michigan to curb the 
use of non-driving factors in setting rates following the model 
of several other States that already do this.
    Prohibiting the use of all non-driving factors in rate 
setting may not be feasible as insurance companies must be able 
to develop actuarially sound models, however, other States have 
struck compromises on this. California, for example, has 
established reasonable rate-setting guidelines and prohibits 
the use of credit scores. Low-income drivers in cities pay 
nearly 60 percent more for auto insurance than high-income 
drivers.
    In Los Angeles, the gap is only 9 percent, likely due to 
regulations placed on insurers. And in Hawaii, where the use of 
credit scores has been banned since 1987, the commissioner of 
insurance testified before Congress in 2007 that despite the 
ban, markets remained competitive and healthy.
    In closing, with sensible reforms to our auto insurance 
policies, we can lower transportation costs and dramatically 
improve economic opportunity for families. Thank you, again, 
for inviting me to share my research findings with you.
    I would be happy to answer any questions.
    [The prepared statement of Mr. Rivera can be found on page 
63 of the appendix.]
    Chairman Green. Thank you.
    Mr. James Lynch, you are now recognized for 5 minutes.

   STATEMENT OF JAMES LYNCH, CHIEF ACTUARY, AND SENIOR VICE 
   PRESIDENT, RESEARCH AND EDUCATION, INSURANCE INFORMATION 
                           INSTITUTE

    Mr. Lynch. Thank you.
    I would like to take a moment to thank you, Representative 
Green, and the entire committee for giving me the opportunity 
to speak today.
    My name is James Lynch. I am chief actuary and senior vice 
president of research and education at the Insurance 
Information Institute in New York. Founded in 1960, we are the 
trusted source of unique data-driven insights to inform and 
empower consumers.
    Our members include 8 of the 10 largest personal auto 
insurance writers in the United States. We provide objective, 
fact-based information about insurance, information that is 
rooted in economic and actuarial soundness.
    I am a fellow of the Casualty Actuarial Society, the 
leading property casualty actuarial organization in the world, 
and I serve on the Society's board of directors.
    I have more than a quarter century of experience in 
property casualty insurance and reinsurance, and have held 
senior actuarial positions at QBE The Americas, and White 
Mountains Reinsurance of America.
    And today I would like to discuss how companies set rates 
for automobile insurance.
    Because of court cases and Federal legislation that stretch 
back decades, insurance companies are primarily regulated at 
the State level. Every insurance company must satisfy the laws 
and regulations of every State it operates in plus the District 
of Columbia, so most large insurers have 51 sets of laws to 
follow and 51 sets of regulators to satisfy.
    Every State regulates what insurers can charge for personal 
auto insurance. State laws ensure that rates aren't too high 
because no State wants its consumers overcharged, or too low 
because if rates are too low, an insurance company might lack 
the funds to pay all the claims that it has said it will pay, 
and are lower for drivers who are less likely to be in a crash 
and higher for drivers who are more likely to be in a crash.
    The company can only offer a discount if it can show that 
the customer is less likely than the average customer to suffer 
an insured loss; it can only surcharge if it can show the 
customer is more likely than the average customer to suffer a 
loss.
    Insurers can't change rates daily or weekly, the way a 
grocery store can change the price of a gallon of milk. They 
must notify the State, usually beforehand, what they intend to 
charge. In some States, the department of insurance must 
explicitly approve changes in advance. The result is that auto 
insurance is not priced according to the law of supply and 
demand; it is a cost-plus product. Insurers estimate what they 
will pay out in claims then add in expenses and a reasonable 
profit.
    In addition to State regulators, auto insurers operate in 
an extremely competitive environment and an important part of 
that competition is to develop sophisticated plans that 
properly assess each customer's likelihood of being in a crash.
    Insurers use teams of actuaries to figure out how to set 
rates. They look for characteristics that successfully predict 
the accident rate, the most famous perhaps is driving record; 
drivers who have avoided accidents for several years are less 
likely to be in an accident in the future but driving record is 
not the only factor. The strongest by most accounts is 
location, which tells a lot about the number of vehicles per 
square mile, and just like with bumper cars, the more cars 
there are in an area, the more likely they are to crash into 
each other.
    There are certain things that is important to know about 
these rating variables.
    First, they work, they are effective at gauging the 
likelihood that a customer will be in an accident.
    Second, they are selected after rigorous actuarial 
analysis; every rating variable has been proven effective 
through analysis of actual data.
    Third, they are filed in advance with State regulators 
along with statistical proof of their effectiveness; in some 
States they must be approved in advance and they can't be 
changed without going through the same regulatory process. Any 
Federal effort to oversee rating variables will overlap 
rigorous efforts that States already undertake.
    Fourth, companies constantly review how effective these 
factors are. If they don't work in the world, they are adjusted 
or abandoned.
    Fifth, the factors can change over time and actuaries 
adjust those factors as a result, for example gender, is a 
well-known commonly used variable and part of the reason it has 
been effective is that men drive more miles than women but that 
is changing. From 1963 to 2013, the number of miles the average 
man drove increased by about a third but the number of miles 
the average woman drove increased nearly 90 percent. The 
predictive power of gender as a rating variable has changed 
because the more miles you drive, the more likely you are to be 
in a crash and women are approaching men and sometimes 
exceeding men in that respect.
    Sixth, insurers are constantly looking for new variables 
and when they find one, the new one can change how much 
emphasis is placed on the old ones.
    And last, but certainly not least, the setting of private 
passenger auto insurance rates is a color-blind process. 
Insurers do not gather information based on race or income nor 
do they discriminate against anyone on the basis of race or 
income and they do not adjust the rates based upon any proxy 
for race or income.
    Thank you for your time. And I would be happy to respond to 
any questions you may have.
    [The prepared statement of Mr. Lynch can be found on page 
57 of the appendix.]
    Chairman Green. Thank you. And I thank all of the witnesses 
at this time.
    Let me yield myself 5 minutes. And I would like to start 
with something very basic. Do you believe that testing is a 
means by which you can determine whether discrimination exists 
in auto lending? If so, would you just kindly extend a hand 
into the air, I would like to make a record?
    I take it, Mr. Rivera, you do not believe that testing is a 
means by which we can determine whether discrimination exists?
    Mr. Rivera. The question in auto lending is a little bit 
outside of my purview so I will defer to the experts on auto 
lending.
    Chairman Green. You will defer.
    Mr. Lynch. I am in the same boat.
    Chairman Green. You will defer.
    Mr. Lynch. Auto lending is a little bit outside of my 
world.
    Chairman Green. Well, persons who claim expertise--Ms. 
Clarke, Ms. Cross, and Mr. Van Alst--indicate that testing is a 
good tool.
    With this tool, have we been able to validate the claims 
that this invidious discrimination exists as it relates to 
people of color and women?
    Let me start with Mr. Van Alst.
    Mr. Van Alst. Testing that has happened more recently, 
looking at auto finance, has certainly been consistent with the 
findings of other analysis. I am more familiar with the use of 
large data sets to identify discrimination that has taken place 
and the report that you referred to earlier from the National 
Fair Housing Alliance, found similar results using testing.
    I will say in the auto arena, testing can be and is a good 
tool, but it is difficult, and in fact the National Fair 
Housing Alliance did have difficulty in getting straight 
information from dealers in order to make testing effective.
    Chairman Green. Have you found that it is the markup that 
becomes the problem, the discretionary mark-up?
    Mr. Van Alst. I found that everything that is discretionary 
at the dealer level becomes a problem. We had certainly seen 
through litigation that these dealer interest-rate markups 
which are in addition to the interest rates already set based 
on risk pricing led to discrimination, and I want to say that 
dealers are understandably defensive when you point this out, 
and the fact that we see evidence of discrimination doesn't 
mean that dealers are necessarily overtly wanting to 
discriminate against races. I am sure, when you talk to 
dealers, they don't want to do that but they have to quickly 
size up someone and decide how far they can push them and what 
we see from the data is that what winds up happening is they 
use race to decide how far they can push someone in terms--
    Chairman Green. Let me move to, Ms. Clarke, quickly. Ms. 
Clarke, give me your thoughts on the dealer markups, and we are 
talking about in addition to the pricing that has already taken 
place in terms of the lending?
    Ms. Clarke. So, matched-pair testing in the fair housing 
context has been a bedrock tool for identifying when landlords 
discriminate on the basis of race, ethnicity, or national 
origin and it is absolutely a powerful tool that can be used to 
identify when we are seeing potential discrimination rear its 
head in the auto lending industry as well. The National Fair 
Housing Alliance study that was released in 2018 did a very 
good job of deploying matched-pair testers out in Virginia and 
identified disparate treatment on the basis of race. Those 
black consumers who were exploring buying a car and accessing a 
loan were absolutely treated differently, they were given 
different information about the cost of loans, different 
information about the cost of the vehicle, different 
information about the markup, and we would not have been able 
to capture those differences in treatment unless we deployed in 
a very carefully controlled setting trained--
    Chairman Green. Ms. Clarke, I am going to--
    Ms. Clarke. --testers.
