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Well-intentioned critics point to the absence of banks in poor communities as the cause of the sprawl of fringe creditors. This observation may have been true at one time, but presently it is backward—it is the prevalence of fringe creditors that forecloses more traditional credit institutions from poor and working class communities. Foreclosure occurs because fringe creditors deny their customers the most basic prerequisite for access to traditional credit markets: portable evidence of creditworthiness, that is, a credit record. Credit records serve both an ex ante and an ex post function. Prior to making loans, banks use credit records to screen for high default risks. After the loan is made, credit records are used to discourage defaults through lenders' implicit and explicit threats to damage borrowers' credit records if they fail to meet repayment schedules in a timely manner. However, most fringe market transactions neither rely on nor contribute to general measures of creditworthiness. A subtle but important effect of this nonreliance on credit histories is that it undermines the repayment threat in traditional lending markets, which discourages conventional banks from making loans to fringe market consumers. Since banks are less likely to lend to them, fringe customers have reduced incentives to develop and maintain good credit records, leading them to be screened out more often at the loan application stage. The fringe credit market expansion is thus self-perpetuating in the way it structurally undermines its customers' access to alternative low-cost credit.

This Essay suggests a direct response to this problem, while cautioning against over- and underregulation of the fringe credit industry. Simply, what if fringe creditors were encouraged to report credit? With proper reporting, "good" borrowers could establish favorable credit records, which would allow them the option of leaving the fringe market for the lower borrowing rates of the traditional retail credit market.

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