A tiny credit union in the South Bronx is punching above its weight as an active small business lender.
Even as banks nationwide brace for a credit crunch. Here’s how.
The Bronx – New York City, New York- It’s not common for bank CEOs to walk around a neighborhood in the South Bronx, knocking on doors of local businesses to say hello and start getting to know them and their owners or employees. But what if it was?
That’s what Rachel Macarthy is looking forward to doing later this spring and over the summer. Born and raised in the South Bronx, with a business degree in finance from Howard University, she’s the CEO of New Covenant Dominion Credit Union. At 1185 Boston Road, the Black and Hispanic-serving credit union sits at a busy crossroads in the heart of the borough.
As a credit union, it’s not just any bank, but a financial cooperative owned and governed by its members.
With just $2.5 million in assets, New Covenant Dominion Credit Union is tiny, even by credit union standards. But it’s already punching far above its weight in one very important, very timely way: New Covenant Dominion Credit Union has recently become an active small business lender, unusual for a credit union of its size.
It’s made just a dozen small business loans over the past year or so, but those loans now account for about a third of its loan portfolio. On average, credit unions under $10 million in assets have less than 0.25% of their portfolio in small business loans.
By knocking on those doors and getting to know more business owners and employees in the neighborhood, the credit union hopes to continue growing its small business portfolio. It’s taken a lot of extra fundraising and other work to set up the credit union for this new phase of growth, but as I’ve previously covered, it’s been something this credit union has been working toward since long before the pandemic.
“We’ve always been a credit union that has wanted to get into small business,” Macarthy says. “Everything’s challenging because everything about small business lending is new to us, so everything is a learning experience. But it’s exciting.”
Meanwhile, much of the rest of the country is bracing for an anticipated credit crunch — a result of higher interest rates, deposits being pulled from large or regional banks in the aftermath of this year’s bank failures, a possible recession, and a possible unprecedented default on U.S. government debt. The percentage of bank loan officers tightening lending standards for small businesses is up to levels that, historically, often indicate a recession is either coming or is already here.
This Bronx credit union is one example of something that might be different about this potential recession or credit crunch, versus any that have come before.
New Covenant Dominion is one of hundreds of credit unions, community banks, loan funds and venture capital funds with federal certification as community development financial institutions, or CDFIs — meaning they have a primary mission of serving historically disinvested communities. And as part of federal pandemic response packages, hundreds of CDFIs including New Covenant Dominion have recently received a significant influx of growth capital.
The new influx is significantly larger than in the last economic downturn. The CDFI Fund, which certifies CDFIs and doles out subsidies to certified institutions, saw its budget appropriation jump from $109 million in 2009 to $247 million in 2010. Subsequently, during the Great Recession, CDFIs increased their small business lending as they were flooded with requests from small businesses in distress. A 2012 analysis funded by the U.S. Treasury found that CDFI-certified credit unions grew their loan portfolios by 47% from 2005 to 2010, compared with 29% growth for non-CDFI credit unions; meanwhile, CDFI loan funds grew their loan portfolios by 76%, and CDFI banks also grew faster than non-CDFI banks.
This time around? Not only has the CDFI Fund’s primary budget allocation continued to increase, up to $270 million in the FY2021 federal budget – but even more significantly, the post-COVID-19 response packages from Congress included more than $12 billion in growth capital for CDFIs. That includes the $9 billion Emergency Capital Investment Program (ECIP), the $1.75 billion Rapid Response Program (RRP), and the $1.75 billion Equitable Recovery Program (ERP). More than 700 CDFIs received funding through at least one of these three programs.
New Covenant Dominion Credit Union is one of 53 CDFIs that received funds from all three — 27 of which were CDFI-certified credit unions (loan funds were not eligible for ECIP).
On top of all that, there’s also the renewed $10 billion State Small Business Credit Initiative, which contains incentives for those dollars to flow through CDFIs. New Covenant Dominion Credit Union is also accessing New York State’s slice of SSBCI funding to support its nascent but quickly growing small business loan program.
