Petition — Household Finance Corp. v. United States

Supreme Court brief1980

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Supreme Court of the United States... R., SLER

OCTOBER TERM, 1979

* 79.705

HOUSEHOLD FINANCE CORPORATION,

HFC AMERICAN, INC., and

AMERICAN INVESTMENT COMPANY,

Petitioners,

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

GEORGE D. REYCRAFT

HAVEN C. ROOSEVELT

J. DAVID OFFICER

One Wall Street

New York, N.Y. 10005

Attorneys for Petitioners,

Household Finance

Corporation and HFC

American, Inc.

LEWIS R. MILLS

720 Olive Street

St. Louis, Missouri 63101

Attorney for Petitioner,

American Investment

Company

Of Counsel

CADWALADER, WICKERSHAM & TAFT

PEPER, MARTIN, JENSEN, MAICHEL & HETLAGE

THOMAS J. O'CONNELL

aes

TABLE OF CONTENTS

PAGE

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I. The Consumer Credit Market ................. 3

LE 7

Reasons for Granting the Wit ............ccccsccsssesesees 9

I. The Holding of the Court of Appeals

That Complete Overlap in the Identity of

Customers Is Required in Order to Deter-

mine That Two Competing Firms Are

Within the Same Line of Commerce Is

One of First Impression With Far-Reach-

ing Implications for Basie Antitrust

Analysis and Is in Conflict With Previ-

ous Holdings of This Court ................0. 9

A. The Holding of the Court of Appeals

Ignored the Basic Tests Set Forth by

This Court for the Delineation of a

Relevant Submarket ................c:00008 10

B. The Court of Appeals’ Delineation of

the Relevant Market Ignored the Ex-

istence of Substantial Competition 15

II. The Decision of the Court of Appeals

with Regard to the Relevant Product

Market in the Consumer Credit Industry

Is in Conflict with Well-Established

Supreme Court Decisions and Rulings of

Other Courts and Federal Agencies ...... 19

III. In Holding That the Consumer Credit

Market Is Segmented on the Basis of

Risk, the Court of Appeals Misconstrued

and in Many Instances Misread Portions

of the Record Upon Which It Based Its

Decision and Accordingly the Decision of

the Court of Appeals is Erroneous ........

ER i RAE a ORY OE NAS OR

RI cen cavspirighel Abit p ceeded eaccdte eet aCe ooo

Appendix B: Opinion of the Court of Appeals ...

Appendix C: Order of the Court of Appeals Deny-

ing Petition for Rehearing ..............

PAGE

ill

TABLE OF AUTHORITIES

PAGE

Cases

Brown Shoe Co. v. United States, 370 U.S. 294

FMD scskaknedisuscaetaserigiasapieechia ceousebanandeaassantemmaleted passim

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.

oe fg Speen enn SER MR Nr OAC se: PAO 9

International Telephone & Telegraph Corp. v. General

Telephone & Electronics Corp., 518 F.2d 913 (9th

Ree WMP IED cusctas;ssouchcekcuiapicencacncaciaunanenunobencemeaneie 17

Reynolds Metals Co. v. FTC, 309 F.2d 233 (D.C. Cir.

WIPED Saks ryhashaicecs senna nataale capusenalovene eens canons id cab ee 13

Sargent- Welch Scientific Co. v. Ventron Corp.,567 F.2d

701 (7th Cir. 1977), cert. denied, 439 U.S. 822

CES Sco cibencik eerie dass once tonnes Pema eileaasen ee 10

Seeburg Corp. v. FTC, 425 F.2d 124 (6th Cir.), cert.

ented, GIP WB. BOG (AGT) scvsssssecvsenssecsavacssieissnevcce 13

Standard Fashion Co. v. Magrane-Houston Co., 258

SE age Be 2 AMangeteMeeoy Mca den eo aR elear 17

Times-Picayune Publishing Co. v. United States, 345

Fate ME OW ID Gis ascesnacematavscss santincs Rnseelenaoeaiae sonore 14

United States v. Connecticut National Bank, 418 U:S.

WEE PE pica cs vaseiscoupecedaesi ts tactns roaperperandiceecomeriecs 15,16

United States v. Continental Can Co., 378 U.S. 441

SUNIL 5 5dsisavesiay asaceuudabsedtansendsacesismmeteacensbereconmede 17

United States v. E.I. du Pont de Nemours & Co., 351

BI Pe Ce SUD entinccsciuaiticniuaioiicominncuach aobendeten 10,12

United States v. General Dynamics Corp., 415 U.S. 486

URMIO UD: cccecisidlagiaciactiesnaitecdehmduitlatoensepaebasiasbaaaiae 18

United States v. Jos. Schlitz Brewing Co., 253 F. Supp.

129 (N.D. Cal.), affd per curiam, 385 U.S. 37

I ie iiedintinoce dita ue Aah ee 14

PAGE

"Ph 1868) ce

United States v. Philadelphia National Bank, 374 U:S.

SER CEDGR) cavcnsessiscesscceannomatonminncsea eee 15, 16, 18

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Statutes

15 U.S.C. § 18, Section 7, Clayton Act... passim

IN THE

Supreme Court of the United States

OCTOBER TERM, 1979

No.