    Chairman Green. --have to ask you to wrap that one up and 
let me ask you another question that relates to the methodology 
used by the CFPB with surnames and geography to perform a 
study.
    Can you give us your opinion about that, please, in terms 
of it being valid or not?
    Ms. Clarke. In my view, these kinds of studies and tests 
are one factor among many that we should look at in identifying 
discrimination. We do these kinds of analyses in the voting 
rights context, in the Title VII employment discrimination 
context, and once you have conducted an analysis that suggests 
you have identified discrimination, that is when you move 
further, you depose witnesses, you subpoena documents and get 
other evidence that might ultimately reveal and help you 
conclude whether or not you have a lender engaged in unlawful 
discrimination, so it is one important factor.
    Chairman Green. Has any court invalidated the study that 
the CFPB performed?
    Ms. Clarke. I am not aware of any court that has 
invalidated this study and I appreciate some of the questions 
and concerns that have been raised but again this is just one 
factor that should be further corroborated by testimony and 
other documents; further analysis of data that may reveal 
unlawful discrimination.
    Chairman Green. Thank you.
    I now recognize Ranking Member Barr for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    And let me start with just making an observation, and maybe 
it is just me, or maybe it is just central Kentucky in my 
congressional district, and I certainly defer to the expertise 
of the panel who have studied this issue with great intensity, 
in terms of what you have seen, in terms of discrimination, 
racial discrimination in auto lending but in my experience, and 
again maybe this is just in my congressional district, I don't 
know a single racist auto dealer, I don't. I have never ever 
observed in my interaction with any auto dealer, a desire to 
not sell a car.
    And in arranging financing, my experience in actually 
listening to my constituents of all races, is that auto dealers 
want to arrange financing and get a car moved off their lot and 
in the possession of their customers, regardless of race.
    And what I would say also about the indirect lending model 
is that contrary to what we have heard today in a lot of the 
testimony, dealer-arranged financing helps, it doesn't hurt, 
consumers and customers and it does so because the dealer has 
the ability to have the scale and the purchasing power to 
actually interact with banks in a way that the consumer cannot.
    The dealer has the ability to bring volume to a bank and 
arrange financing in a way that a cherry-picked customer cannot 
and so what I would say is remember dealer-arranged financing 
is a service, it is a service provided by the dealer that the 
customer may choose to use or choose not to use and no one is 
forced to use a dealer to arrange for financing, that is 
something that we haven't heard in the testimony here today. A 
car buyer opts, chooses to use dealer-assisted financing, he or 
she as a result receives a significantly more convenient buying 
experience and can achieve a lower interest rate.
    Now, last Congress when we rolled back the CFPB's Indirect 
Auto Financing Guidance, in no way did we amend the fair credit 
Laws or hinder their enforcement. In fact, the National 
Automobile Dealers Association encourages dealers to adopt a 
robust DOJ-based Fair Credit Compliance Program and under this 
program dealers are required to be able to demonstrate through 
documentation any deviation in discount rates between 
individuals which must be based on legitimate business reasons.
    I just wanted to make that statement and I invite the panel 
if they disagree with that, to talk about that in your 
testimony later.
    But at this point let me move on to insurance and I want to 
first recognize my colleague from Michigan, the gentlelady from 
Michigan, for justifiably expressing concern about high rates 
in Michigan. And Mr. Rivera, to that point and that issue in 
preparation for this hearing, I reviewed not only your 
testimony but also your report and op-ed on Michigan auto 
insurance rates that you released in March. After reading that 
report, I thought you made a very compelling case for the 
Michigan State Legislature to reconsider some of its policies, 
but nowhere in your written testimony did you mention 
Michigan's No-Fault Auto Insurance Mandate that is paired with 
the only unlimited personal injury protection (PIP) requirement 
in the country. Your report states that this No-Fault PIP 
requirement currently accounts for 42 percent of the average 
premiums paid by the Michigan driver.
    On top of this, you state that Michigan does not impose a 
medical fee schedule resulting in the average auto accident 
claim in Michigan totaling over $75,000, which is more than 5 
times the average of the next closest State. Why is that 
information excluded from your testimony and don't you think 
that may be why Michigan premiums are so high?
    Mr. Rivera. Well, thank you for the excellent question. And 
thank you for reading the brief. As you know, we attached the 
brief to the written testimony and for the purposes of the 
written piece, really wanted to focus on what is really one of 
two issues: one is, why are rates so high just generally, and 
that is around the medical cost State practices that we all 
know so well; but then there is a second question, which is, 
why do rates differ between people? And that is where we really 
thought we had to incorporate this discussion around non-
driving factors for the simple fact that you could get charged 
more if you lost your spouse, you could get charged more if you 
live in a rural area, and for factors like that we wanted to 
have a focus for the purposes of making sure that we also 
answered the prompt of the title of the testimony.
    Mr. Barr. Mr. Lynch, in my remaining time, why do insurance 
companies use credit scores?
    Mr. Lynch. Because they are very effective. They work and 
they are very good at predicting how likely a person is to be 
in an accident in the coming 6 months or a year.
    Mr. Barr. Is it ever used as a single variable to determine 
a rate or is it part of a larger algorithm?
    Mr. Lynch. No. It is always part of a larger algorithm.
    Mr. Barr. And can you explain how consumers' prices would 
be effective, if insurers were not allowed to use that?
    Mr. Lynch. Well, then, what would happen is that for some 
people and by some measures most people their rates would go up 
and for other people their rates would come down and it would 
come to an average. In the State of Michigan, the average rate 
would be twice the average in the typical State but what would 
happen is that your drivers who present less risk would be in 
essence overcharged and people who are at greater risk of being 
in an accident would be undercharged.
    Chairman Green. The gentleman's time has expired. The Chair 
now yields to the Chair of the Full Committee, Chairwoman 
Waters.
    Chairwoman Waters. Thank you very much, Mr. Chairman.
    Since 1991, academic studies have demonstrated that when 
auto dealers have the discretion to mark up the interest rate 
on auto loans, non-white borrowers are disproportionately 
harmed. Nearly 2 decades ago, the National Consumer Law Center 
brought several successful class actions that revealed racial 
disparities in dealer markups of interest rates.
    I would like to ask, I think it is Mr. Van Alst, to 
describe this academic research and how prevalent such 
discriminatory markups happen; are you familiar with the 
research that was done?
    Mr. Van Alst. Yes. We were co-counsel in 12 cases that were 
litigated between 1998 and 2007. We analyzed millions of 
transactions. We coded these transactions for race based upon 
driver's license data. At the time we were involved in these 
cases, 14 States collected race information for driver's 
licenses and we were able to therefore code these transactions 
by race. This is something that can't be done today. I know we 
have had lots of discussion about data and lots of folks have 
indicated an interest to have good and accurate data, working 
on these problems but currently the Equal Credit Opportunity 
Act prohibits the collection of race data in these transactions 
and so we can't replicate today the same analysis that was done 
at the time this litigation took place.
    Chairwoman Waters. What year was this done?
    Mr. Van Alst. This was between 1998 and 2007 and so that is 
not only us but enforcement entities and States as well are 
both prohibited from collecting this data and prohibited from 
using that data because they don't have it, towards enforcement 
and this is a great hurdle whether we talk about State 
enforcement in this area or Federal enforcement, without the 
data, without knowing what is happening, we are forced to rely 
on--as has been pointed out--measures that are perhaps slightly 
less accurate than if we had good data about the race of people 
involved in these transactions.
    Chairwoman Waters. Do you have any studies or information, 
not polling data but stories that have been told by individuals 
about what happened to them when they went to purchase a car?
    Mr. Van Alst. I have reams of stories about abuses that 
people suffer when they go to purchase a car both from the time 
when I worked at Legal Services and since then when I have 
dealt with attorneys across the country, however very few 
consumers know that they have been discriminated against in 
terms of financing. This is not something that you can see, you 
can't tell that you were marked up 3 percent, your financing 
was, and the next person wasn't marked up at all, consumers 
have no way of knowing that this is happening to them, so I 
hear stories about all sorts of other things but consumers can 
never know that this is being done to them.
    Chairwoman Waters. But there are many stories in the 
African-American community about how they were treated when 
they went to buy a car and now, some African-American consumers 
will ask someone to go with them because of the way they have 
been basically abused, they have been bullied, they have been 
lied to, and so these stories are legendary about what happens 
to African Americans and women when they are trying to purchase 
a car.
    And I know that the members of this committee, every member 
of this committee has heard these stories about what happens 
when women and people of color and African Americans go to 
purchase a car. So I wanted to find out a little bit about that 
study and perhaps what we need to do to keep proving, to keep 
giving the information because it is not that this is not 
happening, it is because the auto dealers have a lot of 
influence in this Congress, and Members who believe it is their 
responsibility to protect the automobile dealers and not the 
consumers and so this is a very difficult issue.
