As the nation watches the twists and turns of the global financial crisis, it is easy to grow nostalgic about what banking was like 30 or 40 years ago, when it was strictly a local affair.

But let's not romanticize those days too much. Consumers — especially underbanked ones — need highly functioning financial markets, both around the globe and in their own communities. Reaching harder-to-serve consumers requires combining local market knowledge and a personal touch with global innovation, technology, and scale.

We are witnessing what happens when local lenders lose their connection with global markets. Liquidity vanishes, and credit is severely constrained. The ranks of underserved consumers are growing by the day as credit requirements tighten further to the point where only those with sterling records need apply.

Reckless mortgage lending to unqualified borrowers is different from making loans to consumers whose demographic and credit profiles do not fit in traditional boxes. In the wake of the subprime mortgage mess, this critical distinction has been lost.

Lenders need to be more mindful of risk, but they also need to be smarter about assessing it. Consumers will be no better off if the pendulum swings too far the other way.

Re-establishing connections between borrowers and lenders should be a top priority. The world has changed too much to return to the old days, when all transactions were conducted face to face, but community banks still have a role to play in reaching the underbanked.

Small banks know their communities more deeply, because they have a stake. They are more nimble when it comes to adding products and services, and their size helps them manage customized offerings and processes from one branch to another.

Big banks also have a role to play in building mutually beneficial, long-lasting relationships with the underbanked, but they need to move beyond Community Reinvestment Act-inspired efforts and adopt enterprisewide strategies.

The CRA has been a powerful tool for bringing credit to neighborhoods and consumers who otherwise would not receive attention from banks, but it has done less to link underbanked consumers with basic banking products and services.

Large banks in particular tend to cede the hard work of finding and grooming nontraditional borrowers to nonprofit partners, as opposed to building their own pipelines of consumers through their retail banking operations.

The CRA could be a better impetus for banks if the regulators retooled the services test to measure retail banking activities more accurately. And nonprofits have an important role to play in helping banks find and market to underbanked consumers. But banks need to build business models that shift serving the underbanked from a government mandate to a desirable business activity.

They should be working to reach consumers earlier in the life cycle, connecting them to bank accounts, savings products, and credit-building opportunities well before they are ready to apply for a mortgage.

Balancing local efforts with global liquidity and scale is the key.

Consider the secondary market initiative created by the Center for Community Self-Help, a North Carolina nonprofit community development organization that runs a credit union, a financing arm, and an advocacy operation. Since its launch in 1994, the organization has purchased more than $4.5 billion in CRA and other affordable mortgages from 35 lenders across the country, creating liquidity for nonconforming loans and proving that lower-income borrowers are bankable.

A $50 million grant of risk capital from the Ford Foundation enables the nonprofit's Self-Help Federal Credit Union to provide a credit enhancement for the loans it purchases.

The credit union then sells the loans to Fannie Mae, which sells them as mortgage-backed securities. Lenders retain servicing rights — a smart way to ensure local market and capital market interests remain aligned.

The loans themselves are almost quaint compared with the exotic products that proliferated in the last few years. The credit union purchases only 30-year, fixed-rate mortgages that are fully underwritten to the borrower's ability to repay.

But the nonprofit exclusively targets low- and moderate-income and minority borrowers, the very consumers that are often stereotyped as too risky. The average income of borrowers in the portfolio is $32,600, and more than 40% of the borrowers are minorities.

Moreover, the portfolio includes borrowers with lower credit scores and nontraditional credit histories.

The result? The cumulative loss rate to date is a mere 76 basis points, and researchers from the University of North Carolina's Center for Community Capital have found that the average borrower has built about $25,000 of home equity.

If a small credit union can achieve such impressive results with a $50 million grant, think what we could do as a nation with as we restructure the financial system.

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