Roughly speaking, based on the post COVID-19 CDFI support that New Covenant Dominion Credit Union has received so far, it could triple in size tomorrow — tripling its portfolio in personal loans, car loans and small business loans — and still be in compliance with the capital requirements that credit unions have from the National Credit Union Administration. That’s the independent federal agency that regulates credit unions and insures their deposits up to $250,000 per depositor, per credit union.
Of course, growth won’t happen that quickly. New Covenant Dominion has only two full-time and one part-time employee (plus a volunteer through its church sponsor), though Macarthy anticipates hiring staff to help with outreach and financial counseling over the next few months. Despite the promise of online lending or financial technology-driven lending, small business lending is still largely based on relationships and trust.
In the Federal Reserve System’s 2022 Small Business Credit Survey, among firms with employees, 81% reported being satisfied with their small bank lender, compared with 68% for large banks and 48% for online lenders. Small banks at least partially approved 82% of small business loan applications they received, compared with 71% for online lenders and 68% for large banks. The survey also found large disparities based on race and ethnicity — white small business owners saw 58% of their small business loan applications fully approved, compared with just 38% for Hispanic, 33% for Asian, and 20% for Black small business owners.
But small lenders aren’t equally accessible to all communities based on race. Just 122 of 4,258 community banks are designated as minority-depository institutions by the FDIC. Among the 4,737 active credit unions, just 503 are currently self-designated as minority-depository institutions, according to the NCUA — and more than 70% of them are under $50 million in assets, meaning they don’t collectively do very much in the way of small business lending.
New Covenant Dominion’s story shows it’s possible for smaller credit unions to get into small business lending, but only with a lot of extra fundraising and other work. New Covenant Dominion got its credit union charter back in 2007, after at least seven years of organizing efforts to get it by New Covenant Christian Ministries, the credit union’s faith-based sponsor. The church also runs a community development corporation and a school.
The work for New Covenant Dominion Credit Union to expand into small business lending really started in 2014.
Macarthy, who also attended the church’s school through high school, was just a board member at the time. That was the year that the credit union, on advice from consultants, expanded its “field of membership” — the potential pool of people who are eligible to become a member of the credit union. What started as an “associational” credit union, in which only members of New Covenant Christian Ministries could join the credit union, expanded into a “multiple common bond” credit union in which local organizations or businesses could join the credit union’s field of membership and therefore make the business owner or its employees eligible to join the credit union.
After securing a change in its field of membership status, New Covenant Dominion Credit Union started applying for grants or low-interest loans to start scaling it up. First came a grant from the NCUA itself, which offers grants and loans specifically for credit unions serving low-income communities, such as the South Bronx. New Covenant got one in 2016, then another in 2017 and again in 2018.
Those grants helped get the credit union resources to gain CDFI certification in 2017 and start applying for CDFI Fund grants, which is an onerous application process that takes months and often requires help from consultants or other outside groups. New Covenant Dominion Credit Union got its first grant from the CDFI Fund in 2020, and got another grant in 2022 — that’s in addition to the three COVID-19 recovery awards. New Covenant Dominion has also received assistance from Inclusiv, a trade association for credit unions with a community development mission. The trade association has provided some funding as well as assistance with applications to the CDFI Fund.
The grants that New Covenant Dominion has received have helped pay for new branding, and an expansion of the branch. It used to take up less than half the square footage it currently occupies in New Covenant’s headquarters, and it didn’t have separate branding from the church. Now it does, with a new bright gold and teal awning and its own tagline: “Banking to Believe in.”
Since the branch expansion and rebranding, Macarthy says they get a handful of new members every week just from walk-ins.
They’ve also invested in new back-end infrastructure, a big expense for every credit union, especially with the threat of cyber-criminal fraud. But even more importantly for New Covenant Dominion, the credit union established a relationship with CUBG, an organization that helps credit unions across the country to evaluate commercial loan applications. It’s a credit union service organization, meaning it’s an entity specifically established and owned by one or more credit unions in order to provide a specific service to the credit union industry.