    You saw what happened before when it came before this 
committee and you saw how they rolled out the lobbyists, how 
they put the money into the campaigns, and you saw the results 
coming out and so this is difficult work and we have to keep 
doing it, we have to keep finding ways to get more information 
and not just rely even on the stories that we hear oftentimes 
but the fact that this has to change.
    I yield back the balance of my time.
    Chairman Green. The gentlelady yields back.
    The Chair now recognizes the gentleman from Florida, Mr. 
Posey, for 5 minutes.
    Mr. Posey. Thank you, Mr. Chairman, and Ranking Member 
Barr, for holding this hearing today. There is no place for 
discrimination against any American citizens. Allowing 
discrimination to persist would dishonor those who fought so 
bravely to defend our nation and currently are online to do so, 
we all abhor discrimination clearly.
    For today's hearing I think we ought to follow the 
principle of evidence-based decision-making. Evidence-based 
decision-making encourages us to look beyond first impressions, 
not for the purpose of dismissing concerns but to reach a 
deeper understanding on why something is the way that it is and 
that is what we must do to solve problems like we have before 
us today. That is the spirit I believe we ought to have in 
approaching today's hearing; we must collaborate to see the 
full story with respect to auto insurance and markups of auto 
insurance interest rates. Often, there is more going on than 
first impressions might tell us.
    Perhaps a solution is something different than calling the 
usual cast of regulators and sending them forth. We would all 
find it reasonable that a business seeking profits probably 
shouldn't care about ethnicity, age, or gender of their 
customers. Clearly, a business shouldn't make any more money by 
merely charging more for certain groups and market economy with 
competition we have in this country, ought to result in a 
person taking his business elsewhere and for businesses 
competing for this business to offer him a better deal than 
someone who discriminates. Now, that is how we expect the 
markets to work and our competition usually drives down prices 
for everyone.
    For the panelists, if the differences we see in the auto 
insurance rates in the interest markups are solely due to 
ethnic, age, or gender bias, why doesn't the marketing 
competition drive these practices out of existence?
    And we usually start from left to right, so let us start 
from right and go back left today.
    Mr. Lynch. That is your right?
    Mr. Posey. Yes.
    Mr. Lynch. Okay. So insurance companies--a lot of the 
discussion today has involved the use of the word 
``discretion,'' and once insurance companies have made their 
determinations based upon the risks that they see and the data 
that they observe year in, and year out, once those rates are 
set for automobile insurance, the world of discretion ends; 
there is no discretion left, the rate is what the rate is and 
it is based upon the characteristics that any customer presents 
and those and all of those have been linked to higher or lower 
propensity to be in an accident and that is simply how 
insurance is priced and how insurance is done and once that is 
in place, in auto insurance there is no more discretion.
    Mr. Posey. Okay. Thank you.
    Mr. Rivera?
    Mr. Rivera. Hello, thank you for the question. Some of the 
factors used in auto insurance have been found to not be 
correlated with risk. There are certainly non-driving factors 
you want to consider; they need to be included for insurance 
companies to have sound rates. A good example of this is 
gender, the way in which it is treated has been found in 
research to vary from company to company in which sometimes you 
get a discount, and other times you get charged a little more. 
It also varies by State and it is this inconsistent application 
that could be potentially unfair for the consumer going from 
one State or another to have their gender matter differently, 
as one potential way in which risk might not be fair.
    Another is the use of things like credit scores. I agree 
with my colleague that credit scores are not correlated with 
race but we have to ask the question, why people of color are 
disproportionately represented in the ranks of Americans with 
poor or no credit and it is not because they lack financial 
skills, it is because of systemic, sometimes implicit 
discrimination that happens elsewhere in the market that ends 
up showing at things like credit scores.
    So I would say well, I think there are compromise factors 
looking State to State they have looked at it, there are 
certainly some factors that deserve a little more scrutiny for 
thinking about what their basis really is, and I think for 
insurance companies themselves, that transparency is not always 
available to consumers. It is often very hard to get 
information about what factors they are using and one of the 
biggest factors that can weaken a good free market is imperfect 
information.
    Mr. Posey. Thank you.
    Ms. Clarke?
    Ms. Clarke. The foreclosure crisis and resulting recession 
resulted from us relying on the market frankly and from 
insufficient oversight and regulation on banks that were 
peddling sub-prime and predatory mortgage products to 
consumers, many of them people of color. Likewise, in the auto 
industry, we don't want to return to that era. We need strong 
Federal oversight and regulation to ensure that consumers are 
being treated fairly and equitably and most importantly to 
ensure that practices like markups are not rearing their ugly 
head.
    Mr. Posey. Thank you.
    Ms. Cross?
    Ms. Cross. One reason perhaps that the market hasn't 
corrected this so to speak is because a lot of times borrowers 
with poor credit histories or in areas of other disadvantaged 
situations know that they have no other option and that puts 
them in a very vulnerable state when they go to buy a car and 
to get financing, to be kind of at the will of creditors who 
know that they are able to take advantage of that situation.
    Mr. Posey. Okay.
    Mr. Van Alst. Another reason that competition hasn't cured 
these problems is that this is not a transparent and clear 
marketplace; you have to actually spend hours at the dealership 
to even find out what terms you will eventually be offered, 
typically you have to have already gone through the sales 
process back at the F&I Office before you can even find out 
what sort of finance terms are going to be offered, so it is 
much more difficult to do comparison shopping unless you are 
prepared to spend days and days to try to go from one dealer to 
another.
    Mr. Posey. Thank you, Mr. Chairman.
    Chairman Green. The Chair was quite liberal with the time; 
the gentleman yields back.
    The gentlewoman from Michigan, Ms. Tlaib, is recognized for 
5 minutes.
    Ms. Tlaib. Thank you, Mr. Chairman.
    Thank you so much, Mr. Rivera, for being here. Would it 
surprise you to know that a driver with a DUI and a good credit 
score will pay less for auto insurance than a driver with no 
DUI and a good driving history who has a decent credit score, 
not so great?
    Mr. Rivera. When I found out I was shocked, yes.
    Ms. Tlaib. Tell us a little bit more about that? I want you 
to tell people here, the non-driving factor, the use of a 
credit score, a person who committed DUIs who has a really bad 
driving history compared to somebody who doesn't have a great 
credit score but for the fact that--and let me tell you I have 
seen people's credit scores impacted by the fact they have 
become a widow, that they are retired, I know a woman who 
worked at Beaumont Hospital for 25 years, had been driving for 
55 years, and when she retired, her car insurance went up $350, 
and when she called, they said it was because her credit score 
was impacted, however she is driving less, she is not getting 
any tickets, so how is this legal? How is this possible?
    Mr. Rivera. Yes. So some of the research has said that one 
of the reasons why credit scores are a factor is it predicts 
the likelihood of a claim but we really need to unpack that. 
Why do folks with low credit scores need to make a claim? And 
the answer to that is, think about the situation that gets you 
to there in the first place; for many Americans, their credit 
score is influenced by factors outside of their control, a 
family emergency, loss of a spouse, getting behind because of 
the high cost of college or education, and for those--
    Ms. Tlaib. But Mr. Rivera, they are saying if somebody has 
a low credit score, the likelihood of them committing a 
fraudulent claim is higher, so they are saying because they are 
poor, because they have a low credit score, the likelihood of 
them committing a crime is higher, isn't that discrimination?
    Mr. Rivera. Yes, I believe so. It disproportionately 
impacts low-income, working-class families.
    Ms. Tlaib. That is right.
    So Mr. Lynch, there are two drivers, true fact, who can 
talk to each other from across the street in their driveways, 
they are the same age, they have the same driving history, the 
same car, the same credit score, what I can't figure out is why 
a driver who lives in Detroit on the side of Mack Avenue gets 
quoted double the price for basic minimum coverage than a 
driver who lives right across the street on Mack Avenue on the 
Grosse Pointe Side?
    Mr. Lynch, can you explain why it is determined by the auto 
insurance industry that that side of the street pays $3,000 
more per year than the driver in the Grosse Pointe area?
    Mr. Lynch. That is because of the way that the territories 
have been drawn and those--
    Ms. Tlaib. But you are basing it on zip codes, right, not 
driving history and driving record, say it, you are using--
    Mr. Lynch. It is being--
    Ms. Tlaib. --zip codes.
    Mr. Lynch. --based upon the territory which is the zip, 
the--
    Ms. Tlaib. Zip codes.
    Mr. Lynch. --codes are usually used to determine what the 
territories are, those territory factors, the boundaries of 
them, are being constantly reevaluated by insurers and in fact 
one of the things that insurance companies are trying to get a 
better handle on, is something called, I think it is called 
geospatial coding which is the use of the exact longitude and 
latitude to set rates so that some of those--
    Ms. Tlaib. Mr. Lynch--
    Mr. Lynch. --discrepancies--
    Ms. Tlaib. We call that redlining. It is a discriminatory 
practice to base it not solely on people's driving history. And 
the non-driving factors are hurting families.
