With just $50 million in assets, Brooklyn Cooperative Federal Credit Union is a rounding error compared to the nation’s largest brand-name banks. But this tiny institution serving communities of color has made more federally-guaranteed small business loans in Brooklyn than Citibank, Wells Fargo and Bank of America combined. In the first part of this series, published Monday, we explored how the union got its start. Here, we dive into the mechanisms that have allowed the credit union to grow and the challenges it has faced.

What brings in members and keeps them coming back to Brooklyn Cooperative Federal Credit Union?

For one, its ability to provide credit on terms that work for them. Its interest rates are lower than non-bank lenders because it has access to deposits to build out its balance sheet. Non-bank lenders typically have to borrow from banks themselves to raise cash for the loans they make to consumers or businesses, meaning final end-borrowers are paying interest to both the non-bank lender and the bank.

“​​Because we have federal deposit insurance behind us, it comes back to that charter,” says Brooklyn Cooperative CEO Samira Rajan, who started as an AmeriCorps VISTA volunteer at the credit union and worked her way up the ladder. “That’s a golden ticket because members will continue to put their deposits in because they value a savings account, and that becomes cheap, patient and abundant capital for lending. It’s really easy for me to raise deposits, because every dollar I raise, it’s federally insured.”

Combine that with the credit union’s years of experience and mutual trust, giving the credit union the ability to underwrite loans for little to no collateral, to members with an average credit score below 650, and to members without social security numbers.

Residential mortgages for one to four family homes account for more than half of Brooklyn Cooperative’s current loan portfolio. But its small business lending prowess, too, says something about the neighborhoods it serves. Brooklyn is a place that eats, lives, breathes and bleeds hustle, or what some might call entrepreneurship. The credit union’s catchment area includes Marcy Houses, the public housing community that was once home to hip hop’s first billionaire, Jay-Z.

The credit union’s entree into small business lending was entirely in response to the community.

Initially, as with most newly chartered credit unions, regulators only allowed Brooklyn Cooperative to start out doing small personal loans. Rajan noticed early on that it was not uncommon for members to take out personal loans to support their business — bodegas, hair salons and barbershops, boutique apparel shops and the like. Some would take out a car loan to acquire a vehicle as an independent taxicab driver or for-hire transportation provider. Besides the car loans, the credit union made most of these loans without any collateral.

Like any other deposit-taking institution, Brooklyn Cooperative is constantly on the lookout for tools to help reduce its risk. In 2006, Rajan found one for small business loans: the Small Business Administration’s 7(a) loan guaranty program. Under this program, the federal agency offers to repay as much as 85% of a small business loan in case a borrower defaults, dramatically reducing the risk to the lender.

The 7(a)program is known for its hefty paperwork requirements that often discourage borrowers, particularly those from Black and Brown communities. Lenders often add their own requirements on top of the agency’s, such as credit score minimums, which the SBA doesn’t actually require but almost all lenders do. In 2022, just 7% of 7(a) loans went to Black borrowers, and 10% went to Hispanic borrowers — and that’s actually an improvement on previous years.

The 7(a) program does include an option to guarantee only 50% of a small business loan using lenders’ own underwriting requirements instead of SBA requirements. And a 50% guarantee was more than good enough for Brooklyn Cooperative, one of the few lenders that does not have credit score minimums for its small business lending. A 50% guarantee is a huge risk reduction from providing unsecured personal loans that get used for business purposes.

Samira Rajan (Photo courtesy Brooklyn Coop)

With 7(a) loan guarantees to help reduce risk for Brooklyn Cooperative, the credit union could be much more active marketing and promoting its small business lending. It started taking referrals from other nearby community-based organizations that couldn’t make loans themselves. Nearby banks sometimes direct prospective small business loan applicants to Brooklyn Cooperative if they can’t work with the applicant because of a bank’s own credit score minimums or if the requested loan amount is smaller than the bank is interested in doing.

Brooklyn Cooperative’s average 7(a) loan size is $24,000, compared to upwards of $120,000 for TD Bank or Chase. The SBA website’s Lender Match function has also become a source of small business clients for Brooklyn Cooperative.

It’s the fact Brooklyn Cooperative does so many 7(a) guaranteed small business loans that really puts the credit union in the running as one of the most important economic institutions in Brooklyn. Small businesses create the majority of employment across the country, and Brooklyn is no exception. For all its shortcomings, the 7(a) program has become one of the most important sources of capital for small businesses, supporting close to 60,000 loans adding up to around $25 billion every year across the country. Brooklyn Cooperative is one of the top connections that small businesses in Brooklyn have to this major national economic development program.