The NCUA’s registry lists over 1,000 active credit union service organizations across the country, helping credit unions with everything from commercial lending and commercial real estate to home mortgage underwriting and other more sophisticated tasks that can be challenging for credit unions to handle because they might be very small or because their board members are all volunteers and may see value in having insight from an outside pair of eyes on a small business loan application.
CUBG doesn’t provide a final decision on any loans, Macarthy says, but it offers helpful guidance to her and the board, and makes a recommendation on approval or denial that the credit union doesn’t have to follow.
“It’s been helpful vetting small business loan applications,” Macarthy says. “But we anticipate some instances where there’s some deeper relationship, a long standing member where we see their deposit history and even though it might violate the standard policies that CUBG recommended for us, or it didn’t meet some guidelines, we know our customer and we believe that it’ll work out.”
Regardless of whether they follow CUBG’s recommendation, there is a fee associated with evaluating each small business loan application. Eventually Macarthy anticipates having a large enough loan portfolio that the interest income from those loans will cover the CUBG fees and staff salary time devoted to those loans; for now, those expenses are mostly coming out of the COVID-19 recovery awards that New Covenant Dominion has received.
One of the benefits of being a credit union is that, as members open up business deposit accounts at the credit union and those businesses begin to develop, growth in those deposit accounts help enable the credit union to expand its loan portfolio in other ways: car loans, personal loans for refinancing high-interest debt, and more. Already, about 40% of New Covenant Dominion’s deposits are from business deposit accounts.
New Covenant Dominion hasn’t seen a huge outflow of deposits, despite the turmoil in the banking industry from the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank. Overall, small banks — defined as those with less than $5 billion in assets — have not seen the same large deposit outflows as their larger counterparts, according to a recent analysis by researchers at the New York Fed.
Still, as much as the new influx of growth capital has paved the way for New Covenant Dominion to grow over the next few years, one institution by itself isn’t enough to completely counter the overall impact of a looming nationwide credit crunch or recession on the Bronx, a borough of 1.5 million people. Even if New Covenant Dominion tripled in size, it would still be less than $10 million in assets.
Three institutions probably isn’t enough either – Spring Bank and Ponce Bank, the only two community banks in the Bronx, also each received funding from all three post COVID-19 recovery programs for CDFIs. New Covenant Dominion is one of only four active credit unions based in Bronx. While there are other financial institutions based outside the Bronx that are doing business in the borough, the importance of locally-based financial institutions rooted in local social networks is, while difficult to quantify, also difficult to overstate.
Macarthy has been finding the credit union’s first small business borrowers through its existing members and other networks via word of mouth. One long standing credit union member came in one day last year looking for a personal loan. He’d paid off a previous loan, and had benefited from a program to skip a payment on that loan during the pandemic. But Macarthy also knew he had a DJ business, and in conversation with him about this new loan she found out that he was looking for funding to buy some new DJ equipment. He wasn’t aware that the credit union had recently established a new small business lending program, so she let him know if he applied for a small business loan instead of a personal loan, he could qualify for a larger amount based on his business plan and prior track record with the credit union.
“He didn’t even have an LLC yet,” Macarthy says. “But I knew what he does, so I helped him through that process to get him all of what he really needed for his business.”
The question of why so few financial institutions are based in the Bronx is a question for another story. For now, at least, Macarthy is hoping to have a big small business lending year in a neighborhood where her counterparts at large banks are almost certain to pull back hardest and fastest — not that they have been a huge lending presence to begin with.
“We’ve got another one pending right now, for a personal health products business,” Macarthy says. “She got a personal loan from us last year, that’s where we started her to build some history and now she’s moving up. Where people can see you, there’s power in trust.”
This article has been updated to clarify that the credit union is already accessing SSBCI funding, that the team includes one volunteer in addition to paid staff, and that the credit union used to take up less than half of its current square footage.