New York City Credit Unions Give Mom-and-Pop Stores a Chance, Despite Gentrification

In the trendy Lower East Side of New York City, where high-end restaurants have replaced many of the old mom-and-pop businesses, a stream of customers flows through the door of Rossy’s Bakery: construction workers and cab drivers, residents of the public housing complex across the street, and Spanish-speaking clientele who have lived in the neighborhood for decades. Inside, diners sit at wooden tables, chitchatting above steaming plates of rice, beans, and pork. Below a print of a succulent rose dripping with dew, a display case offers mouth-watering Dominican specialties, from Guava cake to corn pudding.

While many of the Lower East Side’s new businesses cater to wealthier residents who’ve moved here in recent years, this bakery, which opened in 2010, attracts the neighborhood’s old timers and Caribbean immigrants. Cases like this are relatively rare in gentrifying neighborhoods, in part because banks can often earn higher returns on loans to businesses that serve moneyed newcomers. But credit unions with a mission to serve low-income people provide an exception to that logic. Rossy’s Bakery is an example of what can happen when longtime residents team up with them to outwit the forces of gentrification.

The story of this business begins with Norma Ortiz, an immigrant from the Dominican Republic who has lived in the Lower East Side since 1980, a time when the neighborhood was best known for its squatters, drug dealing, and high murder rate. Ortiz worked in a clothing factory on Broadway, but when it closed began selling cakes out of her apartment. Eventually, her kitchen was too small to accommodate a growing number of orders.

Ortiz and her daughter Rossy Caba dreamed of opening a bakery. The reduction in crime created new opportunities for local business, but made it more challenging to find an affordable storefront. “People can’t afford to live here anymore,” Caba says. “A lot of the tenants have been bought out by the developers.” She herself can’t afford to rent in the neighborhood where she grew up, and recently moved to Queens.

Nevertheless, Caba set out in search of a storefront. She recalls visiting a cramped space that cost a whopping $7,000 per month. And even when she did find a decent rent, landlords turned her down because her family had never officially owned a business. Eventually, Caba appealed for help from her mother’s bank, the Lower East Side People’s Federal Credit Union (FCU).

Residents of the Lower East Side protest against drug dealing in the mid-1980s. After the neighborhood’s last bank, the Manufacturers Hanover Trust, closed in 1984, community activists converted it into the Lower East Side People’s Federal Credit Union. (Photo: Marlis Momber)

A credit union is a federally insured, nonprofit, member-owned bank that provides financial services to a specific group of people, such as the employees of a union or the members of a church. There are about 6,500 credit unions in the United States, and collectively their assets are about $1.1 trillion. That’s on the same order of magnitude as – although smaller than – the holdings of Wells Fargo.

But not all credit unions operate by the same rules. The Lower East Side People’s FCU is a Community Development Credit Union (CDCU), a category of organizations that specifically work to serve low-income people and communities. A CDCU can obtain a federal designation as a Community Development Financial Institution, which allows it to gain access to certain funds to provide services to undeserved communities, as well as exemptions from regulations that limit a credit union’s business loans to 12.25 percent of overall lending. About 4 percent of credit unions are CDCUs, and many are very small, with less than $1 million in assets, while the largest hold a few billion.

The Lower East Side People’s FCU is among the largest of New York City’s 22 CDCUs, with assets of about $46 million and branches in the Lower East Side, Central Harlem, and East Harlem. Membership is defined broadly: Anyone who lives, works, worships, volunteers, or belongs to an organization in the Lower East Side or Harlem is qualified to become a member. New York City residents who make less than $38,000 also qualify.

Caba found a spot for about $4,000 a month, and applied for a loan to help cover the cost of rent and construction. The Lower East Side People’s FCU agreed to back up Caba’s application by offering a business loan with an interest rate of less than 10 percent, allowing Caba to finally secure a space. But its support didn’t end there. When it took years for Caba to find an affordable construction contract, the credit union provided another loan to cover her costs. More recently, when Caba got behind on the rent, the credit union loaned to her again and even met with Caba’s landlord to negotiate her debt. (Chase Bank, on the other hand, rejected her application.)

“Everyone’s so surprised that we’re still here,” says Caba. She thanks the credit union for helping her family’s catering project grow into a restaurant in a hot neighborhood.

A Bulwark Against Displacement

CDCUs are already respected for the role they play in impoverished urban communities, which continue to suffer from a lack of access to financial services and fair credit. According to research conducted in 2013, New York City neighborhoods where people of color make up the majority contain 43 percent of all the city’s businesses, but receive only 36 percent of the city’s total business loans.

In underserved neighborhoods, CDCUs are often the only alternative to predatory loan sharks. According to Linda Levy, CEO of the Lower East Side People’s FCU, when neighborhood activists started the credit union in 1986, it was the only bank in a 100-square-block area. Governed by their members and not beholden to profit-minded shareholders, credit unions are often able to offer better services than traditional banks, including low-interest loans and high-interest savings accounts.