“There’s demand for small business lending, especially if you’re serving an immigrant community,” Rajan says. “Sometimes small business owners come to you because they want to pay back the loan shark. So you realize how many of these guys get sucked into those and how many of those we’re not seeing because they never come over to us to ask us to pay off their loan shark.”

In its early days, Brooklyn Cooperative’s board and staff debated about whether it was right for credit union loans to ultimately land in the pockets of loan sharks. The decision to keep doing so came down to the fact that ultimately the loan sharks and other predatory lenders really rely on a model in which borrowers never actually repay their original loan and just keep on making interest payments forever. The credit union could at least break its members out of those debt traps.

“People get themselves into really bad situations because they feel like entrepreneurship and small business ownership is the only way forward,” Rajan says. “They’re not going to make it in the job market. It’s terrible. Like, what’s your alternative? An Amazon warehouse job? That’s crazy. So they feel like it’s worth it to try to get their small business on their feet, and then they end up with these terrible predatory partners.”

Working the system

In the world of community development finance, a common refrain is how challenging it is to be or work with highly regulated institutions like banks and credit unions. Banks are, after all, the organizations most closely associated with redlining — historically, the practice of discriminating in lending to certain neighborhoods or people based on race or immigration status.

Many community development lenders choose to be non-regulated, non-bank lenders, also known as loan funds, because they want to be able to lend in historically redlined neighborhoods without regulators looking over their shoulder all the time.

There’s a lot of truth to to that concern. Regulators can definitely cause headaches for the lenders they oversee, in more ways than one. As a longtime CEO at a regulated financial institution, Rajan knows more than almost anyone else what it’s like to have those regulators looking over your shoulders all the time — or at least every eight to 12 months or so, when examiners come around to evaluate the safety and soundness of your institution and its lending practices.

Here’s how things usually go. For credit unions, the examiners come from the NCUA. The agency rotates examiner teams every three years, ostensibly to keep institutions on their toes. It’s not a perfect system.

When a new examiner team comes to Brooklyn Cooperative Federal Credit Union for the first time, Rajan says, there’s a lot of raised eyebrows and expressions of concern from examiners. The credit union is making a lot of loans to people with low credit scores, or no social security numbers, or documentation that isn’t anywhere close to what’s considered industry standard (even if there are plenty of documents as well as memos by loan officers explaining the situation for each loan they’ve made since the last examination).

The credit union’s annual general membership meeting, held in September this year inside the Bed-Stuy branch. (Photo by Oscar Perry Abello)

It’s the credit union’s mission, Rajan explains to the examiner team, to serve communities that are left out or left behind by mainstream institutions, so all that is to be expected.

“Every three years, we have literally a new examiner come in and they’d be like, we’ve never seen this before,” Rajan says. “Yeah, I know you’ve never seen that before. New examiners have to get their whole head wrapped around the fact that you’re going to be doing lending which is non-conventional, that you’re deliberately going to be lending, knowing that your loss rates will be higher than the normal and you’re going to be lending to borrowers who on paper don’t qualify. … It flies in the face of what apparently you’re supposed to be doing, which is lending only when you definitely have a 700 credit score.”

What matters most is that the credit union’s default rate is consistent over time, and it’s setting aside enough of a cash cushion to absorb losses and keep the institution financially self-sufficient over time. Over the years, grants from the CDFI Fund have helped ensure that cushion is as substantial as it needs to be based on the size of the credit union.

At times, Rajan says, she’s had to explain what the CDFI Fund is to new examiner teams. Some don’t believe it’s real at first, even after she shows them the credit union’s own corporate account statements or wire transfer documents confirming that they’ve received the grant dollars.

Out of 4,800 credit unions across the country, only 529 participate in the CDFI Fund’s programs. None of the examiners that have rotated over to Brooklyn Cooperative have ever overseen one of those 529, Rajan says.

By the second year, the examiner teams can see for themselves that, despite all their initial skepticism about the credit union’s underwriting standards, Rajan was right — the credit union’s default rate is consistent, and it has accounted for that slightly higher than usual loss rate under its loan loss reserve practices. The vibe in the room is much more comfortable and calm.

“By the third year, examiners love us because — and I’ve heard this over and over — they say things like ‘you are the reason that credit unions are great’… or ‘you’re actually serving your community and this is wonderful,’” Rajan says. “But then I lose them. And then I start from scratch with the new guy who’s like, ‘That’s shady, dude.’”