    And I really do have a question for Mr. Rivera because I 
have limited--Mr. Rivera, what research did you find in the 
difference between the rates between zip codes? Because I know 
according to the Consumer Federation of America, a zip code in 
Detroit with an 8 percent white population adjacent to zip 
codes with 85 percent white population pays 65 percent more in 
auto insurance, is that correct?
    Mr. Rivera. That is correct.
    Ms. Tlaib. For instance, even though we are talking about 
this being a white-black issue, and we have talked about this, 
I don't see this as a white-black issue anymore, I am talking 
to people and it is true, African Americans in my district pay 
a lot more but what I am showing now is that 97 percent of 
Michigan's zip codes pay unaffordable car insurance rates.
    This has nothing to do with no-fault. These are non-driving 
factors. They are using gender and Mr. Rivera, when you talked 
about gender, I was a little taken aback, you are saying that 
someone, a woman and a man, you are using that as a factor in 
calculating rates, not where a person works, and you asked us 
where we work and you calculate the length of the driving 
between your home and your workplace, so why isn't that used? 
Why are gender and people's marital status and their credit 
score being used to calculate rates?
    Mr. Rivera. Well, from my perspective, they shouldn't be. 
They are being used because insurance companies think that 
those folks will file more claims and they want to charge them 
more and the unfortunate effect of this is that the people who 
need the cheapest auto insurance the most, are the ones who get 
charged more and those in relatively wealthy areas, relatively 
wider areas who have relative privileges, get charged less, 
despite the fact that they could afford it.
    Ms. Tlaib. And lastly, Mr. Chairman, if I may, I did pass 
out and ranked so you all can see this is not just a Michigan 
issue, but car insurance rates are high risk especially with a 
lot of our residents. The use of non-driving factors is really 
putting more people into poverty and it is something that our 
families are facing every single day. And so, I did pass out 
the ranking from Florida to Kentucky to New York and Ohio.
    So I hope my colleagues consider this as they look at the 
bill that I have right now, that prohibits the use of credit 
scoring in calculating car insurance rates.
    Thank you, Mr. Chairman.
    Chairman Green. Thank you. The gentlelady's time has 
expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Loudermilk, for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman.
    I thank everyone on the panel for being here today. This is 
an issue we need to address but it is an interesting issue, in 
that most if not all of our States by law require drivers to 
have some form of auto insurance, and as someone who has 
recently been involved in a very bad accident, was hit by 
someone who had no insurance, it is obvious to me why we do 
require people to have insurance.
    On the other hand, insurance is not a one-size-fits-all 
thing, and what I found through my experience in life is when 
you have a one-size-fits-all, it is only one very narrow 
segment of a consumer base that it fits; everyone else is then 
harmed in some way or the other because it doesn't fit where 
they are and insurance is one of those areas that I see that 
with one-size- fits-all, is generally going to raise the price 
for everyone and when that price goes up, those who come from 
low-income families, as I grew up, are harmed the most, and so 
that is my concern of where we are going in all of this and my 
serious concern over the proposed bill.
    Mr. Lynch, I understand we do use credit ratings which, 
from the information that I have derived, is a fairly accurate 
way of--not the sole way but a way of helping to determine a 
risk factor because insurance is all about risk. I remember 
growing up that if you were a male, you were going to pay more 
in car insurance up until you were 25-years-old; I don't know 
if that is still the case. I remember when I turned 25, that 
was a magic age of, now I get cheaper insurance, and it 
happened, even though my wife, she was already you know, she 
was a less risk her car, she paid a little less on it because I 
guess statistics showed that men had a little heavier foot than 
women did.
    The point I have is--my understanding of the rates in 
insurance are based on multiple risk factors because you do not 
have a crystal ball, you cannot sit down and predict if someone 
is going to have an accident at some time and is it going to be 
their fault so you have to have tools and I know it has been 
touched on already, but how does the credit rating apply in 
helping to make those determinations of risk as you also use 
other tools, how do they work together?
    Mr. Lynch. It is a type of analysis that actually has 
become a lot more sophisticated in recent years. One of the 
things that actuaries have gotten really good at is 
understanding how those individual rating factors interact and 
overlap or miss each other and so they adjust rates for that, 
so for example when you see the kind of a one-way analysis that 
you have seen with gender rating in particular, where you take 
six factors and hold them constant and then only change gender, 
when you go from community to community, that does give you a 
window but you can't project forward and extrapolate that 
experience to all women who are drivers.
    Mr. Loudermilk. Right.
    Mr. Lynch. You can't do that because you haven't done 
anything to take into account that interaction. I can also 
state that all of these variables, all of them are constantly 
being reassessed by insurance companies. Gender was one that 
specifically insurance companies are currently looking very 
closely at because we are starting to understand the nature of 
gender identification in a very different way that we did even 
10 years ago. And insurance companies have their eyes open, and 
they see those things as they are happening. And so they are 
working hard to make sure that their rating plans take that 
into account.
    And then as women have been driving more in recent years, 
that relationship between men and women, which at one time was 
thought to be exclusively because men have a heavier foot than 
women, it actually is being shown to be at least in some of the 
cases it appears to be just the number of miles being driven.
    Mr. Loudermilk. Okay.
    Mr. Lynch. The number of miles you are on the road tells 
you how likely you are to be in an accident, which is kind of 
a--
    Mr. Loudermilk. Don't most States who have the predominant 
regulatory impact on insurance require that you only use risk-
based factors in determining--
    Mr. Lynch. Yes.
    Mr. Loudermilk. Okay.
    So quickly, Mr. Rivera, you revealed that there may be some 
discrimination in the actual credit reporting which is not 
directly effective on the insurance agency, shouldn't we focus 
on that, not eliminating the insurance companies from using 
something that is a tool, address the discrimination on the 
credit report side not eliminate their ability to use a tool?
    Mr. Rivera. I think it has to be examined because just 
because something is a risk factor, it doesn't mean that the 
reason for why it creates a risk factor is justifiable. In the 
case of credit scores, it might be correlated with risk, but 
you want to unpack it and I think as you know, I have kind of 
talked to today, some of the reasons for why it can become a 
risk factor are actually reasons that we may not want to 
penalize when it comes to pricing, there are certain consumers.
    Mr. Loudermilk. Thank you. I yield back.
    Chairman Green. The time has expired.
    The Chair now recognizes the gentlewoman from Ohio, Mrs. 
Beatty, who is also the Chair of our Subcommittee on Diversity 
and Inclusion. She is recognized for 5 minutes.
    Mrs. Beatty. Thank you very much, Mr. Chairman.
    And thank you to all of our witnesses here today.
    I am not sure where I should start with this, after reading 
everyone's testimony. Certainly, I associate myself with much 
of everything that Congresswoman Tlaib has said.
    You probably can tell by our tone that it is a subject that 
we want to weigh in on very much because when you talk about 
discrimination in any field, when you talk about disparities 
that we should be able to change, when you cite information in 
testimony and reports that oftentimes don't match up or you 
highlight things that don't make sense, it puts me on pause of, 
where do I start?
    So Mr. Rivera, you are up first. In your report you cited 
the findings by the Federal Insurance Office that nearly 19 
million people live in zip codes where auto insurance is 
unaffordable, 19 million people out of 327 million people, 
meaning about 6 percent of the American people live in zip 
codes with unaffordable insurance. Now, you also stated, if we 
compare that with Michigan where you state 97 percent of the 
people live in zip codes with unaffordable insurance, now, you 
know, I am from Ohio, so I am not picking on you because it is 
Michigan, I am just giving you back what you gave to us, this 
to me seems like a Michigan problem. Why should we use 
Michigan, with its deeply flawed system, as evidence that the 
Federal Government needs to usurp State laws and change how 
insurance rates are calculated, explain that to me?
    Mr. Rivera. Of course. There are two questions there that I 
will think through.
    The first is that the question of jurisdiction is a 
question that I will leave open to Congress and it is not the 
subject of my expertise.
    The second is, I can provide recommendations for what could 
be done at any level of government. And I think Michigan is the 
canary in the coal mine; I don't think it is alone. You see 
rising insurance rates throughout the country and you see 
working-class drivers struggling to pay rates. And a part of 
that factor is the use of non-driving factors.
    So as Congress considers the policy levers in front of it, 
we have attempted to provide the best evidence for the case for 
or against, looking at those factors.
    Mrs. Beatty. Okay. Mr. Van Alst, let me just say, any time 
we are using zip codes, that poses a problem to me. People 
should not be judged, in my opinion, by their zip codes, their 
addresses, and where they live, but there was a bill that came 
up in our 114th Congress where we dealt with this, and it was a 
system that was used, the Bayesian Improved Surname Geocoding 
(BISG) methodology, and it used race and zip codes, so let me 
ask you, between 2003 and 2007, the National Consumer Law 
Center settled for more than $100 million on related class-
action suits so I am going to ask you, did you use the BISG 
Methodology in that suit and if not, what did you use?