HOUSEHOLD FINANCE CORPORATION,

HFC AMERICAN, INC., and

AMERICAN INVESTMENT COMPANY,

Petitioners,

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Petitioners pray that a writ of certiorari issue to review

‘the judgment of the United States Court of Appeals for the

Seventh Circuit.

OPINIONS BELOW

The opinions of the Court of Appeals (App. B, pp. 1b-

19b) and of the District Court (App. A, pp. la-l5a) are not

yet officially reported.

JURISDICTION

The decision of the Court of Appeals was rendered on

August 10, 1979. A timely petition for rehearing was

denied on September 13, 1979 (App. C, p. le). The jurisdic-

tion of this Court is invoked under 28 U.S.C. § 1254(1).

QUESTIONS PRESENTED

1. Whether, under Section 7 of the Clayton Act, com-

plete overlap in the identity of customers is required in

order to determine that two competing firms are within the

same line of commerce.

2. Whether the court of appeals, in reviewing a decision

of the district court pursuant to the recent amendments to

the Expediting Act made by the Antitrust Procedures and

Penalties Act of 1974, may set aside a judgment on the basis

of a de novo review of the record in camera without regard to

the trial court’s findings of fact, which are supported by

substantial evidence in accordance with Rule 52, Federal

Rules of Civil Procedure.

STATUTE INVOLVED

Section 7 of the Clayton Act, 38 Stat. 731, as amended, 64

Stat. 1125, 15 U.S.C. § 18, provides in pertinent part:

No corporation engaged in commerce shall

acquire, directly or indirectly, the whole or any part

of the stock or other share capital and no corporation

subject to the jurisdiction of the Federal Trade

Commission shall acquire the whole or any part of

the assets of another corporation engaged also in

commerce, where in any line of commerce in any

section of the country, the effect of such acquisition

may be substantially to lessen competition, or tend

to create a monopoly.

* * *

STATEMENT OF THE CASE

This action was initiated on January 9, 1979 by the filing

of a complaint wherein plaintiff contended that the acquisi-

tion of the stock of American Investment Company

(“AIC”) by Household Finance Corporation (“HFC”) vio-

lated Section 7 of the Clayton Act (15 U.S.C. § 18). The

complaint alleged that actual competition in the making of

direct cash loans by finance companies in various cities

within the United States might be substantially lessened

by the acquisition. Subject matter jurisdiction of the dis-

trict court was invoked under 15 U.S.C. § 25.

Pursuant to stipulation by the parties, the only issue

tried was “whether the business of making direct cash

loans by finance companies is a line of commerce within the

meaning of Section 7 of the Clayton Act....” After a trial

on the merits, the district court held that there was no

violation of Section 7. On appeal, the Court of Appeals for

the Seventh Circuit reversed.

I. The Consumer Credit Market

The consumer credit market has undergone a substantial

transformation during the past twenty years and espe-

cially since the late 1960’s. During this period, consumer

installment credit has increased tenfold and is presently

approaching $300 billion in outstandings.

Even more significant than the absolute growth in the

consumer credit market is the change in market shares held

by various types of institutions serving that market. The

consumer credit market is served by commercial banks,

finance companies, credit unions, thrift institutions and

retailers. In the late 1950’s and early 1960’s, it may have

been true that finance companies and retailers served a

segment of the consumer loan market which commercial

banks, credit unions and thrift institutions did not serve.

However, with the rapid growth in the consumer credit

market and the increasing attractiveness of that market,

significant changes have taken place. Table I shows the

change in the shares of the consumer installment credit

market held by various participants in that market during

the past decade.

TABLE I

CONSUMER INSTALLMENT CREDIT BY HOLDER

(in millions of dollars)

1967 b} Oct._1978 &

Commercial Banks $33,152 41.7% $132,457 49.99%

Finance Companies 24,576 30.9% 51,984 19.6%

Credit Unions _ ..... 9,003 11.3% 44,635 16.8%

ee 11,484 14.5% 22,464 8.5%

CPU ics ccstineievaces 1,213 15% 14,036 9.2%

$79,428 $265,576

—— Savings and Loan Associations and Mutual Savings

anks.

Table II converts the same data into 1967 dollars.

TABLE II

CONSUMER INSTALLMENT CREDIT IN 1967

DO!.LARS BY HOLDER

(in millions of dollars)

1967 Oct. 1978 1967-0et 1978

Commercial Banks ............ $33,152 $ 66,229 + 99.8%

Finance Companies ........... 24,576 25,992 + 58%

Credit Unions wo... 9,003 22,318 + 147.9%,

Retailers .......ccccccccsesseceee, - 11,484 11,232 — 2.9%

CPEROPR 5... oscsracscrsnssvesnanesangs 1,213 7,018 + 478.6%

WOME: sninlisinsninns $79,428 $132,788 + 67.2%

* Includes Savings and Loan Associations and Mutual Savings Banks.

Since 1967 the share of the consumer credit market held

by finance companies increased in real dollars by only

3.8%. On the other hand, the share of the market in real

dollars held by commercial banks increased by 99.8%, that

of credit unions increased by 147.9% and that of the

“other” category, which includes savings and loan associa-

tions and mutual savings banks, increased by 478.6%.

The decrease in the market share of finance companies

has been due directly to the increased competition from

commercial banks, credit unions and thrift institutions.

