Navy Federal contract with Department of Defense is live

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Navy Federal Credit Union in Vienna, Virginia, is making good on its contract to provide military bases in Europe and the Pacific with banking services by officially opening its Military Banking Facilities.

The $171 billion-asset credit union announced Tuesday that it began operating the MBFs, which include 60 locations and 272 ATMs across designated installations, this month as part of its September agreement with the Department of Defense. The locations will function under the brand "Community Bank, operated by Navy Federal Credit Union," and are considered wholly separate entities from Navy Federal itself.

"The Overseas Military Banking Program fits our core values at Navy Federal and is consistent with our primary mission of supporting active duty military members and their families," Kara Cardona, chief operating officer of Navy Federal, said in a press release Tuesday. "Serving these families through this important DoD program is directly aligned with our mission."

The program, which had been run by the $3.2 trillion-asset Bank of America for the last 40 years, was established by the DoD following the end of World War II to ensure that active duty members of the armed forces stationed abroad had access to necessary financial services like savings and checking accounts. 

The distinction of membership between those who hold accounts with Community Bank, and those with Navy Federal created a problem for the credit union as the question of share insurance came into focus.

Shortly after being awarded the contract, credit union executives entered into tense discussions with regulators at the National Credit Union Administration to establish necessary federal insurance for deposits held at the MBFs. But the NCUA held that accounts with Community Bank were not credit union accounts — and therefore not eligible for backing by the National Credit Union Share Insurance Fund as established by the Federal Credit Union Act, according to an NCUA spokesman.

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"Deposits made by customers of the Community Bank as part of the Overseas Military Banking Program are separate and apart from those deposited by members of Navy Federal Credit Union," the spokesman, Joe Adamoli, said in previous American Banker reporting. "Navy Federal would only be acting as a servicer for the DoD program, and the deposits from that program would not be those of Navy Federal's members."

Traditional checking and savings accounts held at MBFs, as well as certificates of deposits and interest-bearing checking accounts, are instead privately insured for up to $250,000 each by the Dublin, Ohio-based property and casualty insurance company Excess Share Insurance, a subsidiary of American Share Insurance. Regular Navy Federal accounts are insured by the NCUA for up to $250,000 per member.

David W. Kettlehake, vice president of sales and marketing for ASI and ESI, said that while pricing is confidential, the "expectations on capital and reserves are different from the requirements for the [Federal Deposit Insurance Corporation] or the NCUA."

Excess Share Insurance

Banking advocates with the Independent Community Bankers of America have decried the decision to hand over control of the MBFs to Navy Federal since last year, and have recently called for regulators with the NCUA and the FDIC to "issue cease-and-desist orders directing [Navy Federal] not to refer to itself as a bank," said ICBA President and Chief Executive Rebeca Romero Rainey.

"Although credit unions may like to present themselves as banks, federal agencies should ward off any attempts to conflate a bank with a credit union, which would likely result in confusion among servicemembers," Rainey said in a press release Tuesday.

Representatives with America's Credit Unions responded to the ICBA's statement by highlighting that the name was dictated by the DoD as part of the program contract and not Navy Federal itself.

"When the DoD sought another financial institution to operate its Community Bank program, no other banks answered the call — demonstrating again that they care more about profits than serving communities in need, including deployed service members," Carrie Hunt, chief advocacy officer of America's Credit Unions, said in a public statement.

In a rare occurrence, some credit union trade groups like the Defense Credit Union Council, which lobbies on behalf of Navy Federal and other institutions serving the military and veteran communities, sided with banking peers and also voiced concerns regarding the feasibility of the contract.

Anthony Hernandez, president and CEO of the DCUC, said in a written statement last October that the unique situation of offering a "'not-for-profit' credit union a contract to operate a large for-profit community bank" has created numerous legal challenges that require regulators to grant "unique exceptions and encouraging one-time interventions by other regulatory agencies to override or change the law.

"DCUC believes that healthy competition drives better rates and best-in class service for our military and veterans. … However, there are valid reasons for why the 'one bank/one credit union' policy was implemented, and why it has endured for decades," Hernandez said.

Navy Federal has continued to post significant growth over the last few quarters, but with ongoing executive shifts and allegations of racial bias in its mortgage lending practices, only time will tell what the next steps are.