Let's get something straight — the Community Reinvestment Act is not to blame for the subprime mortgage crisis.

Only in the age of the Internet could such a patently false idea gain traction. The notion that the 1977 law fueled reckless lending to low-income borrowers has taken on a life of its own not just in the blogosphere, but also in newspapers and on television.

Misunderstanding the origins of the financial meltdown is dangerous, lest we be doomed to repeat the mistakes that led us to it. As policymakers prepare to restructure the financial system and the regulatory framework that governs it, let us make sure we know the facts about the CRA, so we don't inadvertently shut out the consumers and communities most in need of productive financial relationships.

The CRA was a response to redlining, the practice of withholding much-needed mortgage credit from consumers who lived in low-income and minority neighborhoods in a bank's service area. The act requires banks and thrifts to lend money in the same neighborhoods where they take deposits. Regulators rate how banks perform, publish the results, and make mergers and branch location decisions subject, at least in part, to the CRA records of the depositories involved.

The fact that CRA data is publicly available has made the law and its impact the subject of significant study. The dominant conclusion drawn by reputable researchers is that it has been a positive force in the market. More loans have been made to lower-income and minority borrowers because of the law, increasing the homeownership rate among those groups, without a concurrent increase in risk.

Risky mortgage products, not risky borrowers, are at the root of the growing foreclosure epidemic. The latest evidence to support this idea comes from a study released this month by the University of North Carolina at Chapel Hill's Center for Community Capital on default rates among low-income and minority homebuyers.

The study shows that mortgage borrowers with similar risk characteristics defaulted at much higher rates when they took subprime mortgages than when they took loans made primarily for CRA purposes.

Regulators had been warning institutions covered by the CRA to steer clear of exotic mortgage products that required little underwriting. High-cost mortgage lending by banks and thrifts increased in the last few years, but depositories were not the main culprits. About half the high-cost subprime mortgages came from independent mortgage companies, which are not subject to the law. Another 12% were made by bank affiliates, another group not covered by the CRA.

The debate about the CRA's role in the current crisis is not merely an academic exercise. The law will almost certainly be reconsidered next year along with the overall structure of the entire financial system.

The CRA will need to change. It should cover all financial services companies, not just banks and thrifts. It should reward good behavior and penalize bad practices, accounting for both quantity and quality. And it should focus as much on the kinds of basic banking services that help prepare consumers for loans as it does on lending.

But if we continue to harbor the belief that lending to low- and moderate-income borrowers caused the financial mess, we risk cutting them off altogether in the next era of banking.

The subprime mortgage crisis flies in the face of a decade's worth of refinements in the underwriting tools and analytical models that can help lenders identify and manage risk more precisely. These new-and-improved tools did not fail; lenders simply failed to use them.

Policymakers need to restore a regulatory framework that encourages prudent risk-taking by balancing consumer protection with safety and soundness. Consumer protection should be about protecting consumers from both excess and exclusion.

The CRA targeted exclusion, and it succeeded dramatically in making credit more widely available. Never in their wildest dreams would the law's supporters have imagined that 30 years later too much credit would be made available.

The next incarnation of the CRA should make sure the pendulum does not swing too far in either direction, but it should preserve the spirit of the original law: Borrowers must not face discrimination based on their ethnic background or where they live.

Neither should our nation's recent habit of irresponsible lending make it unduly difficult for qualified low- and moderate-income loan candidates to get the credit they deserve.

The sense of fairness that inspired the CRA is critical to rebuilding the financial system.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.