The primary reason for such significant changes in the

consumer credit market is that commercial banks, credit

unions and thrift institutions have embarked on aggressive

programs of market penetration. These institutions have

succeeded in competing in and have captured a significant

portion of the consumer credit market previously served by

finance companies. They have accomplished this by hir-

ing former finance company personnel as loan officers and

using methods previously identified solely with finance

companies, such as consumer credit advertising and active

solicitation of consumer credit customers.

The most innovative vehicle introduced into the con-

sumer credit market during the past decade has been

revolving credit, particularly bank credit cards. Table III

compares bank revolving credit in gross dollars with per-

sonal loans made by commercial banks and finance compa-

nies in 1970 and 1978.

TABLE III

COMPARISON OF BANK REVOLVING CREDIT WITH

PERSONAL LOANS (excluding automobile, mobile

homes and home improvement financing) BY COMMER.

CIAL BANKS AND FINANCE COMPANIES

(In Millions of Dollars)

Jan. 1970 Oct. 1979

Eee $14,766 $40,966

Commercial Bank

Unsecured Credit

Finance Companies

Unsecured Credit

Bank Revolving

Unsecured Credit

a 18,148 29,820

taunting 3,907 22,165

Table IV presents the same data in 1967 dollars.

TABLE IV

COMPARISON OF BANK REVOLVING CREDIT WITH

PERSONAL LOANS IN 1967 DOLLARS (excluding auto-

mobile, mobile home and home improvement financing )

BY COMMERCIAL BANKS’ AND FINANCE

COMPANIES

(In Millions of Dollars)

% Change

Jan. 1970 1978 Jan. 1970-Oct. 1978

Commercial Bank $12,994 $20,483 + 57.6%

Unsecured Credit

Finance Compa-

RO ie 15,970 14,910 — 66%

Unsecured Credit

Bank Revolving ... 3,438 11,083 + 222.4%

Unsecured Credit

While personal loans made by commercial banks

increased by 57.6% in real dollars from 1970 to 1978, the

total outstandings in bank revolving credit increased by

222.4% in real dollars. In contrast, finance companies’

personal loans during this period actually decreased in real

dollars by 6.6%.

II. Proceedings Below

The complaint was filed on January 9, 1979. The trial

was held from February 5, 1979 through February 26, 1979.

The district court issued its opinion, dismissing the com-

plaint, on March 23, 1979.

In the district court, plaintiff argued that direct cash

loans made by finance companies to consumers constitute a

unique product market on the grounds that finance compa-

nies are the only type of financial institution that deals

primarily in the granting of such loans, that the character-

istics of direct cash loans granted by finance companies are

different from those granted by other types of financial

institutions and that finance companies serve a significant

number of higher risk customers who are not served by

other types of financial institutions.

The district court rejected plaintiff’s contentions. The

district court acknowledged that the position taken by the

government was “a correct statement and description of

conditions existing in the consumer finance industry in

1960.” (App. A, p. 3a). However, the district court recog-

nized that the marked changes that have taken place in the

consumer credit industry during the past twenty years

compel the reassessment of the view that finance companies

serve a distinct submarket. The court analyzed the market

in general and concluded that the significant decrease in

finance companies’ share of the market was a direct result

of aggressive competition from other types of financial

institutions, particularly commercial banks.

In reaching its conclusion, the district court took particu-

lar notice of the tremendous market impact of commercial

banks’ revolving credit. From 1970 through 1978, bank

revolving credit increased by over 222% and now totals

over $22 billion, in comparison to the $29.8 billion in out-

standing personal loans held by finance companies. The

court also noted that credit unions had expanded their

portion of the market significantly and that over one-half

of the adult population of the United States is now eligible

to be a member of a credit union.

The district court also analyzed the types and character-

istics of loans issued by various types of financial institu-

tions and concluded that there were no significant

differences in any of these factors with regard to the com-

peting types of financial institutions.

Finally, the district court addressed the government’s

contention that the consumer credit market was segmented

on the basis of risk and that finance compauies serve higher

risk customers who are not served by other financial insti-

tutions. The court analyzed studies of various credit scor-

ing systems of competing institutions, studies of the credit

outstandings of various finance company customers and

Statistical studies that attempted to determine whether the

consumer credit market was, in fact, segmented on the basis

of risk. The court concluded that “there is no significant

market segmentation on the basis of risk with regard to the

making of loans by various types of financial institutions.”

(App. A, p. lla).

On appeal, the Court of Appeals for the Seventh Circuit

reversed. The court of appeals did not dispute any of the

district court’s findings with regard to the structure of the

consumer credit market and the changes that have taken

place in that market nor did the court dispute the findings

with regard to the relative fungibility of the credit pack-

ages offered by the various types of financial institutions.