Banks have long since returned to the Lower East Side: There are currently four traditional bank branches sharing the Lower East Side People’s FCU’s zip code, according to the Federal Deposit Insurance Corporation. “Obviously, the Lower East Side has changed a lot since 1986 when we started there,” says Levy. “However, I would say that for us, since our focus has always been the low-income and immigrant community of the Lower East Side, that hasn’t changed. They’ve been left behind by the gentrification.”

The story of Rossy’s Bakery exemplifies the way CDCUs are crucial actors in a city that is often inaccessible to all but the rich. When neighborhoods begin to gentrify, the new influx of money doesn’t change the fundamental fact that banks do not like “small depositors,” according to Levy. CDCUs help long-term, poor residents get a foothold in a transforming economy. And this is not true only of the Lower East Side People’s FCU, but of CDCUs across the city, from the Bronx to Brooklyn.

“It’s kind of fundamental to their mission,” says Deyanira Del Rio at The New Economy Project, an organization that seeks to build democratic local economies by supporting a range of cooperative enterprises. “Not just helping people tap into financial services … but creating opportunities to purchase owned homes and have real economic roots [in the neighborhood] … to help combat some of the forces of gentrification.”

Anchoring Businesses in Brooklyn

No part of New York City has experienced gentrification quite like the borough of Brooklyn. In Bedford Stuyvesant, one of Brooklyn’s most rapidly changing neighborhoods, a business owner who asked to be identified by his nickname, Frenchy, says local stores have struggled to adapt to shifting demographics.

Over the past decade, there’s been at least a sixfold increase in the neighborhood’s white population and a roughly 15 percent decrease in the African-American population.

“The clientele don’t live here anymore,” he says. “A lot of businesses have closed.” He believes that many of Bedford Stuyvesant’s newer residents don’t want to shop “in the ghetto,” and tend to spend their money at Manhattan stores. Even those who do shop in the neighborhood have different consumption habits than longtime residents, he says.

But there is a lifeline for businesses that are struggling with these changes. The historically black and Latino neighborhoods of Bedford Stuyvesant and Bushwick are home to Brooklyn Cooperative FCU, a credit union dedicated to ideals of fairness and affordability, which emerged in 2001 and grew up during a period of intense gentrification. Brooklyn Cooperative now has the third-highest membership of any CDCU in the city. It also has one of the largest loan portfolios, with more than $1 million in business loans to members in 2015.

That may not sound like much, relative to the millions that traditional banks lend to big businesses. But because Brooklyn Cooperative’s loans are small, they benefit a wide pool of clients. “Startup loans are made for $500 through $15,000 and established businesses are eligible for loans as large as $50,000,” according to the credit union’s website.

Employees at the offices of the Brooklyn Cooperative FCU. (Photo courtesy of Brooklyn Cooperative FCU)

While Brooklyn Cooperative’s business partners are economically diverse, many of their loans protect mom-and-pop businesses struggling to survive in Brooklyn. New York City’s rent regulations protect many residents from displacement, but the presence of newcomers often leads to the formation of a two-tier economy. High-income newcomers support their own set of expensive businesses, while low-income residents continue to shop at longstanding stores. These older businesses face the stress of both rising commercial rents and a diminishing customer base. In addition, they are often unable to gain access to credit through traditional banks, putting them at a disadvantage relative to new, high-end businesses.

“All of those banks, they make you pay an application fee, run around, and at the end … no one will talk to you,” says Frenchy. Over the years, he owned a clothing shop and a CD store, but he never had success securing loans from traditional banks. An immigrant from France, he suspects that the banks disliked his lack of credit history, his immigrant status, and his business’s small income.

TD Bank, one of the institutions that denied Frenchy’s application, said in a statement that they are “committed to meeting the financial services needs of low-to-moderate income individuals, neighborhoods and small businesses.” The bank points out that since 2008, they have received “Outstanding” marks in performance evaluations mandated by the Community Reinvestment Act of 1977, which rate banks’ efforts to meet the needs of low and moderate-income neighborhoods. But even if the bank is sincerely dedicated to serving disadvantaged neighborhoods, their qualifications for obtaining a loan – including “credit history of the business,” “the income of the business,” and other factors – can put low-income borrowers at a disadvantage.

In any case, when he tried to open a fish and chips restaurant in 2012, Frenchy was sure that traditional banks would refuse to assist. So he went directly to the New York City Department of Small Business Services, which referred him to Brooklyn Cooperative to get a loan of about $10,000.

“The [loan officer] was very nice,” Frenchy says. “He lived in the neighborhood.” After Frenchy submitted his application, it took less than a month to receive the loan. “Actually, after that, I closed my account with all the different banks! I don’t want to bank with anybody else.”

But Is a “Better Capitalism” Enough?

Of course, credit unions have not been able to stop displacement, reverse centuries of racial discrimination, or challenge a capitalist system that drives the booms and busts of real estate. Their presence helps to treat – some might say Band-Aid – the inequality underlying the system.

