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 in terms of impact on marginalized communities, this tiny institution punches well above its weight. This is the first story in a two-part series on the credit union’s model and its path to success.

Samira Rajan needed to get out of the house. It was Sept. 14, 2001, and the Financial District was still enveloped in a cloud of toxic smoke after the Twin Towers fell. After a few days being cooped up for safety at her family’s home in Queens, she was feeling antsy, and she had an appointment that day to meet the CEO of the brand new Brooklyn Cooperative Federal Credit Union.

Amid the ashes, Rajan walked into the doors of the credit union for the first time. She was fresh out of grad school at the Harvard Kennedy School of Government. Before that she had worked at the Federal Reserve Bank of New York. Now she planned to return to financial regulation and public policy.

“The banking system is the gatekeeper for a lot of the resources and opportunity in society,” Rajan says. “I went into regulation with an eye towards being able to influence policy, to see if we make a dent or make an impact into whether or not opportunity is available.”

A grad school professor suggested she go out and learn more about how things work on the ground before going back into policy. The idea, she says, was to spend a year or so working with community institutions and understanding how people in low-income neighborhoods are impacted at the ground level.

“Then I would go back to regulation and be all woke and such about the impact of this stuff,” Rajan says. “And then I never left because it’s so cool. Your heart as well as your mind become completely dedicated to this work, because it’s so interesting, it’s so invigorating, and it’s so inspiring.”

Rajan quickly rose up the ranks, and by 2008, she was serving as the CEO of Brooklyn Cooperative. Today, with her still at the helm, the credit union is arguably one of the Brooklyn economy’s most important institutions.

With just $50 million in assets, Brooklyn Cooperative focuses on a few predominantly Black and Brown neighborhoods in North and Central Brooklyn. Yet, since 2010, the credit union has made more federally-guaranteed small business loans in Brooklyn than Citibank, Wells Fargo and Bank of America combined.

Counting by number of federally-guaranteed small business loans in Brooklyn since 2010, Brooklyn Cooperative is ranked fourth, behind only TD Bank, Chase and M&T Bank. Yet in comparison to all these other banks by asset size, the credit union is just a rounding error.

If one relatively tiny credit union focusing on a few mostly Black and Brown neighborhoods can rise to such a prominent small business lending position in Brooklyn, it raises the question: should there be more credit unions like this one across the borough? Or across New York? Or across the country?

Samira Rajan (Photo courtesy Brooklyn Coop)

There is evidence of unmet need. Black or Brown small business owners across the country are less able to access credit compared to their white counterparts. Black and Brown households are far more likely to be unbanked or underbanked than white households.

There are other credit unions in Brooklyn and New York, including a few others whose members are also predominantly people of color. But Brooklyn Cooperative is the only credit union in Brooklyn with anywhere close to its level of small business investment. Its story offers a sense of what it takes for a credit union to get to that level — and perhaps why so few ever do.

Rajan and Brooklyn Cooperative Federal Credit Union make the case that it’s worth jumping through all the hoops to create and operate a chartered depository institution serving communities of color and immigrant communities that have long been denied access to the same opportunities to build wealth as white communities.

“Once you get that charter and you can enjoy that kind of trust from your clients, your customers and your members, there’s a whole supportive structure that comes in out of the blue,” Rajan says. “This whole edifice just springs up and you’re like, wow, this is actually something where people can begin to build wealth. It really does start at the individual account level.”

Accounting for character

The first loan Rajan ever closed herself was in December 2001. The credit union’s loan officer at the time had already gone on holiday break, and Rajan had carved out a catch-all position at the credit union under the AmeriCorps VISTA volunteer program, which offered her a stipend while the new credit union didn’t yet have the capacity to offer her a salary. As an undergraduate, she had double-majored in economics and Spanish — and there was a lot of work to do creating and translating brochures and other documents into Spanish for the credit union.

His name was Jose, Rajan recalls. He’d been an early member of the credit union. Though his credit score was terrible, he’d already taken out and repaid one small personal loan at the credit union earlier that year. Now it was the holidays, and he needed another. Within a few months, he had repaid that loan. He came back again for another loan, which Rajan approved again based on his track record to that point.

And that was the first loan Rajan made that didn’t get paid back.

“You wonder about your judgment of character, because so much of it ends up being about character,” Rajan says. There are the clear yeses and noes, based on credit or income. “But [there are] ones in-between where you’re like, well, is this guy legit? Do his explanations make sense – he says he’s getting paid under the table extra. Or they have a good track record with us. So it comes down to a judgment call. And so the ones that you lose, it’s like, what did I do wrong with it?”

The answer is usually nothing. The loan officer can do everything right, but not everything can be controlled. Shit happens. All loan officers have to learn how to deal with it, and all lending institutions have to plan to lose some small but predictable percentage of their loans.