    And part of the reason, it was interesting as I was 
reviewing some of the testimonies here, I plugged in my surname 
and everything they asked me for, and it came up that there was 
an 80.24 percent chance that I was white. Now, clearly, saying 
there was an 80 percent chance that I was white by that zip 
code, the system is flawed when you do that, and conversely for 
a whole lot of people it would come up and actually maybe they 
are poor and maybe that they do live in an area and it will 
work against them and so I am curious, what system do you use? 
Because I am going to plug my name and address in and see what 
happens.
    Mr. Van Alst. In our litigation, what we actually did was 
pull race data that folks reported themselves to their State 
DMV or RMV when they got their driver's license. At the time we 
were doing our litigation, there were 14 States in the U.S. 
that collected race data, and because people move around, we 
were able to use that data to get statistically significant 
results in a number of States beyond those 14. That is no 
longer the case, those States no longer collect race data. 
There are issues with using surname and geocoding as a proxy 
for race. I think the CFPB and others certainly agree that 
there are issues with that unfortunately because the Equal 
Credit Opportunity--
    Mrs. Beatty. I am going to have to stop because my time is 
running out, and I just want to quickly say, it works two ways 
because it could not only hurt African Americans but also 
benefit folks who might not be a minority, who live in a 
minority neighborhood.
    Thank you, Mr. Chairman. And I know my time is up.
    Chairman Green. The gentlelady's time has expired.
    The gentleman from Ohio, Mr. Davidson, is recognized for 5 
minutes.
    Mr. Davidson. Thank you, Mr. Chairman.
    And I thank our witnesses.
    And following my colleague from Ohio, I have a similar 
observation about the difference between Ohio and Michigan, and 
we are not talking football but with insurance. If you look at 
the consequences. Ohio is less than half the cost for 
comparable coverage, and we are here talking about laws and 
public policy because laws and public policy have consequences 
and you can see clear differences in the policy requirements to 
write a policy in Michigan versus to write a policy in Ohio and 
that is embedded in the price.
    I have appreciated the education in preparation for this 
hearing and in the dialogue here about other factors that are 
going into the pricing and I guess some differences of opinion 
about how those factors are affecting the price.
    But Mr. Rivera, at the core, when you write a policy in 
Detroit, and you write a policy in Cleveland, Ohio, they are 
demographically very similar, so isn't the core price 
difference between the two States the content of the policy?
    Mr. Rivera. Well, certainly State-by-State trends impact 
the cost of auto insurance but for drivers in both Toledo and 
Detroit, their credit score or their gender can also impact 
their price, which is something that they share in common.
    Mr. Davidson. Okay. So there are factors that can influence 
it.
    But Mr. Lynch, as you look at these generic things like 
sex, gender, zip code, things like that that are not 
personalized, when you look at the rate differences on 
insurance, there are some people who are advocating for, 
everybody gets a policy, you get a policy and you get a policy 
and you get a policy, and it doesn't really matter what your 
driving records are like and we just want to average-price it, 
so everybody shares the risk which produces more risk in the 
pool and no one could be denied the ability to buy insurance or 
even have to pay a higher price.
    Why would we do that? Why wouldn't we say, you are a safe 
driver so you will pay less than somebody who is not a safe 
driver?
    If someone has 5 speeding tickets and a DUI, isn't it 
rational that this person would pay more then somebody who has 
never had a moving violation?
    Mr. Lynch. Well, driving record is used to evaluate whether 
a person is a good risk. It is one variable, but it is not the 
best predictor of risk, and that is a simple fact.
    I did a simple one-off analysis about the percentage of 
cars that were in an accident and the percentage of people who 
get a moving violation in a year. And I figured out that about 
75 percent of Americans probably got a discount for good 
driving because they haven't had either of those happen in the 
last 3 years. So that would be 3 out of 4 people in this room 
getting that discount and there is a lot more to whether you 
are going to be likely to be in an accident than that.
    I have talked to some people, and that is actually kind of 
reflective of what the industry really is. The strongest 
predictor, the absolute strongest predictor is the number of 
cars in a territory, because the more cars there are per square 
mile, the more likely they are to bump into each other. And I 
live in New Jersey where we have about the highest rates in the 
nation and we have the highest vehicle density in the nation 
and that is no coincidence.
    Mr. Davidson. Right. So when you do that, even though you 
have all these other factors for the individual, you inherently 
have to come back to something like zip code, something like 
who drives through this area here and what kind of vehicle, the 
price for insurance for certain types of vehicles, that 
influences what kind of car you drive, that also affects your 
rate, correct?
    Mr. Lynch. Depending on the package of coverages of auto 
insurance, that can make a significant difference. Obviously, 
it costs more to have first-party coverage on, say, a $50,000 
car than it does on a car that you got secondhand for $1,000 or 
$2,000 or $4,000.
    Mr. Davidson. Correct. And then my understanding is when 
you look at data analytics and of the panelists it seems that 
your organization would be in the best position to offer 
perspective on the data that is collected. Data is increasingly 
monetized. And I assume many of your companies are purchasing 
and acquiring data that allows for highly personalized pricing 
based off of a whole variety of data analytics.
    Can you comment on that please?
    Mr. Lynch. Well, yes. Data is critical and data is very 
expensive. It is very expensive to prepare the dataset, it is 
very expensive to preserve it. We did some work in the State of 
Florida and just cleaned up a small database of only about 
300,000 records which is quite small and only about 10 
variables and it cost us $15,000 for about 3-months' worth of 
work at the Triple-I.
    It is very expensive to maintain a dataset, and companies 
don't do that unless they can get actionable and important 
information from it. And that is why we developed the sets of 
rating factors that we developed; if it wasn't necessary to do 
that, in all likelihood it wouldn't happen.
    Mr. Davidson. Thank you.
    My time has expired, and I yield back.
    Chairman Green. The gentleman's time has expired.
    We will now recognize the gentlewoman from Texas, Ms. 
Garcia, for 5 minutes.
    Ms. Garcia of Texas. Thank you, Mr. Chairman. And thank you 
for putting this hearing together. I think it is a very 
important topic and I know that as a former Legal Aid lawyer in 
the consumer section, I certainly understand a lot of the 
issues that face particularly a lot of working-class people in 
my district, and it is sad to note that these issues were there 
many years ago and they are still here today.
    So thank you to all the panel for being here because this 
is something that directly impacts so many of us in and around 
Texas.
    But Mr. Chairman, I know that my colleague from Michigan 
has followed this issue because she is after all from the place 
where the cars are built, so I yield the rest of my time to my 
colleague from Michigan, Ms. Tlaib.
    Ms. Tlaib. Thank you so much.
    So Mr. Lynch, why does marital status have anything to do 
with somebody's driving history or driving record?
    Mr. Lynch. It is one of many factors that insurance 
companies have looked at, in that case, over the course of 
decades and determined that in certain conditions and in 
combination with other factors, it can make a difference as to 
how likely a person is to be in an accident.
    Ms. Tlaib. So Mr. Rivera, one of the things that I talked 
about is obviously the use of credit scores and the fact that I 
think a lot of my colleagues on both sides are agreeing that 
there is some flawed system to credit scoring, and I appreciate 
them saying that.
    I will tell you a story about somebody in my district who, 
at a very young age, went and served our country, and came 
back, and of course didn't build up their credit, through no 
fault of their own, and is trying to build up their credit as 
they come back after serving, after driving Humvees in Iraq. 
And they come here and they try to get car insurance and their 
credit score is being used as a factor--not where they live, 
the distance between their job and their workplace or any other 
driving history because they have been driving since they were 
16.
    Again, I really want to unpack this idea around the use of 
non-driving factors because I do think even if we fix whatever 
other issues are going on, there are layers of issues when it 
comes to insurance coverage on home and auto but this use of 
non-driving factors, to me, is a really dangerous loophole in 
that we on the Federal level have a responsibility to push back 
against especially corporations using these factors because 
they are a factor to get around obviously the accountability of 
making sure it is fair and just for everyone.
    And as a woman, as soon as I am divorced, my credit score 
drops, even though I am still making the same amount of money--
it just drops. The use of credit scores to me is extremely 
dangerous.
    And I want Mr. Rivera to really dive in and talk about this 
unpacking, around the use of credit scoring.
    Mr. Rivera. Yes. Well, in many instances it can be 
egregious, particularly when you think about, a credit score is 
not just a reflection of your financial acumen, it is a 
question of what opportunity you have in the market. And in 
many hearings that I have been to before this very committee, 
there is rampant evidence of discrimination and a whole host of 
markets that lead one to have a bad credit score.
    I will give you one example of something that is just down 
the block from me, there is something called L.A. Insurance. 
They used to sell 7-day insurance, it was a way of charging you 
an extremely expensive package just so you can meet your 
obligations to this State and then when the State took action 
against 7-day insurance, they started selling 6-month 
insurance. And if you called them, they said hey--
    Ms. Tlaib. Thirteen days, too.