James DeFilippis, a professor of planning and public policy at Rutgers, writes in an analysis of a Bronx-based CDCU that the popularity of community-based financial institutions “has grown and flourished because it very neatly and easily fits into the neo-liberal political consensus, and because the community development movement itself has increasingly embraced free market, neo-liberal understandings and, therefore, solutions.” In other words, CDCUs do not make any fundamental challenges to the existing order; they merely give low-income individuals a “leg up” in the competition.

While he recognizes the valuable resources that CDCUs bring to disinvested communities, DeFilippis further points out that these organizations operate on an assumption that does not always hold true:

that individual borrowers, and individual access to capital, is assumed to be a good realized by the entire community. But the reality in low-income areas is that all too often “doing well” means moving out, and therefore individual outcomes may, or may not, translate into community-level ones.

DeFilippis’ critique provokes important questions about CDCUs and their role in fostering community well-being. Should they lend only to businesses and people they believe will create local jobs, or pay living wages? Should so-called “gentrifiers” – however we define them – be allowed to take advantage of the credit union’s resources?

Credit union staff are aware of these issues. Levy of the Lower East Side People’s FCU says that when evaluating loan applications, she takes community impact into account, especially when assessing applications from more loosely connected members – people who don’t live in the Lower East Side or Harlem, but are affiliated with one of the credit union’s partner groups.

“We only encourage organizations and businesses to join that share the kind of goals that we have,” she says. “We don’t want to make a loan that is going to encourage gentrification.”

Samira Rajan, CEO of Brooklyn Cooperative FCU, says her credit union grants loans based on the merit of the application, not the content of the loan. “It isn’t for us to say – ‘Oh, they’re a gentrifier,'” she says. “I figured out a long time ago that it doesn’t make any sense for me to judge.”

Scott Short, housing director at the Ridgewood Bushwick Senior Citizens Council, suspects that making that kind of judgment might raise legal issues as well. Indeed, a financial institution could violate the Fair Housing Act if it refused to make a mortgage loan on account of someone’s race or nationality.

Even if you believe in the potential for market-based solutions to community development, CDCUs are still only a piece of the puzzle. “They are part of a larger ecosystem,” says Steve Dubb at the Democracy Collaborative, a research and advocacy organization dedicated to equitable, inclusive, and sustainable development.

Dubb says that you also need business training programs to help low-income entrepreneurs get to the stage where they can apply for a loan, as well as the support of loan funds – organizations that lend to projects in distressed communities, and, because they are not as strictly regulated, can take on ventures with greater risk than CDCUs.

Perhaps CDCUs by themselves have only a limited role in preventing gentrification. Yet one way these organizations can make sure they are investing in community good and helping low-income families is to fund and partner with other cooperatives, from worker-owned businesses to community land trusts. Recently, the New York City Real Estate Investment Cooperative, a new group that seeks to take land out of the private market for community use, banked over $3,000 at Brooklyn Cooperative FCU.

The city’s growing movement around community land trusts will likely provide new opportunities for CDCUs to move beyond the “neoliberal” purpose of giving individuals a path to success, to its ultimate goal of helping entire neighborhoods to thrive.

The Struggle to Grow

Though CDCUs may be limited in their ability to make systemic change, they remain a valuable resource for low-income communities – and one in demand across the city. Both Brooklyn Cooperative and the Lower East Side People’s FCU receive numerous requests from other organizations to open branches in new neighborhoods.

Unfortunately, CDCUs are expensive to run and challenging to start or expand. After nearly 15 years of operation, Brooklyn Cooperative FCU still depends on grants to cover its costs, though it hopes to be fully self-sustaining by 2017.

“It’s hard to really routinize transactions and then be more efficient in your lending when you’re working with individuals … when you’re sitting down with people,” says Professor DeFilippis.

New banking regulations also make life difficult for CDCUs. “It’s a challenging time for small credit unions to keep up with all the technological advances and all the compliance requirements,” says Ann Solomon, strategic initiatives manager at the National Federation of CDCUs. She adds that the Federation aims to help credit unions reduce costs by achieving “economies of scale,” by sharing operating systems and lending platforms between credit unions across the country.

But efficiency can only get these groups so far. Without increased financial support from the government, credit unions have struggled to scale up. While they have access to the Community Development Financial Institutions Fund, which gave out $150 million last year, the Fund tends to prioritize loan funds or credit unions with large loan portfolios, leaving other types of credit unions underfunded.

And the National Credit Union Administration, which regulates credit unions, has been mostly interested in promoting consolidation between credit unions. While the number of people who bank at credit unions is growing, the number of credit unions continues to decrease. And minority-owned credit unions have been hit particularly hard.

Five years after the launch of Rossy Caba’s business, her relationship with her credit union continues to be of value. Her bakery in the Lower East Side is bustling, and she’s aiming to add a juice or salad bar for health-conscious customers.

But she has her share of worries. Her rent has already climbed by more than 20 percent, and she’s holding her breath for the expiration of her multiyear lease, when her landlord may decide to further increase the rent.

Caba hopes she can count on the credit union for her bakery’s survival. “If I’m in another jam,” she says, “maybe the credit union will help again!”