Information Asymmetry

Everyone wins when lenders and borrowers are on a level playing field.

About that algorithm…

I wasn’t planning to write about the Apple Card, but then this happened:

And it led, rather quickly, to New York regulators opening an investigation into Apple and Goldman Sachs’ underwriting process.

The department will be conducting an investigation to determine whether New York law was violated and ensure all consumers are treated equally regardless of sex,” said a spokesman for Linda Lacewell, the superintendent of the New York Department of Financial Services. “Any algorithm, that intentionally or not results in discriminatory treatment of women or any other protected class of people violates New York law.

Three quick takes:

  • Without detailed information on the financial history and assets of the applicants and the specific underwriting process used by Goldman Sachs, judging this complaint on its merits is impossible. We’ll have to wait and see what the New York Department of Financial Services finds out.

  • Speaking of which, I’m not sure how I feel about regulatory investigations being triggered by same-day Twitter rants that go viral.

  • Also, making subsequent credit risk decisions in response to those same Twitter rants (instead of your established policies) isn’t the strongest statement in support of those policies. From the same Bloomberg article:

    As soon as this became a PR issue, they immediately bumped up her credit limit without asking for any additional documentation,

And a slightly longer take:

  • In all the furor over this, a simple fact is getting a bit lost in the shuffle — neither Apple nor the applicant benefited from this outcome.

    Information asymmetry in most cases leads to less efficient markets in the long run, but usually it also produces an advantage for either the seller (e.g. used car salesperson) or the buyer (e.g. life insurance applicant) in the short-term.

    What’s interesting to me is that, in credit decisioning, there is no short-term advantage in asymmetric information for either the lender or the borrower. To return to our example, let’s assume that Hansson’s wife’s true credit worthiness justifies a significantly higher credit limit than the one she got. It’s not like Apple and Goldman Sachs wouldn’t have wanted to give it to her. The bigger a credit line that she can responsibly handle, the more money Apple/GS stand to make.

    This is the good news — there is no rational economic reason for lenders like Apple/GS to give applicants less credit than they deserve.

    However, this incident also highlights the bad news — despite the economic incentive, many applicants still seem to be getting less credit than they deserve (check out the replies to the original tweet thread for plenty of anecdotal data).

    Bottom line — we have more work to do to close the information gap in credit decisioning.

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Alex Johnson


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