Testing the limits

The largest loan Brooklyn Cooperative has made so far, in March 2022, almost didn’t happen.

The story of how it went through illustrates some of the limitations of the current community-based credit ecosystem, as well as what else could be done to make things easier for credit unions or other local banking institutions serving neighborhoods like these.

The customer was a longtime member with a business designing wedding dresses for on women with non-traditional body types. The credit union had recently helped the business with a Paycheck Protection Program loan to get them through the pandemic.

Inside the East New York branch during the grand opening, CEO Samira Rajan (center front) stands with supporters of the credit union including Michelle Neugebauer (second from the right) executive director of Cypress Hills Local Development Corporation, which owns the building, and Al Scott, board president of the East New York Community Land Trust (far right).

The founder had recently won a season of a fashion reality TV fashion show, and she wanted to use the $1 million in prize money as a down payment to buy a building in Brooklyn where she could permanently house her business, including a dressmaking operation, warehouse and flagship store. With her prize money and a $3 million loan from the credit union, she bought that building, a former lumber warehouse on Church Avenue in Brooklyn’s Flatbush neighborhood.

The loan almost didn’t happen: Technically, $3 million is beyond Brooklyn Cooperative’s legal lending limit as a regulated financial institution. The stated purpose of legal lending limits is to ensure each regulated institution isn’t overly dependent on any one or several large borrowers. There’s a long and complicated list of rules for calculating the exact limit based on a number of factors including the purpose of the loan. With $5.2 million in capital, Rajan says Brooklyn Cooperative’s legal lending limit is $1.8 million for a commercial real estate loan to a small business.

But Brooklyn Cooperative was still able to provide this $3 million loan using a loan participation, a common but not very widely known practice that lenders of all sizes use when someone — even a massive corporation approaching a big bank — requests a loan that goes beyond a bank’s lending limit. In a loan participation, the lead lender goes behind the scenes to recruit other lenders who supply a portion of the borrowed amount; all the lenders share in the interest generated by the loan. To the borrower, who may or may not know this happening behind the scenes, it’s just one loan they’re repaying to one institution on a monthly basis.

Loan participations happen mostly on an informal basis, with the lead lender shopping around for participation partners. Brooklyn Cooperative’s first two phone calls, one to a larger credit union and another to a local bank, both came up empty. Every lender goes through their own internal review process for loan participations, which can be just as stringent as if they were making the entire loan themselves. Rajan says one lender was concerned that this borrower was still waiting on a lot of payments from clients. (But it’s a wedding dress designer, Rajan says. People tend to wait until the last possible minute to pay. That’s just how the industry works.)

Fortunately, the next two credit unions Brooklyn Cooperative called were willing to go in on the deal.

“It’s been over a year and the loan is perfect, payments come in every month, there’s nothing wrong with it,” Rajan says. The other banks “let a really good loan go. Too bad for them.”

Brooklyn Coop's newest branch, in East New York, at its grand opening in January. (Photo by Oscar Perry Abello)

Loan participation programs are now seeing a quiet surge in use as a tool to support lenders working in historically disinvested communities. The programs pool public and sometimes private dollars from various sources, and offer to buy loan participations from eligible lenders to eligible borrowers. Throughout the pandemic, several states including New York created loan participation programs for emergency small business loans delivered through community development financial institutions. Many states are renewing previously dormant loan participation programs using dollars they’ve received through the 2.0 edition of the federally-funded State Small Business Credit Initiative.

In North Dakota, the century-old Bank of North Dakota relies almost entirely on loan participations. The only state-owned bank in the country, it has only one depositor, the state government, which is required to deposit all its funds in the Bank of North Dakota. Other than student loans, the bulk of the state-owned bank’s lending supports economic development statewide by purchasing loan participations from local banks and credit unions across North Dakota.

Today there are campaigns at various stages to adapt the Bank of North Dakota’s model in places as different as New York City, Philadelphia, Massachusetts, New Mexico, San Francisco, Los Angeles and more. Rajan says if there was a local public bank nearby modeled after the Bank of North Dakota, the credit union could definitely take on more and larger deals. During the pandemic, the credit union got a glimpse of what it might be like.

As part of the federal government’s COVID-19 response back in 2020, the Federal Reserve System created a temporary loan participation program to provide cheap credit for otherwise healthy businesses to survive. It was called the Main Street Lending Program. The program was only open for the last six months of 2020, but it allowed Brooklyn Cooperative to make several loans beyond its usual lending limits to local Brooklyn businesses, including an urban planning firm and a multi-vehicle food truck business.