    Mr. Rivera. Thirteen days. And if you called them and you 
got on the phone with them, like I did, you would ask, hey, do 
I really need to have this for 6 months? And they kind of say, 
no, cancel it after this, once you send us the check.
    So in many ways, minority communities, low-income 
communities, just get up-charged every step of the way before 
they even get to the auto insurance policy and so it is only 
salt in the wound when the credit score is used again to 
determine their rate.
    Ms. Tlaib. So Mr. Lynch by and large, the insurance 
industry has never admitted that communities of color actually 
pay more for their car insurance, in fact they often become 
downright defensive about it. According to the balance in 2014, 
the National Association of Mutual Insurance Companies sent a 
letter--and I have it here and I would like to submit it for 
the record.
    The Federal Insurance Office insinuated that people of 
color can afford to pay more for car insurance because--wait 
for it--they spend money on their pets, toys, alcohol, tobacco, 
and recording equipment. Is that true?
    Mr. Lynch. What are you asking?
    Ms. Tlaib. Do you know about this letter?
    Mr. Lynch. I had nothing to do with composing that letter. 
But that letter does exist. And the minute I saw it, I thought, 
what could you possibly be thinking, that is not the--
    Ms. Tlaib. But doesn't that--
    Mr. Lynch. --way--
    Ms. Tlaib. --already ensure--
    Mr. Lynch. --the world operates.
    Ms. Tlaib. And I am sorry, Mr. Chairman, doesn't that 
already ensure they are using discriminatory--they are thinking 
of my people of color, in America, in this way, that they 
would, to use that as a basis.
    Mr. Lynch. I get where you are coming from, I really do 
because when I saw the hole it put in your stomach, it put it 
in mine as well.
    But I can tell you that the insurance industry doesn't 
operate that way and that was just an unfortunate and gross 
exception to the way that the industry normally operates. And 
you know what? We had nothing to do with that statement but I 
personally and sincerely apologize that any person here was 
subjected to that kind of thinking.
    Ms. Tlaib. Well, Mr. Lynch, I--
    Chairman Green. The gentlewoman's--
    Ms. Tlaib. --appreciate that you acknowledge that.
    Chairman Green. --time has expired. But please--
    Ms. Tlaib. I do ask, Mr. Chairman, unanimous consent to 
insert for the record the letter--
    Chairman Green. It will be admitted, as well as your other 
document styled, ``Auto Insurance Rate Oversight and Reform 
Subcommittee Members State by State.'' Do you desire to have 
that in the record?
    Ms. Tlaib. Thank you, yes.
    Chairman Green. Without objection, it is so ordered.
    The Chair will now recognize the gentleman from Tennessee, 
Mr. Rose, for 5 minutes.
    Mr. Rose. Thank you, Chairman Green, for calling this 
hearing. And I appreciate the opportunity to hear from the 
witnesses today.
    I understand my colleagues' concerns about the high prices 
in Michigan and concern that those prices may be impacted by 
certain demographics, by non-driving factors like income level, 
but Cleveland and Detroit are fairly similar in terms of 
demographics and income level yet Cleveland has dramatically 
lower insurance premium rates. According to Mr. Rivera's 
report, in Cleveland the average annual insurance premium is 
$1,277, while in Detroit the average premium is $5,414.
    Mr. Lynch, can the conditions that you have described in 
Michigan such as the no-fault insurance law partly explain the 
difference in insurance rates between Cleveland and Detroit?
    Mr. Lynch. That is an enormous part of the difference. No-
fault automobile insurance--when actuaries look at all the 
different States, they look at the State of Michigan completely 
separate from the rest of the country because the laws there 
are drawn differently for auto insurance than they are anywhere 
else, and that is just a statement of a projective fact, it is 
not a value judgment. It is the most generous system in terms 
of claim payments.
    For a no-fault auto insurance claim, the limit on payments 
is infinity, it can be $5 million, it can be $10 million, it 
can be $20 million. And there are claims that come through of 
that size.
    In other States where no-fault exists, and it doesn't exist 
in most States, but where no-fault does exist, typically the 
limit is somewhere between $10,000 and $15,000, so when that 
$10 million claim comes through, the auto insurer pays the 
$10,000 or whatever their limit is and then it moves over into 
the health insurance system.
    But in Michigan, especially if you are dealing with 
Medicare or Medicaid, those types of insurance have any other 
insurance pay first, so if a 65-year-old was involved in a 
terrible accident in Michigan, they are going to get coverage 
first from the no-fault policy and it is going to pay and pay 
and pay forever and then they will never touch the Medicare.
    What that means is that insurance is a cost-plus product. 
Insurers estimate what the cost of claims is going to be and 
then they add in provisions to cover agents' commissions and 
taxes and licenses and fees and a reasonable provision for 
profit and when you do that, when you have an infinite limit, 
you know you are going to have a higher rate than you have in a 
State like Ohio where I don't believe it is a no-fault State. 
And I believe on liability coverages, the minimum limit is 
around $35,000 to $60,000.
    So the difference between a $60,000 claim and a $10 million 
claim is going to have a big influence on how much money every 
person in the State pays regardless of how that rate is arrived 
at.
    Mr. Rose. Thank you.
    Before coming to Congress, I was a private businessman, and 
also served briefly as Tennessee's Commissioner of Agriculture. 
I tend to think that government and regulation work best the 
closer they are to the parties being governed and regulated. 
The insurance industry is one of the few success stories in 
that it hasn't been swallowed whole by Washington.
    We have been regulating insurance at the State level for 
over 150 years, and it is a system that works for consumers in 
terms of accessibility and affordability. Members from both 
parties seem to agree on this. Even when crafting the Dodd-
Frank Act and creating the CFPB, Democrats on this very 
committee stipulated that the CFPB was not an insurance 
regulator, they didn't want to supersede State-based insurance 
laws and commissioners.
    Like them, I am opposed to any potential overreach by 
Congress that diminishes a State's right to regulate insurance. 
I believe H.R. 1756 represents such an encroachment by 
Washington. Of all 50 States, only 3 have decided to prohibit 
the use of credit-scoring data in auto insurance underwriting: 
California; Massachusetts; and Hawaii. Now, I might disagree 
with their decisions because I think that data helps better 
price the product for consumers but that is the decision those 
State regulators have made and legislatures and government 
legislators and governors have made and I respect it.
    Tennessee and Michigan or any of the other 45 States could 
make the same decision, but it is their decision not ours, and 
I hope it remains that way. Thank you.
    And I yield back.
    Chairman Green. The gentleman's time has expired.
    The Chair now recognizes the gentleman from New York, Mr. 
Zeldin, for 5 minutes.
    Mr. Zeldin. Thank you, Mr. Chairman.
    I represent a district on Long Island in the State of New 
York. It is very difficult there, as it is in many other parts 
of the country, to get around without a car, whether it be to 
try to get to school or to try to get to work.
    Access to affordable financing and insurance is what helps 
them have that opportunity to have a car that can get them to 
work or to school. This isn't a wonky policy debate that we are 
having here; it really impacts each and every one of their 
lives very personally.
    In real life, absent a government takeover of the lending 
market, you always have divergent auto lending rates for 
different borrowers based on creditworthiness, the term of the 
loan, the price of the car, and the difference between State 
laws and regulations. Now more than ever, consumers can shop 
around, compare rates, and get the best deal.
    It is so critical and it has been said over the course of 
the hearing today that any discrimination related to race, 
gender, or ethnicity is entirely unacceptable. Extorting honest 
lenders and using spurious statistics to justify those attacks 
that some of what we are getting into here during this this 
hearing could hurt the very people we are supposed to be 
helping so it is very important to have the best possible data 
when reaching our conclusions that we are talking about.
    Using questionable disparate-impacted data means no actual 
discrimination has to be proven or occur for what could be a 
politically motivated lawsuit, it could be a bureaucratic 
attack to shut down an honest lender or an auto dealer. 
Meanwhile, rates go up and access to credit goes down and 
consumers, especially low-income ones, will suffer. When it 
comes to flawed mandates on auto insurance, we have also had 
State policies that I briefly mentioned earlier, that have led 
to rates skyrocketing, so any attempt to do that at the Federal 
level could be very problematic.
    My question first, for Mr. Lynch is, we have been talking 
about the State of Michigan a lot today and that is good. The 
State of Michigan mandates unlimited personal injury protection 
(PIP) and no-fault auto insurance. There are people at home who 
don't live in the State of Michigan, and they are listening to 
today's hearing. So, what does that mean? Can you explain it to 
them? And do any other States in the country do that?
    Mr. Lynch. Yes. They are about--and unfortunately, I didn't 
prep myself on that exact question but there are about a dozen 
States that have some form of no-fault automobile insurance. 
