Mr. KING. Thank you, Mr. Chairman. Actually, I already gave a speech today on the floor so I am going to sit back today and listen. This is a very serious topic. The whole question of redlining is something that has to be resolved if our inner cities are going to rebound.

I want to thank the chairman again for setting up this agenda. Chairman KENNEDY. Bernie Sanders.

Mr. SANDERS. I am just here primarily to listen. We have an important issue. I am glad you are dealing with it.

Chairman KENNEDY. Thank you, Bernie.

I would now like to ask the witnesses to please come forward and be seated at the table. I would like to thank all the witnesses on this panel for being with us this afternoon. I am looking forward to, as I am sure everyone else is, your testimony.

We will have your entire written statements submitted for the record, and I would just ask, in consideration of other witnesses and the ability of the members to ask questions, that you please try to limit your opening statements to 5 minutes.

I also understand that certain people might have to catch airplanes, and if that is true, please don't hesitate to let us know when the time is at the moment you must leave.

I now take great pleasure in introducing John Garamendi, the insurance commissioner of the State of California, who has served in both the California Assembly and the State Senate. Mr. Garamendi more than any other is really responsible for putting the issue of fair insurance on the political map in this country.

I am very honored, as the whole Congress is, for his presence here this afternoon.

As California's first elected commissioner. Mr. Garamendi has been a vigorous defender of the interests of consumers. Commissioner Garamendi has proposed antidiscrimination regulations for insurance companies in California that would link insurers' profits to their service in underserved communities.

We are very pleased to have you with us today. Please proceed.

STATEMENT OF JOHN GARAMENDI, INSURANCE

COMMISSIONER, STATE OF CALIFORNIA

Mr. GARAMENDI. Mr. Chairman, it is a great pleasure to be here. Congratulations on your chairmanship, Mr. Chairman.

You have asked me to testify about discrimination in insurance, specifically redlining. The practice of redlining is a system wherein insurers carve out an area; that is, put a red line around it or some other line around it, and refuse to serve in that area. They don't put agents there, they don't sell insurance there. They have got a million and one excuses. And as a result, people can't insure their cars, their homes, they can't start businesses.

There may be some people that deny that redlining exists. They are not telling you the truth, or they just don't know what they are talking about. It is real, it does exist, and it is a very serious socioeconomic problem. I am here to tell you it is real and I am here to describe to you its effect in the State of California.

I want to make three brief points and then offer some background.

From time to time my department receives unsolicited information about redlining and other issues. Three weeks ago we received from an agent who represents a significant insurance company in the State of California a map and a letter. The map was of the city of San Francisco, and the letter alleged that the company had specifically drawn on this map areas that he was not to serve. This is the map that was presented to us by this agent.

We are now undertaking an investigation of the situation, and should his allegations prove to be true, it would be a blatant violation of the laws of the State of California, and quite possibly the laws of the Federal Government also.

It is, plain and simple, a yellow line, not a red line. They used a marking pen, a highlighter pen to accomplish the redlining

purpose.

This is one of many examples that we have had presented to us about redlining. This one is specifically from the industry itself, or from an agent who represented a part of the industry.

Unfortunately, I am not going to leave the map here with you. I will send you a copy for your records. This may become evidence in a future action that my department will take.

We began to look at the issue of redlining originally from a statistical point of view. We gathered statistics and did the analysis. The numbers told us what is happening. They told us where the policies are being sold, they told us where the agents are. It is very clear that the distribution of agents from major companies is skewed away from the inner city and the minority communities of California.

For example, one major company, this is testimony presented at an earlier hearing in California, State Farm, had more agents in Sacramento than they did in all of Los Angeles. You can know the population difference is actually about tenfold.

My department has moved in the intervening months since we began receiving this information, to provide strict regulations where none existed previously in order to encourage good insurance practices and to toss out the bad and discriminatory practices.