Rather, the court of appeals based its reversal on the fact

“that the district court erred as a matter of law in concluding

that no significant market segmentation exists.” (App. B,

p. 10b) (emphasis added) The court of appeals concluded

“that the record below supports the proposition that finance

companies offer unique products and services to a class of

higher-risk customers than are served by other financial

institutions.” (App. B,p.19b) The court of appeals found

from its de novo analysis of the record that such high risk

customers constitute anywhere from 15% to 50% of finance

company clientele. The court went further and stated that

“even if these customers constituted a far lesser percent of

the finance company clientele, we would still find that

group significant.” (App. B, p. 19b)

REASONS FOR GRANTING THE WRIT

The Holding of the Court of Appeals That Complete Overlap in the

Identity of Customers Is Required in Order To Determine That Two

Competing Firms Are Within the Same Line of Commerce Is One of

First Impression With Far-Reaching Implications for Basic Anti-

trust Analysis and Is in Conflict With Previous Holdings of This

Court

A major goal of the antitrust laws is to nurture, protect

and regulate competition and competitive behavior. The

aim is to protect competition, not competitors. Brunswick

Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977);

Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962). In

interpreting Section 7, this Court has set down various

criteria for evaluating the competitive effects of any acqui-

sition. These include standards for delineating a line of

commerce and the requirement that competition be recog-

nized where, in fact, competition exists. The holding of the

Court of Appeals for the Seventh Circuit sets forth a unique

rule of law to the effect that a relevant product market

within the meaning of Section 7 can be defined solely on the

basis of a distinct customer submarket. The Court o

Appeals went further and held that the absence of 100

percent competitive overlap between two firms precludes a

finding that the firms operate in the same line of commerce

within the meaning of Section 7. Such a holding ignores

not only the economic realities of any industry, but rejects

the standards enunciated by this Court for the delineation

of a line of commerce.

A. The Holding of the Court of Appeals Ignored the Basic

Tests Set Forth by This Court for the Delineation of a

Relevant Submarket.

The basic test tur determining the relevant product mar-

ket in antitrust analysis was put forth in United States v.

E.I. du Pont de Nemours & Co., 351 U.S. 377, 395 (1956):

In considering what is the relevant market for

determining the control of price and competition, no

more definite rule can be declared than that com-

modities reasonably interchangeable by consumers

for the same purposes make up that “part of the

trade or commerce.”

The duPont “reasonably interchangeable” test was

expanded upon in Brown Shoe Co. v. United States, 370 U.S.

294 (1962), wherein this Court listed various “indicia” that

should be used to delineate a proper market or submarket as

a line of commerce. These include “industry ‘or public

recognition of the submarket as a separate economic entity,

the product’s peculiar characteristics and uses, unique pro-

duction facilities, distinct customers, distinct prices, sensi-

tivity to price changes, and specialized vendors.” 370 US.

at 325.

Several lower courts, including the Court of Appeals for

the Seventh Circuit, have held that the most important of

the Brown Shoe indicia is the “uniqueness of the product’s

functions and therefore its uses.” Sargent- Welch Scientific

Co. v. Ventron Corp., 567 F.2d 701, 710 (7th Cir. 1977), cert.

denied, 439 U.S. 822 (1978). The court of appeals in this

case only paid lipservice to applying the “unique product or

service” standard in reexamining the record. (App. B, pp.

6b-7b) The court’s opinion clearly shows that it basically

ignored any analysis of the uniqueness of the product or

any of the other Brown Shoe indicia, preferring to focus

solely on distinct customers. In so doing, the court of

appeals has developed a novel mode of market analysis that

is at complete variance with the previous holdings of this

Court.

To reach its result the court of appeals had to ignore the

Brown Shoe indicia because consumer credit is basically

fungible and it makes little difference by whom it is

granted. The district court found and the record below

supports the proposition that there is little difference in the

characteristics of the loans made by various types of insti-

tutions including the size and maturity of loans, the pur-

poses for which they are extended and the delinquency

rates and charge-off rates of the various types of institu-

tions granting such loans.’ There is some difference

between the interest rates charged by finance companies

and that charged by banks, but the difference in such rates

has been declining and is virtually non-existent when one

considers the rate charged by credit cards, which is approx-

imately 17-18%.”

1. In 1977, the average size personal loan made by finance companies

was $1,393 while the average size unsecured personal loan made by

commercial banks and credit unions was $1,480 and $1,898, respectively.

The average maturity for finance company loans in 1977 was 42.9

months while the most common maturity for large banks was 36 months.

33.7 percent of credit union loans carried maturities longer than 36

months and an additional 41.3% had maturities of 25-36 months.

In 1977, the 60-day delinquency rate for finance company loans out-

standing was 3.2%. In 1978, the average delinquency rate for personal

loans at commercial banks was 3.2%. In 1977, 3.6% of the number and

2.2% of the amount of outstanding loans in federal credit unions were 60

days or more delinquent.

In 1977, the nationwide charge-off rate for finance companies ranged

between 1.75% and 2.04%. In the same year, the average installment

credit dollar losses for commercial banks for personal unsecured loans was

1.45% gross and .94% net. This last figure for commercial banks does not

include the losses on bank credit card loans, which are expected to total

1.8 to 2.4%.

2. Furthermore, a banker testified at trial that a recent survey of

installment loan customers showed that 70% were more interested in the

monthly payment than the interest rate. It was shown at trial that

finance companies often accommodate their customers by extending the

period of a loan by a month or two in order to reduce the monthly

Ignoring the fungibility of consumer loans granted by

different types of financial institutions and the other Brown

Shoe indicia, the court of appeals focused solely on distinct

customers. By reexamining the record, the court of

appeals concluded that anywhere between 15 and 50 per-

cent of finance company customers would not be served by

competing types of financial institutions. The court went

further and held that even if the percentage of such cus-

tomers were much smaller than 15%, that would be suffi-

cient for a delineation of a submarket within the meaning

of Section 7. The record simply fails to support the proposi-

tion that any significant number of finance company cus-

tomers (and certainly not any number approaching 50% )

cannot obtain credit from other financial sources. (See

Point III infra). Further, the court of appeals’ analysis of

the relevant market is the first of its kind and totally at

variance with all precedent.