The idea of no-fault is that it kind of usurps the idea of 
liability and claims. A typical claim--we always think, who is 
at fault in the accident, and whoeveris at fault pays in the 
accident, but in States like Michigan, the alternative for 
medical injuries is no-fault insurance so it doesn't matter if 
you are in an accident and you are injured in the accident, it 
doesn't matter if you are at fault or not at fault, the 
insurance responds and pays so that that is the difference 
between no-fault and a typical tort system, which I believe is 
the case in Ohio, which is the other State that seems to have 
come up in a number of comparisons.
    Mr. Zeldin. The average cost of an automobile accident 
insurance claim in Detroit in 2017 was $51,000. Is that normal?
    Mr. Lynch. I would guess it is normal for Detroit but it is 
not normal for the rest of the country.
    Mr. Zeldin. Can you explain, I guess tied to the first 
question, how that mandate impacts the rates?
    Mr. Lynch. Well, what happens is no-fault is not the cause 
of that high rate. The actual cause is the fact that the no-
fault is unlimited, so when you say a $50,000 claim, that is 
obviously an agglomeration of some small claims and some 
medium-sized claims and some large claims, and in Michigan, 
because of the no-fault law, the large claims can get really, 
really large, in fact there is an entire insurance entity that 
is ultimately responsible for claims that exceed I believe 
$550,000, no-fault claims and that is above what virtually any 
personal automobile insurance policy in the United States is, 
except for in Michigan.
    Mr. Zeldin. Mr. Rivera, your report got into--and I guess 
this question is for you and maybe Mr. Lynch but we only have a 
few seconds--a whole lot of different reasons why the Michigan 
rate in the State is so high. Can you speak to what that would 
do for the rest of the country if the Michigan model was used 
elsewhere around the country as far as what, in your report 
causes the high rates?
    Mr. Rivera. I would hate to extrapolate given that there 
are vast differences State by State but I do believe that the 
research cited by Mr. Lynch on this question of personal injury 
protection claims is worth considering as was in the brief I 
think, they play a part in averages, they can explain 
differences between people, which I think is the focus.
    Chairman Green. The gentleman's time has expired.
    The Chair recognizes the gentleman from Wisconsin, Mr. 
Steil, for 5 minutes.
    Mr. Steil. Thank you very much. And Mr. Chairman, thank you 
for holding today's hearing on what is a really important 
topic. There is no place for discrimination in our system 
across the board and I think we are identifying that here 
today.
    I also want to talk about the high rates of insurance and 
where, as policy folks, we can dive in to try to drive the cost 
of insurance down for everyone so everyone could benefit. I 
think the State-based insurance regulations allow us to compare 
how different policies work and apply those lessons to other 
States. We have come to observe these policy decisions yield 
sometimes bad outcomes for customers.
    I am from the State of Wisconsin, which actually has the 
second lowest insurance rate in the nation, averaging $951. We 
share a border with Michigan so snow in Wisconsin, snow in 
Michigan, sunny day in Wisconsin, sunny day in Michigan. And 
you see probably about the most divergent of pricing, you see 
one of the highest at $2,600 a month--well over twice the cost 
for a car to be insured in Michigan, directly opposite the line 
of a car to be insured in Wisconsin.
    And so, Mr. Lynch, could you comment on what Wisconsin is 
doing right in keeping these costs down?
    Mr. Lynch. Well, I wouldn't characterize personally, and in 
my position with a non-partisan organization, I wouldn't 
characterize it as right or wrong but I would characterize it. 
I can speak to the differences--
    Mr. Steil. What is causing that?
    Mr. Lynch. As I said, in Michigan you have no-fault 
automobile insurance with no limit to the policy. And if you 
have a $10 million claim, that is a dollar on every person in 
the State of Michigan, give or take.
    A comparable claim in Wisconsin would be, say, $60,000, 
which is--how many people are there in Wisconsin? Sixty 
thousand divided by however many people there are that is what, 
like a dime of policy and those things add up over time so I 
think that is probably the biggest driver.
    I can tell you that to my knowledge, credit scoring is 
regulated in 40 States, it is banned in 2 or 3 but credit 
scoring is not the reason that rates are higher in Michigan or 
lower in Wisconsin, it is--
    Mr. Steil. It is interesting--
    Mr. Lynch. And I want to say one other thing--
    Mr. Steil. I am going to reclaim my time. I appreciate--
    Mr. Lynch. Sure.
    Mr. Steil. But we are so limited. I appreciate that take.
    Mr. Chairman, I would like to insert in the record a letter 
from the American Property Casualty Insurance Association.
    Chairman Green. Without objection, it is so ordered.
    Mr. Steil. And what it does is, it identifies and 
highlights some of these policy areas that we look at to 
ultimately drive down the cost of insurance and make it 
affordable for folks living both in Wisconsin and across the 
United States.
    When we look at the importance of risk-based pricing and 
doing that--I want to just go across the panel, if I can and 
just ask, if you believe in risk-based pricing because it seems 
like on some of our discussion today maybe that is or maybe 
that is not the case and so just to go across.
    Mr. Van Alst, do you believe in risk-based pricing on car 
insurance?
    Mr. Van Alst. For car insurance, yes.
    Mr. Steil. Ms. Cross?
    Ms. Cross. I defer to my fellow panelists, as I do not 
focus on insurance.
    Mr. Steil. All right.
    Ms. Clarke?
    Ms. Clarke. Yes. But but the devil is in the details. And 
it----
    Mr. Steil. Okay. But risk-based pricing is--
    Ms. Clarke. Yes.
    Mr. Steil. Fair enough.
    Mr. Rivera?
    Mr. Rivera. Risk-based pricing that doesn't discriminate on 
the basis of gender and other factors that are not proxies for 
income.
    Mr. Steil. Understood, the risk-based pricing at its core 
is an important aspect.
    Mr. Lynch?
    Mr. Lynch. I would be consistent with the State laws in 
every State in the United States and say yes, risk-based 
pricing is an appropriate way to price automobile insurance.
    Mr. Steil. Thank you.
    Going back to you, Mr. Lynch, as we look at insurance-based 
pricing, do you believe that non-driving related factors are 
predictive of driving risk?
    Mr. Lynch. Well clearly, they are, that is why they are 
used.
    Mr. Steil. And can you maybe describe for us the process 
that insurance companies are using to identify and evaluate 
these risks?
    Mr. Lynch. Well, when you price insurance, you use a two-
step process and the first step is that you estimate what the 
average rate is going to be for the average consumer in 
wherever your book of business is, let us say it is the State 
of Michigan. And then after that you go through a process and 
you identify through actuarial analysis of your data, 
supplemented by data from other companies sometimes that are 
outside of the insurance industry, and then that is how you 
determine based upon the risks that you find that correlates 
strongly with the likelihood of being in an accident and that 
is how you come up with rating factors to adjust your rate come 
to a final rate.
    Mr. Steil. Thank you very much.
    I yield back my time.
    Chairman Green. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Budd, is recognized 
for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman, for letting me sit in on 
this hearing.
    And I want to thank the witnesses as well.
    It is not often that we have hearings about the insurance 
industry in the U.S. Congress, and that is because we have a 
State-based system that has been working well for over 150 
years, so I believe that North Carolina insurers should answer 
to Raleigh and not to Washington, D.C., so again these are 
rare.
    Mr. Lynch, I have reviewed the Insurance Research Council's 
April 2019 Report on Auto Insurance Affordability in Michigan 
and I would like to ask permission to enter this to the record, 
Mr. Chairman, if that is okay?
    Chairman Green. Without objection, it is so ordered.
    Mr. Budd. Thank you, Mr. Chairman.
    I want to make sure that I have the facts right. How many 
States, including Michigan, allow for the use of credit-scoring 
data in auto insurance underwriting, Mr. Lynch?
    Mr. Lynch. I believe that number is 47.
    Mr. Budd. Okay, 47. So it strikes me as fair to say that 
Michigan is not unique in allowing for the use of this 
predictive-scoring data, so how is Michigan unique?
    Mr. Lynch. As I said before, the no-fault automobile 
insurance system and the unlimited no-fault makes it different 
from every other State, the unlimited nature of it is itself 
unique.
    Mr. Budd. So this IRC Report states that the average cost 
of a claim for an auto accident in Detroit is $51,000 on 
average per accident and the average cost of auto insurance 
coverage in the area is $5,400 a year. Now, I have two teenage 
drivers in a home that I insure on one policy and it is less 
than that a year, in North Carolina, so how much of an outlier 
are these figures when compared with other States like North 
Carolina and what is to blame for the high cost of these 
figures?
    Mr. Lynch. Well, this is something that I think I have 
answered once or twice but it never hurts to try to make it a 
little clearer, when you have unlimited claims, when your claim 
can be any size especially in the United States where health 
insurance is so expensive, you can get claims where people 
suffer tremendous injuries, and in Michigan if it is in an 
automobile accident, not in any other kind of accident but if 
it is in an automobile accident, then the automobile insurance 
system as a whole has to bear that cost and that cost ends up 
being directly reflected in the rates the consumers pay.
    Mr. Budd. So do you agree that State-based insurance 
legislators and regulators in Michigan can best solve this 
problem?