“The credit score is a tremendous indicator, it’s very strong, and it explains most of what’s going to happen in loan,” Rajan says. Sometimes things play out differently than what they expected based on credit and income, and the reason is usually clear. “They had a shock. Something happened, there’s an emergency and they have to travel, or there’s an emergency with their car, or they got sick, they got fired. Those things are truly unexpected, for us and for them.”

Brooklyn Coop’s longest-serving branch, in the Bushwick neighborhood. (Photo by Oscar Perry Abello)

“There was a time earlier on, within the first two, three years of me getting there that I wanted to be systematic in terms of figuring out which loans went bad,” Rajan says. She started compiling a spreadsheet to document why different loans were made and why they later defaulted. She hoped to be able to crack the code for her own work — after her year as an Americorps VISTA was up, the credit union hired her as a loan officer — as well as to improve the industry as a whole.

“If we’re going to do lending in a different way than the algorithms, we should be able to identify these patterns,” Rajan says. “This isn’t something that we should have to invent from scratch every single day, there are clearly patterns. But I wasn’t able to. It ends up being too hard just to say.”

What Rajan needed, and what all lenders who want to do this character-based kind of lending need, was time. Loan officers need time to listen and learn from experience lending to communities whose only other access to capital may be a loan shark or some other predatory lending institution that will charge them triple-digit interest rates.

The credit union needed time, too. A community needs time to build trust in a new institution, trust that it’s going to stick around and also trust that it really is built differently than other institutions.

But the credit union also needed time to figure out how many loans would go bad over any given period of time if it served individuals with poor credit scores. If you know that rate, you can plan for it and make sure your institution sets aside enough of a cash cushion against expected losses — conveniently known as a loan loss reserve. You can even have a higher loss rate than mainstream lenders, if you’re working with demographics that are more vulnerable to structural issues like chronic disease or recession layoffs.

New credit unions “need to have latitude early on, as a lender, to make those initial mistakes, make those loans that go bad and understand intuitively what you’re looking for,” Rajan says. “You need that runway. It can take five years or more. You’re not going to build a profitable loan program in 12 months. It just doesn’t happen.”

One thing hasn’t changed since the credit union’s early days: Back then, as now, it’s hard to find funders that have the patience to give community-based institutions that kind of runway.

How many funders does it take to build a runway?

While Rajan was learning how to get comfortable with lending on character, not just credit or collateral, Brooklyn Cooperative’s founding CEO Jack Lawson was busy fundraising to build the credit union the runway it needed.

Lawson was a PhD student in economics at the New School in the late 1990s, and he was looking for a part-time job related to his research. He found a job posting at Ridgewood-Bushwick Senior Citizens Council — today known as RiseBoro Community Partnership — where he began helping local businesses access public grants for storefront improvements and other needs. Not long after Lawson started, the organization began to discuss launching a credit union as part of its ever-growing suite of community development programs. Lawson jumped at the chance to lead the work. It was much more in-line with the economic democracy ideas he was researching as an academic.

The basics of a credit union charter application are mostly the same today as they were then. It starts with a market analysis showing an unmet need in a specific area or among a specific population subgroup, like a set of employees at one company, a church congregation, a union shop, or some other kind of member-based organization. You need a marketing plan and a business plan with growth projections based on the market analysis that show a path to financial sustainability within the first few years after opening for business. You have to conduct a statistically-robust survey of your target market showing unmet demand for bank accounts and different types of loans from the prospective credit union. You should also have a sufficient level of deposit pledges from the community or other supporters in advance of a credit union getting final approval to open for business. You also need to recruit an all-volunteer board of directors and volunteer or paid initial management team, all of whom must pass credit and background checks by regulators.

All this work can be done on a volunteer basis, but it doesn’t have to be. New York Community Trust, the local community foundation, provided early grant funding to Ridgewood-Bushwick Senior Citizens Council to support Lawson’s part-time salary and other costs for doing all that work organizing a new credit union. Lawson recalls other early grants for organizing the credit union that flowed through the nonprofit via Chase Bank, Citibank, Ridgewood Savings Bank and other local banks and local foundations that frequently funded the nonprofit’s work. “The relationship with the sponsoring entity was really important to opening those doors,” Lawson says.

Inside Brooklyn Coop's bank branch at Chestnut Commons. (Photo courtesy Brooklyn Coop)

Lawson got in touch early in the process with federal regulators at the National Credit Union Administration, and by October 2000, they’d approved the charter and deposit insurance application for what started out originally as Bushwick Cooperative Federal Credit Union. Ridgewood-Bushwick Senior Citizens Council provided a vacant storefront rent-free to the credit union for its first few years.