If not for the Federal Reserve purchasing those loan participations, “we wouldn’t have been able to do those loans otherwise,” Rajan says. “They would have been turned away.”

The real bottom line

To be sure, others in Brooklyn have tried to do at least some of what Brooklyn Cooperative has been able to accomplish. Brooklyn Cooperative wasn’t even the first to try.

Back in 1993, Central Brooklyn Federal Credit Union was chartered to serve some of the same neighborhoods that Brooklyn Cooperative serves today. Central Brooklyn co-founder Mark Winston Griffith, a noted writer and community organizer in Brooklyn, says regulators weren’t very open-minded about Central Brooklyn’s attempts at providing the flexibility in underwriting needed to serve Black and Brown neighborhoods. That hampered the credit union’s growth.

Hamstrung though it was, Central Brooklyn persevered for almost a decade. Regulators ordered Central Brooklyn to close in 2002 — which became one of the reasons Bushwick Cooperative expanded its target neighborhoods in 2005 and changed its name to Brooklyn Cooperative. Winston Griffith went on to serve many years as a board member at Brooklyn Cooperative.

Rajan has stopped counting how many times she’s been approached by others who are interested in starting a new credit union in Brooklyn or other parts of New York. Almost none even get to the point of actually opening for business.

One of them finally did — Everest Federal Credit Union in Queens was chartered in August 2018 to serve Nepali immigrants across the country. Founder Raj Biraj says Rajan has been a helpful guide every step of the way. One of Brooklyn Cooperative’s loan officers is even spending one day a week helping Everest review loan applications.

“I try to do as much as I can in terms of mentorship, but it’s very difficult to find people with experience to serve on your board and to be part of your staff, that’s number one,” Rajan says. “And number two is capital. Somebody has to give you that capital for you to burn through.”

Funders these days are more and more on the hunt for projects that can show, in the shortest possible time frame, the maximum amount of measurable impact: building individual wealth, improving economic conditions of families and households.

Building community institutions that can last, that can respond over the course of multiple decades to an ever-evolving set of needs for members who aren’t wealthy, for members who face all kinds of other systemic racism and other structural barriers that have nothing to do with their access to credit? That’s not grabbing very much attention from most funding sources today.

Even the CDFI Fund, with its limited budget, is not funding brand new institutions today as it did back in the early 2000s, when Brooklyn Cooperative won five CDFI Fund grants in the credit union’s first five years of operation.

Rajan also speaks frankly about the kind of impact the credit union has had on its members’ lives. Reflecting back on more than two decades growing the credit union into what it is today, without a hint of irony she says it’s really impossible for one institution to claim any real credit for any dramatic improvement in the lives of those it touches. It’s not as though Brooklyn Cooperative made it an explicit goal at any point to become one of the most prominent small business lenders in New York’s most populous borough. That’s just where it ended up as a result of responding to its members’ needs.

“Let me put it this way,” Rajan says. “If I were to start to say that we’ve delivered, we’ve actually increased our members’ economic standing, I could definitely point to the unicorns in our small business portfolio. If I want to go and try to take credit for the unicorns, then the right thing to do is also to take accountability [for] the fails.”

Having spent so many years managing risk as a banker, Rajan can’t help but spell out a laundry list of risks that Brooklyn Cooperative’s members have to face every day.

“If you ask any New Yorker, housing is number one,” Rajan says. “How many of our small business owners have failed because they couldn’t afford rent or their landlord evicted them? Or very poor access to health care, poor access to good public education, even law enforcement. People worry about law enforcement and the unequal provision of justice and how many men in our communities are locked up.”

One question Rajan can answer is whether people and communities in those situations can and should be able to have access to affordable credit as a means for dealing with all those things. Brooklyn Cooperative is proof both that it’s possible to build a financially sustainable institution that provides credit for a variety of purposes to people and communities like those it serves — Black and Brown, immigrant, low-income — and that access to credit itself is not enough to change those situations on any widespread level.

“Access to credit, although it’s important, it’s not in the top five challenges of our membership,” Rajan says. Their top challenges, she says, have to do with the fact that they can’t afford rent or access health care. “These are people with diabetes, these are people with disabilities, these are people with mental health trauma. These are children who are born with low birth weight and have impaired functioning. There’s access to education, and the cost of child care is ridiculous. Those are the things that keep our membership struggling and poor.”

This series was published with the support of New City Critics, a partnership of the Urban Design Forum and The Architectural League of New York.