The court of appeals purported to address the “unique

Service standard” (App. B, pp. 8b-10b). However, in so

doing, the court engaged in an olympian leap of logic that

has no support in any decided case. Because the court of

appeals believed that market segmentation exists, it held

that unique products or services must also exist. Thus, if

15% to 50% of finance company customers are not served

by banks, a unique product or service must exist. This type

of logic makes a mockery of this Court’s reasoned analyses

of relevant markets since du Pont and Brown Shoe.

Since this Court enunciated in Brown Shoe the various

indicia to be used to delineate a relevant submarket, no

court has ever found such a submarket based solely on the

identification of a certain percentage of distinct customers.

And in the few cases where distinct customers were of

payments. An example was given of a 24 month loan of $1,000 with the

assumption of two interest rates -- one at 8% and the other at 16%. The

monthly payment for each such rate would be $45 and $47.50. However,

if the lender charging 16% extended the Maturity period to 26 months as

opposed to 24, the difference in monthly payments would be approxi-

mately 50 cents.

significance, the distinct customers constituted virtually

100% of the customer market. See, e.g., Reynolds Metals Co.

v. FTC, 309 F.2d 223, 228-29 (D.C. Cir. 1962) (“With insig-

nificant exception, the sole purchasers of florist foil are the

nation’s 700 wholesale florist outlets ....”); U.S. v. Pennzoil

Co., 252 F. Supp. 962, 975 (W.D. Pa. 1965) (“The indepen-

dent producers of Penn Grade crude can sell their crude

only to the six Penn Grade crude refiners’’); see also Seeburg

Corp. v. FTC, 425 F.2d 124, 128-29 (6th Cir. ), cert. denied, 400

U.S. 866 (1970). (The court rejected a submarket that

could be delineated only on the basis of distinet customers. )

There is simply no precedent for the court of appeals’

holding.

The weakness of the court of appeals’ submarket is best

demonstrated by asking the question: whe is in that sub-

market? Is it made up of low income or blue collar work-

ers, as the court of appeals intimated, despite the fact that

such individuals may be excellent credit risks? The evi-

dence at trial established that banks serve three times as

many blue collar workers and more than two times as many

low income consumers than do finance companies. If the

market is not to be delineated on the basis of income or

profession, should it be identified by comparing debt out-

standing to the income or assets of the borrower? If so,

what should be the appropriate cut off points for such

delineation? There is simply nothing in the court of

appeals’ opinion or in the record that could assist in any-

way in identifying the consumers in the court of appeals

submarket.’ In this regard the court’s submarket is mythi-

eal and arbitrary.

3. A study was introduced into evidence that compared the credit

scoring systems of HFC and two commercial banks. That study showed

that HFC accepted 40% of its recent applicants, whereas the two banks

would have accepted 56% and 35% of the HFC applicants. The court of

appeals misconstrued this study, assuming that the banks would have

accepted 56% and 35% of accepted HFC applicants rather than of all

applicants. The court assumed that 65% and 44% of accepted HFC

Relevant to this point is the analysis of the court in U.S.

v. Jos. Schlitz Brewing Co., 253 F.Supp. 129 (N.D. Cal.), aff'd

per curiam, 385 U.S. 37 (1966), wherein the court rejected

the delineation of submarkets on the basis of price differen-

tials between premium and non-premium beer. The court

held:

The trial court has found that in California, beer

prices range over a wide spectrum from $.79 to $1.44

a six-pack. There is no rational way of choosing a

point along this price spectrum and saying that all

beer which sells above that point constitutes a line of

commerce, or even a sub-market, apart from all beer

which sells below that point. 253 F.Supp. at 145.

Similarly, there is no rational basis for choosing a point

that sets apart high risk from low risk borrowers.

The delineation of a relevant market “cannot be mea-

sured by metes and bounds.” Times-Picayune Publishing Co.

v. United States, 345 U.S. 594, 611-12 (1953). The court of

appeals’ delineation of a submarket on the basis of its myth-

ical high risk consumers is totally at variance with the

economic realities of the consumer credit industry. Peti-

tioners respectfully submit that the holding of the court of

appeals deals more with “ephemeral possibilities,’ which

the Clayton Act was not designed to address, as opposed to

the recognition of competition where, in fact, competition

exists. Brown Shoe Co. v. United States, 370 U.S. 294, 323, 325

(1962).

applicants could not get loans from banks. Contrary to the court’s mis-

taken conclusion, the study provides streng evidence that such a sub-

market does not exist.

4. In Brown Shoe Co. v. United States, 370 U.S. 294, 325-26 (1962),

this Court refused to delineate separate submarkets for medium price and

low price shoes on the same theory.