    Mr. Lynch. I work for an organization that doesn't make 
public policy recommendations and lobby so I can't really 
answer that. I can say that I have testified in the State of 
Michigan as they explore ways to alleviate this issue and that 
at the State level, they are very aware of it.
    Mr. Budd. Understood, and thank you, Mr. Lynch.
    I agree, and I think we have identified the cost of sky-
high auto insurance rates in Detroit and who can fix the 
problem. I see no reason for Congress to supersede, in my case 
North Carolina, in regulating my State's insurance market and I 
also see no reason why my constituents should be forced to 
subsidize Michigan or any other State for their seriously 
flawed State insurance laws.
    With that, I sincerely want to thank Chairman Green for 
letting me join today's discussion.
    And I yield back my time. Thank you.
    Chairman Green. The gentleman yields back.
    Without objection, the Chair now recognizes Ranking Member 
Barr for an additional 5 minutes.
    Mr. Barr. Thank you once again, Mr. Chairman, for holding 
this hearing. And once again, I applaud you for your work in 
Congress and before Congress in combating invidious 
discrimination.
    And as Members on both sides of the aisle have expressed 
today, race discrimination, any kind of discrimination has no 
place in our society, certainly not in auto lending, certainly 
not in insurance or any industry whatsoever.
    I think what a lot of Members have expressed today and some 
of the witnesses as well is that we all want to get at 
discrimination, stop it, prevent it, but we also want to make 
sure that we don't eliminate risk-based pricing so that every 
good driver in America, and most people are good drivers, are 
not punished because they are not credited for their positive 
driving records, and I think it gets to this idea of 
socializing risk versus pricing insurance based on risk.
    Let me ask Mr. Lynch one kind of final question to 
summarize what we have been discussing today and that is, would 
elimination of insurance credit-scores undermine the risk-based 
pricing model?
    Mr. Lynch. Well, to the degree that you restrict the 
ability to use proven predictors of accident rates, you are 
going to have a less robust model, it is going to get weaker 
and that would be regardless of the variable that you were 
deciding to restrict.
    Mr. Barr. And let us really get at the core issue here, the 
core issue is that some of the witnesses on the panel are 
making the argument, as I perceive it, that credit scores are a 
proxy for race. Do you agree with that or not?
    Mr. Lynch. Well, no. They are not.
    Mr. Barr. And tell me why you disagree with the other 
witnesses on that point?
    Mr. Lynch. Oh, well, when we look at insurance, we are told 
what is fair and you--what you have to do is create a fair rate 
and a fair rate is one, as I said in my remarks, that is 
neither too high nor too low nor overcharges or undercharges a 
risk that presents themselves with a certain known risk 
characteristics, and all of that of course is silent as it 
should be to issues of race and income, so insurance companies 
do follow those laws and so that is kind of where I come to my 
conclusion.
    Mr. Barr. If we eliminated credit scores completely from 
the underwriting of insurance, would an African American with a 
pristine driving record be subject to a higher premium?
    Mr. Lynch. I have no way to answer that question because 
the industry does not gather information based upon race so I 
can't say.
    Mr. Barr. Well, forget the race, would drivers in general 
with good driving records, would they be subjected to higher 
premiums as a result of elimination of the use of credit 
scoring in underwriting premiums?
    Mr. Lynch. Well, most drivers have good driving records and 
the people who have good credit scores and good driving records 
and are presenting less risk to the insurance company would end 
up overpaying.
    Mr. Barr. Okay. Without objection, Mr. Chairman, I would 
like to submit several items to the record.
    The first is the Charles River Report on Fair Lending.
    The second is a Report on Auto Insurance Affordability and 
Cost Drivers in Michigan.
    The third is a letter to you and to me from the National 
Association of Mutual Insurance Companies, the Independent 
Insurance Agents and Brokers, the National Association of 
Professional Insurance Agents, and the American Property 
Casualty Insurance Association.
    And the fourth is a statement by the National Association 
of Mutual Insurance Companies.
    Chairman Green. Without objection, it is so ordered.
    Mr. Barr. And with that, Mr. Chairman, I appreciate once 
again, your leadership in holding this hearing.
    And I yield back.
    Chairman Green. Thank you.
    The Chair now yields 5 minutes to himself.
    And I thank the Members, all of whom have said they are 
very much interested in making sure that we do not have 
invidious discrimination.
    Let us talk for just a moment about the indirect auto 
lenders and how they work with the dealers, wherein the dealers 
are acting as agents to a certain extent of the lenders and 
once a price has been set for the purchase of a car with the 
indirect auto lender, the dealer has the option to mark up the 
interest rate and to do so without any rules or regulations for 
the most part and actually the dealer does it at his own 
discretion.
    Do you agree that this is the case, Ms. Clarke?
    Ms. Clarke. That is indeed the case. It is a widespread 
practice.
    Chairman Green. I have to move to the next person.
    Ms. Cross, do you agree?
    Ms. Cross. Yes. I agree.
    Chairman Green. And Mr. Van Alst?
    Mr. Van Alst. Yes.
    Chairman Green. Okay. So we agree that the dealers can mark 
up within their discretion the final interest rate.
    Now, let me ask this of you, Ms. Clarke. Between 2013 and 
2016, the CFPB brought enforcement actions against four 
indirect auto lenders for violating the Equal Credit 
Opportunity Act by authorizing and incentivizing discretionary 
dealer interest rates. These markups resulted in non-white 
borrowers paying higher interest rates than non-Hispanic white 
borrowers. These actions garnered $104 million in restitution 
for borrowers.
    Under Director Mulvaney and Director Kraninger, however, 
the CFPB has not taken any public Fair Lending enforcement 
action against an indirect auto lender or any lender at all.
    What are the consequences of the CFPB's lack of enforcement 
of Fair Lending Laws in the context of auto lending?
    Let us start with you, Ms. Clarke, please. What are the 
consequences of the lack of enforcement?
    Ms. Clarke. We are implicitly sending a green light to 
dealers and lenders across the country that this kind of 
discriminatory lending practice is okay. And by rolling back--
rescinding the 2013 CFPB Guidance we have seen lenders and 
dealers actually abandoned efforts and proactive steps that 
they were taking to reduce and eliminate the incentive for 
dealers to engage in those markups.
    There are a lot of lenders who are imposing a flat rate 
which completely removed the incentive for dealers to markup 
loan interest rates so we are seeing the resurgence of 
discrimination as we see the Federal Government retreating from 
this space.
    Chairman Green. What is a possible solution? And I will 
start with whomever would like to give me the first answer.
    Mr. Van Alst. I can think of two.
    One, is to go ahead and prohibit this discretionary 
increase in the interest rate. There are many other methods 
that can be used to compensate dealers for the time or effort 
they spend trying to arrange financing, such as a flat rate.
    Two, data collection, as we have discussed already today--
without accurate and good data, we can't know what is going on. 
And currently, the Equal Credit Opportunity Act prohibits 
collection of race data in these transactions unlike the 
mortgage market. So it is very important that we gain that data 
to know what is happening.
    Chairman Green. Would simply letting the buyer know that 
this markup exists be a beneficial disclosure?
    Mr. Van Alst. We have found that throughout the auto sale 
and finance process, disclosures can often be really 
ineffective. Dealers who do this on a regular basis are very 
good at getting consumers to sign things, disclosing things, 
while they are covering up with one hand or turning the 
consumers' attention elsewhere, simply disclosing this won't 
fix the problem and in fact as we pointed out already, 
consumers have to go through a long, arduous process to ever 
get to the point where they had have something like that 
disclosed and you can't do that.
    Chairman Green. Let me move on to Ms. Cross. Ms. Cross, do 
you want to add something?
    Ms. Cross. Yes. One of the big things that you see happen 
is a lot of predatory tactics that disclosure won't necessarily 
fix 100 percent. Yo-yo financing is an abusive tactic where a 
consumer is given the information about their loan and they 
think it is a final deal. And then later a lender can call 
back--days or weeks later, the dealership will call back and 
say, ``Oh I am sorry, something went wrong with the financing. 
And we need to renegotiate and charge you a higher interest 
rate.''
    Disclosure is a good principle in general, but it won't 
necessarily cover all our bases in some of those predatory 
tactics we see.
    Chairman Green. And Ms. Clarke, what would you recommend?
    Ms. Clarke. We need the CFPB and the DOJ to enforce the 
law. We need data collection to bring transparency to the 
practices of dealers and lenders. And finally, we need Congress 
to not abdicate its responsibility to eliminate racial 
discrimination, root, and branch across our country.
    It is not enough for the States to do this work. They lack 
the unique expertise and resources that are embodied inside of 
our Federal Government agency. So we need strong Federal 
precedents, if we are going to ever combat the crisis that we 
are up against.
    Chairman Green. Well, let me thank all of the witnesses for 
appearing today, and the Members as well.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
And without objection,the hearing is adjourned.
 [Whereupon,at 12:09 p.m.,the hearing was adjourned.]
 
 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]