After the credit union opened, the most important source of grant funding for Brooklyn Cooperative Federal Credit Union in its early days — and even until now – has been the U.S. Treasury Department’s Community Development Financial Institutions Fund. Better known as just the CDFI Fund, it was created during the Clinton Administration to support access to credit and financial services in low-to-moderate income communities.

Funding from the CDFI Fund is notoriously difficult to access. The annual process typically starts in March and doesn’t end until June. It involves user accounts created at three separate federal websites as well as at least 17 application components; several require multiple documents and additional steps. There are four different deadlines, some with multiple components due that day.

From 2001 until Lawson’s departure in 2008, the CDFI Fund awarded six grants totaling $1.1 million dollars to Brooklyn Cooperative Federal Credit Union. Since Rajan became CEO in 2008, the credit union has received eight grants from the CDFI Fund, totaling $11.3 million.

Growing with the community

The CDFI Fund’s record warrants deeper examination. While grants from the CDFI Fund have helped mobilize billions more in private sector capital invested in its target communities, overall low levels of household wealth and lack of access to financial services in those communities remains a significant challenge. In some places, it’s worse today than when the CDFI Fund was created in 1994.

Zooming in on just one CDFI Fund recipient, however, the difference those funds can make starts to become clear. In addition to building the runway for the credit union’s loan officers to learn how to provide access to credit that members can’t find or can’t afford elsewhere, those grants also helped build the runway for the entire credit union to grow in response to community needs, both as a place to hold savings and a place to access credit.

In the early days, grants helped cover the costs of operating the credit union, while it built up its loan portfolio to the point that revenue from loan repayments could cover those costs. Besides staff, technology costs, and eventually rent and other facility-related costs, one of the most important operating costs is loan loss reserves. Setting aside those dollars counts as a cost to the institution.

Since around 2014, Rajan says, Brooklyn Cooperative no longer depends on grants to cover its operating costs. But CDFI Fund grants still play an important role in helping the credit union grow in response to the community.

As existing and new members continue coming in to make deposits or request new loans, like every other banking institution, the credit union needs to stay in compliance with what are known as capital requirements from regulators. The word “capital” in this context refers to a specific set of balance sheet items such as the market value of a bank’s ownership shares as well as earnings retained by the bank or credit union from previous years. Regulators require banks to have roughly $1 in capital for every $12 in assets; for credit unions, it’s $1 in capital for every $16 in assets.

While banks can sell new shares to shareholders to raise additional required capital, credit unions don’t have that option as member-owned financial cooperatives. To fund their expansion, credit unions have to set aside extra earned income — or they can raise funds from donors, foundations or dedicated public sector programs like the CDFI Fund. Donations hardly ever come in as fast as deposits and new loans, so capital requirements might force a credit union to turn away new deposits or loan requests. Thanks to grants from the CDFI Fund, Rajan has never had to do that.

At the opening of Brooklyn Coop's third full-service bank branch, this one within the Chestnut Commons affordable housing development. (Photo courtesy Brooklyn Coop)

The CDFI Fund doesn’t have an unlimited budget, of course. Over the years, the number of applications and founding amounts requested from organizations like Brooklyn Cooperative have come to far exceed the program’s annual appropriation from Congress, which has increased since its inception but in recent years has plateaued around $250 million. Only recently have several states including New York, Virginia and California created and funded their own state-based versions of the CDFI Fund.

Community demand for these services continues to grow every year, even in neighborhoods like Bushwick or Bed-Stuy in Brooklyn, where today it seems like mainstream bank branches pop up on every corner. There are still plenty of households in these neighborhoods that, for a variety of reasons, either can’t or don’t want to do business with mainstream banks, and they continue coming to institutions like Brooklyn Cooperative.

On the eve of the pandemic, in March 2020, Brooklyn Cooperative held $26 million in deposits and $24 million in active loans in its portfolio. Today it has more than $40 million in deposits and $35 million in loans. Without grants from the CDFI Fund, the credit union would not have been able to accommodate such significant growth in such a short time frame. Most recently, Brooklyn Cooperative used grant funding from the CDFI Fund to build out its third branch, in the East New York neighborhood, where it has been growing in membership.

“I don’t have to compete with mainstream banks for deposits,” Rajan says. “No one wants to bank our members, and our members want bank accounts. They just come because we’re here. Even for lending, we don’t really have to compete other than [against predatory lending models] like Rent-a-Center. So there is a blue ocean out there. It’s possible to do this work. But you do need to invest into the loan officers and give them that runway.”

The second and final part of this series, publishing on Tuesday, will dive deep into the mechanisms that have allowed this credit union to grow and the challenges it has faced. 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.