B. The Court of Appeals’ Delineation of the Relevant Mar-

ket Ignored the Existence of Substantial Competition

In failing to recognize competition where it clearly

exists, the court of appeals erred as a matter of law. The

district court found and the record below supports the pro-

position that the truly Jow risk consumers are almost exclu-

sively served by banks and that the truly high risk

consumers are not really served by any type of financial

institution.’ It is the moderate risk customer that is served

by both banks and finance companies. Similarly the record

below clearly shows that both banks and finance companies

design, market and price their consumer lending packages

for the same type of customer — the moderate risk con-

sumer. These are the customers for whom all types of

institutions in the market compete.

Nevertheless, even if one were to accept the finding of

the court of appeals that 15% to 50% of finance company

customers are not served by banks, it must be recognized

that finance companies and other types of financial institu-

tions are engaged in direct substantial competition for 85%

to 50% of all borrowers. The court of appeals simply

ignored this competition, citing United States v. Connecticut

National Bank, 418 U.S. 656 (1974); United States v. Phil-

lipsburg National Bank, 399 U.S. 350 (1970); and United

States v. Philadelphia National Bank, 374 U.S. 321 (1963), in

Support of its submarket definition. But the court of

appeals delineation of a product market turns these deci-

sions on their head.

In Connecticut National Bank, this Court held that the

relevant product market in the merger of two commercial

banks was that “cluster of products and services” offered

solely by commercial banks. In reversing the district

5. There was evidence in the record that showed high risk consumers

most frequently obtain credit, when they are able to do so, from retailers

who not only charge a relatively high rate of interest, but are also able to

obtain a higher profit by marking up the sale prices of the goods and

services sold.

court, which had included savings banks within the mar-

ket, this Court stated that “the District Court overesti-

mated the degree of competitive overlap that in fact exists

between savings banks and commercial banks.” 418 U.S.

at 663. In so ruling, the Court placed emphasis on the fact

that commercial banks in Connecticut had $1.03 billion

dollars outstanding in commercial loans compared to only

$26 million dollars in savings banks. However, the Court

also stated:

We do not say, and Phillipsburg National Bank,

supra, and Philadelphia National Bank, supra, do not

Say, that in a case involving a merger of commercial

banks a court may never consider savings banks and

commercial banks as operating in the same line of

commerce, no matter how similar their services and

economic behavior. At some stage in the develop-

ment of savings banks it will be unrealistic to distin-

guish them from commercial banks for purposes of

the Clayton Act. In Connecticut, that point may

well be reached when and if savings banks become

significant participants in the marketing of bank services

to commercial enterprises. 418 U.S. at 666 (emphasis

added), |

Using the analysis of the court of appeals, if savings

banks in Connecticut were authorized to and did in fact

market commercial services and the record showed that

Savings and commercial banks shared 85% to D0% of the

commercial customers in that market, savings banks would

still have to be excluded from consideration when defining

the line of commerce. The court of appeals would exclude

Savings banks despite the fact that they had become “sig-

nificant participants” in the commercial market. Such an

interpretation, as well as the holding in this case, is con-

trary to Connecticut National Bank and all other precedent of

this Court. Connecticut National Bank cannot be read to

mean that savings and commercial banks can never be

considered to be in the same line of commerce even where

savings banks become participants in the marketing of

bank services to commercial enterprises to the extent that

both types of institutions share 85% to 50% of the commer-

cial customers.

In United States. v. Continental Can Co., 378 U.S. 441

(1964), this Court held that glass and metal containers

constituted a single line of commerce even though there

was not complete competitive overlap. The Court stated:

There may be some end uses for which glass and

metal do not and could not compete, but complete

interindustry competitive overlap need not be

shown. We would not be true to the purpose of the

Clayton Act’s line of commerce concept as a frame-

work within which to measure the effect of mergers

on competition were we to hold that the existence of

noncompetitive segments within a proposed market

area precludes its being treated as a line of com-

merce. 378 U.S. at 457.

Before a court can carve out a submarket, it must show

that the proposed submarket is “economically significant”

in terms of competition. International Telephone & Tele-

graph Corp. v. General Telephone & Electronics Corp., 518 F.2d

913, 932 (9th Cir. 1975). The antitrust laws were “not

intended to reach every remote lessening of competition....”

Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346,

357 (1922). Unfortunately the court of appeals ignored

these teachings.

In analyzing the effects of the merger, the court of

appeals simply failed to analyze or to give any credence to

the effect of the active competition between finance compa-

nies and other types of financial institutions. Rather, the

court focused on one economically insignificant class of

customers, indistinguishable by concrete criteria, that it

theorized are uniquely served by finance companies and

concluded that the merger violated Section 7. Such conclu-

sion ignores the realities of the market. Indeed that court

focused on competition where it does not exist.

In United States v. Philadelphia National Bank, 374 U.S.

321, 361 (1963), this Court was faced with the similar

question of drawing a relevant market (in that case, a

geographic market) so as to take into effect the varying

financial resources of customers of banks. In that case, this

Court stated:

But that in banking the relevant geographical mar-

ket is a function of each separate customer’s eco-

nomic scale means simply that a workable

compromise must be found: some fair intermediate

delineation which avoids the _ indefenseable

extremes of drawing the market either so expan-

Sively as to make the effect of the merger on com peti-

tion seem insignificant, because only the very

largest bank customers are taken into account in

defining the market, or so narrowly as to place

appellees in different markets, because only the

smallest customers are considered.