These regulations are now approaching their final stages, and they will penalize the discriminating insurer where it hurts, in their wallet, in the bottom line. This affects their profits, and the insurer who redlines is penalized on the profit side, and the insurer who plays by the rules gets a bonus.

Mr. McCandless, there ought to be incentives, carrots and sticks, and we provide both in these regulations. Also in these regulations we gather additional statistical information such as exactly where the agents are located, where they serve, also information about the ethnic background of employers. That is the managers of insurance companies.

I had the opportunity to sit down with many managers of many insurance companies, and the ethnic and sex background of those people does not represent the State of California. It is, therefore, very little wonder in my mind that the people who run these companies are scared to death of the inner cities. They don't look like the inner city, they have never been to the inner city, and they may feel more comfortable selling insurance in Bosnia than in the inner cities.

It is also a practice that exists-let me just do some background here, as I described the practices. In California in 1988, the voters enacted Proposition 103 which obligates the insurers to insure all good drivers, yet many insurance companies still refuse to do so, or those insurers claim the risks are too high in low-income and minority communities and inner-city neighborhoods. In fact, some insurers place unfair restrictions on agents' ability to bring insurance into the very areas that most need those services.

Mostly, you will see this with independent agents as they attempt to get assignments or get contracts to sell the insurance of major companies. They simply cannot obtain the opportunity to sell insurance in those inner-city areas.

Proposition 103 also prohibits any rate that is unfairly discriminatory and violates California law in other ways. We are once again continuing our efforts to stop this continuing injustice.

Because Proposition 103 subjects insurers doing business in the State of California to the State civil rights and antitrust laws as well as other unfair practices, a coalition of consumer advocates has proposed-including the insurance commission-that all insurers be required to serve all people on reasonable terms without discrimination.

That coalition of consumer advocates alleges insurers have abandoned the inner cities. We will provide that to you if you care to see it.

Their petition to me asked for establishment of a system of bonuses and penalties. I described that earlier. That is part of our regulations. And should we be able to adopt those, there will be a reward for good service; that is, more profit, and there will be a penalization for substandard or no service at all; that is, less profit. These regulations propose that the allowable rate of return be varied.

Now, as all of you know, we had some civil disturbances in Los Angeles last year. Shortly after those disturbances, we held hearings. The hearings furthered the information that we needed on these regulations. And we also pointed out an additional serious problem that I want to bring to your attention.

Like banks, insurance companies are a source of funding for economic activities. Unlike banks, insurance companies do not have any requirement to invest in our communities, and they don't. There is very, very little evidence that the insurance industry invests in any meaningful way in the inner cities and in our minority communities.

It, therefore, is imperative for us to address that, and we have conducted hearings, we have conducted other activities, and we will have some coming up in the next month or so, to find ways of encouraging the insurance industry to invest in the inner city.

The issue of the FAIR plan was raised in the opening statements of the members. The FAIR plan in California prior to the riots was in effect. However, it did not provide us with the kind of coverages that were needed. It was expensive and did not include such things as business interruption and other kinds of basic insurance that is needed by a person who wanted to open a business.

We asked the FAIR plan to change their coverage. They have now done so. They now allow for periodic monthly payments rather

than an up-front payment, and they have expanded their coverage to include the full line of coverage most businesses would need. That is a good sign.

However, the FAIR plan cannot be a rationale for insurance companies abandoning the inner city. It simply is not the way the laws are written, nor is it a reasonable mechanism.

While I am on the subject of riots, the Federal Riot Reinsurance Program was terminated in the early 1980's. It was a successful program. The government ran it for about 20 years, and it actually provided a bit of profit for the Federal Government. The termination of that program is likely to be a problem for many inner cities. It certainly is for Los Angeles today, as riot reinsurance is not available, and hence the cost and the availability of insurance is diminished.

We asked last year that Congress reinstate that. A bill was introduced; no action was taken. We draw your attention to this in the hopes that you would deal with that.

