Defense CU Council Raises Concerns, Legal Issues Related to Awarding of Contract to Navy Federal as Other Defense CUs Push Back (CUToday, October 16, 2023)

​WASHINGTON–On behalf of numerous defense credit unions, the Defense Credit Union Council (DCUC) is publicly voicing strong concerns over the awarding of a contract to Navy FCU to provide banking services on military bases, filling a void created when Bank of America chose not to bid on the contract.

​The organization is calling on others to join it in pushing back on the decision and noting that its disagreement isn't with Navy Federal, but with the Department of Defense's changes to long-standing rules and statues. 

The DCUC said the contract may not be viable and will require changes to the Federal Credit Union Act due to issues with deposit insurance, in addition to other legal concerns. The trade group is calling on other “industry leaders” to join it in its fight and not “sit on the sidelines,” creating a delicate balancing act for many given that the institution involved is not just a credit union but the largest credit union in the world by far.

While many in credit unions initially hailed the awarding of the contract to Navy Federal to replace a mega-bank, there was almost immediate pushback from military credit unions that have branches on many of the same bases where Navy FCU will be operating branches under the name “The Community Bank.”

Awarding of Contract
As CUToday.info reported here, in September, the Department of Defense selected Navy Federal Credit Union to provide banking services on U.S. military bases overseas, displacing Bank of America, which has held the contract for 40 years. 

Effective in April, 2024, Navy Federal is to  begin filling the contract to operate some 60 branches and 275 ATMs on bases in Europe and the Pacific for the next 10 years. 

Navy Federal, which is by far the world’s largest credit union with $165-billion in assets, has 13-million members and more than 350 branches.  The move by the DoD upsets the long-time “one bank/one credit union policy” on military bases.

$30 Million in Potential Profit
In a posting on the DCUC’s website, Hernandez said “industry insiders” have said the contract is a cost-plus, fixed-fee banking contract that is estimated to generate approximately $30 million dollars a year or more in residual profit.

In the Defense Credit Union Council’s (DCUC) official ALERT publication, DCUC President/CEO Anthony Hernandez said he has heard the “concerns” within the credit union industry and its counterparts following the awarding of the contract. The announcement of the change in the DoD’s Overseas Military Banking Contract will “not only impact credit unions serving military and veteran communities overseas but also have industry-wide implications,” Hernandez stated.

‘Difficult’ to Operate
He noted the DoD has yet to update the contractual terms, “making it difficult for banks to operate under the contract and comply with regulatory changes in the 21st century. Instead of attempting to work out these regulatory deficiencies, DoD solicited a unique bid from a ‘not-for-profit’ credit union. This is a ‘first’ both within our industry and since the program’s inception. In doing so, DoD failed to consult with industry experts to make sure that this ‘first’ didn’t come with unintended consequences.”

Hernandez said there are “several significant weaknesses and contract deficiencies” related to the award that the DoD has yet to address.

Prior to the official announcement, the Defense Council said it had identified many legal hurdles in the way of a credit union potentially fulfilling the contract. 

The Bottom Line
“Bottom line, in order to make this contract work, changes will have to be made to the Federal Credit Union statute to allow share insurance for non-member deposits as well as eliminate the DoD ‘one bank/one credit union’ policy,” Hernandez wrote. “Even if these unprecedented exceptions were given, they still may not be legally sufficient for the contract to be viable, and there would likely be ‘after-the-fact’ changes needed in order to cure the bid and accommodate the offeror.”

According to Hernandez, DCUC’s immediate concern is the lack of deposit insurance for military members serving overseas, saying they deserve such coverage no matter where they serve—"especially when forced to use the bank contract at one of the overseas locations where there is no U.S. credit union.”

‘Cannot Fight Alone’
When it comes to the changes, Hernandez said DCUC “cannot fight alone” and that “industry leaders can no longer afford to sit on the sidelines.”

“Losing regulations such as the long-standing one bank/one credit union policy would open up unbalanced competition against small and mid-sized credit unions by larger, non-local financial institutions that can afford to operate at a loss in order to make inroads into new communities,” Hernandez stated.
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Hernandez’s full comments can be found here.

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