In drawing the appropriate product market in this case,

the court of appeals ignored the economic realities of that

market and, instead, preferred to draw a market based

totally on a class of customers at the extreme end of the

economic spectrum. In so doing, it has ignored the sub-

Stantial competition existing among the participants in

that market, which is reflected by the fact that the finance

company share of the consumer credit market in constant

dollars has increased over the past decade by only 5.8%

whereas that of commercial banks has increased by 99.8%

and that of credit unions by 147.9%. Such fundamental

changes in the market place simply cannot be dismissed as

irrelevant. United States v. General Dynamics Corp., 415 U.S.

486, 501 (1974).

II.

The Decision of the Court of Appeals With Regard to the Relevant

Product Market in the Consumer Credit Industry Is in Conflict with

Well Established Supreme Court Decisions and Rulings of Other

Courts and Federal Agencies.

The court of appeals has held that the competition

between finance companies and commercial banks in the

granting of consumer credit is not sufficiently significant to

hold that finance companies and commercial banks actu-

ally compete in the same market. This holding is in con-

flict with the repeated rulings of the Federal Reserve

Board, which is charged with evaluating the competitive

effects of acquisitions by bank holding companies and other

types of financial institutions. Since 1973, the Federal

Reserve Board has held that the relevant product market to

consider in the acquisition of a finance company by a bank

holding company is the making of consumer cash loans and

commercial banks are in direct competition with finance

companies in this market.®

The interest of the Federal Reserve Board in the con-

sumer credit market during the past decade is the result of

the significant expansion of the consumer lending activities

of commercial banks in every aspect of that overall market.

In addition to the phenomenal growth of the commercial

bank share of that market due to credit cards, which was

discussed supra, commercial banks have also expanded

their share of the consumer credit market through the

direct acquisition of finance company subsidiaries. As of

year-end 1977, 34 of the 100 largest non-captive finance

companies in the United States had become subsidiaries of

commercial banks.

Dr. Gregory Boczar, an economist with the Federal

Reserve System,’ testified at trial that among the factors

6. HX-181 is a compilation of 37 Federal Reserve opinions issued since

1973 wherein the Board took this position.

7. Dr. Gregory Boczar was incorrectly identified by the court of

appeals as a defense expert. Actually, Dr. Boczar is presently serving as

the Federal Reserve Board considered prior to its issuance

of rulings with regard to the existence of competition

between commercial banks and finance companies in the

consumer credit market was whether there was market

segmentation based on the risk characteristics of consum-

ers. Boczar himself conducted a multi-variate analysis of

the risk characteristics of finance company customers.®

Boczar concluded that market risk segmentation did not

appear to be an effective impediment to competition and

that both commercial banks and finance companies were

Serving the intermediate and low risk Segment of the con-

Sumer credit market with neither of these institutions actu-

ally serving the high risk Segment of the market.

The Department of Justice, in evaluating the effects of

an acquisition between a commercial bank and a finance

company, also has taken the position that finance compa-

nies and commerical banks compete in the granting of con-

sumer credit. In a letter to the Federal Reserve Board,

Assistant Attorney General Thomas E. Kauper has stated:

Clearly the structure of the retail finance industries

will be changed by such combinations and, as a

consequence, long term competition between banks

and finance companies will be reduced, while non-

affiliated finance companies may have increased dif-

ficulty in attracting funds in times of credit

shortage.

Today, banks and finance companies compete in

Supplying retail credit needs for consumers; this is

present in various forms of consumer loans and

credit card transactions. In the long run, with the

Project Manager, Division of Bank Supervision and Regulation, Federal

Reserve Board, and has previously served as Special Assistant to Federal

Reserve Governor Henry C. Wallich, and has worked extensively in the

area of bank structure competition. Dr. Boczar testified before the dis-

trict court pursuant to a subpoena issued by the court and received only

Statutory witness fees.

8. Boczar’s study entitled “Competition between Banks and Finance

Companies: A Cross Section Study of Personal Loan Debtors” was pub-

lished in the Journal of Finance in March, 1978 and introduced.as HX-

200.

emerging electronic technology, banks and finance

companies are likely to become competitors for con-

sumer services on an even broader scale. (HX 223;

see also HX 224; HX 225; HX 264; HX 299)

The Federal Reserve Board’s finding that commercial

banks are in direct competition with finance companies in

the making of consumer cash loans was made in the context

of evaluating acquisitions of finance companies by bank

holding companies. However, the finding by the govern-

mental agency responsible for the evaluation of the compet-

itive effects of mergers among various types of financial

institutions and its view of the competitive environment

must be respected. The considered judgment of the Fed-

eral Reserve Board has evolved over the years. In 1973 the

Board ruled that finance companies do compete with com-

mercial banks in the market of “(1) personal loans_of

$1,400 or less, and (2) all direct consumer installment

loans, the latter including personal loans and automobile,

mobile home, and home improvement loans”, Bankers Trust

New York Corporation, 59 Federal Reserve Bulletin 694, 695

(1973), and the Board has repeatedly taken that position.

See e.g., F & M National Corporation, 65 Federal Reserve

Bulletin 165, 166 (1979).

As noted above, the court of appeals decision is one of

first impression. However, the decision does reject the

analysis and legal reasoning of many decisions of the other

courts of appeals as well as of this Court. Moreover, in

view of the fact that the Federal Reserve Board’s rulings

on the same issue presented by this case are directly oppo-

site the holding of the Court of Appeals for the Seventh

Circuit, petitioners respectfully submit that the issue is

ripe for consideration by this Court.