There is another problem that occurs in the inner cities, and these are the minority communities, particularly the immigrants. They do not have ready access to insurance. There are numerous barriers, including language and custom, as well as the availability of agents, brokers, and companies that understand both their language and custom.

We have seen serious problems in the inner city with unlicensed, unscrupulous ripoffs from insurance companies that often are offshore; they are not even located in America. We anticipate that some $70 million of losses have occurred in Los Angeles from these unlicensed companies that preyed upon minority communities, typically the immigrant community.

We need help with a Federal law on insurance, specifically the unlicensed offshore insurers. We had a bill before Congress for that. I draw your attention to that also.

My department will continue to enforce laws against discrimination. We will try to and will prosecute the few wrongdoers we can get our hands on. We do not have the resources to do all of this. We look forward to more action with a more vigilant Federal Government, which is now in place.

And also our incentives will deal with the people who are employed. Hopefully, we will see more diversity in the background, the racial makeup, and the sex of the people employed in the insurance industry.

There are many, many issues that you will be covering during this hearing. My department and I stand ready to provide you with whatever information we can.

We hope that you will be successful in highlighting this problem and assisting us, where appropriate, in dealing with it.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Garamendi can be found in the appendix.]

Chairman KENNEDY. Thank you very much.

I might ask the members of the subcommittee if it might be worthwhile our taking Mr. Garamendi's questions out of turn here, simply because he is going to have to catch a plane back to California at 3:20. Because of the bells, none of us will get an opportunity

to ask him questions. I would suggest that we can keep our questions short. We can then go back and forth.

Those of you who want to come back swiftly after the bell-
Mr. FLAKE. Unanimous consent, Mr. Chairman.

Chairman KENNEDY. Thank you very much.

Any objections?

Mr. GUTIERREZ. Mr. Chairman, I just ask unanimous consent to have my opening remarks that I wasn't able to give earlier inserted into the record.

Chairman KENNEDY. Absolutely.

Anyone else want to add opening remarks into the record?

[The prepared statement of Mr. Gutierrez can be found in the appendix.]

Chairman KENNEDY. Commissioner, I want to thank you for the tremendous work you have done on behalf of people all across the country. I think your leadership on this issue has inspired others to begin to deal with the issue of fair insurance rates and make sure that insurance is provided to all people who have an opportunity to pay their premiums.

The map that you brought with you is just incredible. I wonder if you could explain to us a little bit more about where you got the map, what the implications of the map are, and what is your sense of what we might do about the problem it depicts.

Mr. GARAMENDI. Mr. Chairman, this map was sent to us by an insurance agent who was instructed by his company to avoid certain areas, and the areas he was told to avoid were highlighted in this yellow highlighter. If any of you are familiar with San Francisco, it is the South of Market area. It is the Mission District. It is Hunters Point. These are minority and low-income areas of San Francisco. Anybody that doesn't live in Pacific Heights or Knob Hill, Russian Hill, out in the Western Sunset District is out of luck as far as this company is concerned.

It is blatant yellowlining, and we have an investigation under way to follow up on the whole situation.

Chairman KENNEDY. Let's presume that that isn't a unique

circumstance.

Mr. GARAMENDI. It is not unique.

Chairman KENNEDY. Is there, in fact, in your opinion, a role for the Federal Government to play with regard to antiredlining issues that could provide the carrots and the sticks that you and Mr. McCandless referred to?

Mr. GARAMENDI. Well, heretofore we had not thought that the Federal Government would be interested in assisting us, except perhaps in the passage of new laws which we had some doubt would be signed. So we have tried to use our resources that were available to us in the State.

However, there are certainly antidiscrimination laws that are on the books that the Federal Government enforces. For example, HUD and the Department of Justice and the like are certainly capable of enforcing that.

Where we see patterns of racial discrimination, certainly I think those laws are probably applicable. So for starters, the enforcement of the civil rights laws of the Federal Government would be helpful.