Il.

In Holding That the Consumer Credit Market Is Segmented on the

Basis of Risk, the Court of Appeals Misconstrued and in Many

Instances Misread Portions of the Record Upon Which It Based Its

Decision and Accordingly the Decision of the Court of Appeals Is

Erroneous

Petitioners recognize that it is not the function of an

appellate court to reverse findings of fact of the lower court

unless they are clearly erroneous within the meaning of

Rule 52(a), Fed. R. Civ. P. However, this is the first case

to reach this Court wherein a court of appeals reversed a

district court’s findings in a government Section 7 merger

since the Expediting Act (15 U.S.C. § 29) was amended so

as to permit court of appeals review of such cases. This

Court has not heard a merger case on the merits since these

amendments. In the past five years, the courts of appeals

have assumed a central role in Section 7 enforcement and,

in certain instances, the decisions of these courts have been

contradictory both as to the ultimate judgments rendered

as well as the methods of analysis employed. Such hold-

ings have resulted in a widespread inability to predict the

legality of a proposed merger at a time during which

merger activity has increased dramatically.

The purpose of the 1974 amendments was to provide “for

real appellate review,” H.R. Rep. No. 93-1463, 93d Cong., 2d

Sess. 8 (1974). Petitioners respectfully submit that this

case is still in need of “real” appellate review because the

court of appeals, in its review of the record, not only mis-

construed, but actually misread the bulk of the evidence

upon which it based its reversal of the district court and

ignored substantial evidence that amply supported the dis-

trict court’s dismissal of the complaint. Petitioners also

Submit that the instant case presents a ripe opportunity for

this Court to provide necessary guidance not only to the

courts of appeals but also to the antitrust bar in general.

At the trial before the district court, HFC called 21 wit-

nesses and introduced 28 affidavits and literally thousands

of pages of exhibits. Plaintiff called 12 witnesses and

introduced 9 affidavits and even more voluminous exhibits

than those introduced by HFC. The evidence was intro-

duced over 13 trial days. The district court issued its

opinion, which included among its findings of fact: -

Although it may have been true in the past, Statis-

tics today demonstrate that there is no Significant

market segmentation on the basis of risk with

regard to the making of loans by various types of

financial institutions. Studies of theredit scoring

systems of the various competing institutions reveal

a broad and significant overlap in the credit scoring

systems used by various competing institutions.

Finance companies, banks, and credit unions all use

substantially the same criteria in making credit deci

sions, and finance companies in the main do not

have a higher or lower credit standard than other

types of financial institutions. Neither do finance

companies lend to any significant percentage of

their customers who would be ineligible to borrow

from other types of institutions. An analysis of the

several studies available in the field reveals that

significant percentages of finance company borrow-

ers are eligible for or actually have nonmortgage

loans, that the majority of customers of consumer

finance companies have bank credit cards. (App.

A, pp. lla-12a)

The court of appeals initially proceeded to examine de

novo some of the evidence relied upon by the district court

for its findings of fact with regard to market segmentation

and attempted to discredit all of that evidence. The court

of appeals then itemized certain pieces of evidence that

purportedly show significant market segmentation. In

each instance, the court of appeals arrived at a somewhat

perverted interpretation of the evidence and in many

instances miscontrued it. The following. paragraphs

briefly summarize the lack of foundation for the interpreta-

tion of the evidence relied on by the court of appeals.

According to the court of appeals, the district court relied

upon the following sources of evidence to support its conclu-

sion that market segmentation is not significant: two multi-

variate analyses of risk characteristics of finance company

customers; credit scoring systems of various types of

financial institutions; opinion testimony by bankers and

finance company officers; and studies that showed finance

company customers with various other types of bank credit.

First, the court of appeals totally misconstrued the pur-

pose and results of two multi-variate analyses of the risk

characteristics of bank and finance company customers.

Both authors of the studies, Dr. Gregory Boczar and Dr.

Neil Murphy testified at trial. Each explained that the

purpose of his study was to examine a hypothesis that

certain consumers with high risk characteristics could only

borrow from finance companies and would not be consid-

ered good credit risks for commercial banks. The hypothe-

Sis would be tested by identifying from a data base those

individuals with high risk profiles according to various risk

related characteristics commonly used in credit scoring Sys

tems and then checking to determine if they were, in fact,

finance company customers. Each author concluded that

there was no significant market segmentation based on the

risk characteristics of borrowers because their models were

unable to delineate finance company borrowers. Thus, Dr.

Boczar found that when he identified the high risk borrow-

ers and then checked to see whether they were finance

company customers, he was wrong two out of three times.

The court of appeals misconstrued Dr. Boczar’s results

and concluded that the study “necessarily entails the

related conclusion that one-third of those customers have

characteristics which would suggest that they would proba-

bly not be bank customers.” (App. B, p. 1lb). This is

exactly the conclusion that the Government argued before

the district court and that was refuted by the district court

and the record. Both of the multi-variate analyses started

with the premise that if the market were actually seg-

mented on the basis of risk, it would be relatively easy to

determine finance company customers because they would

have a high risk credit scoring profile. In the case of Dr.

Boezar’s study, the model was wrong two out of three times.

Dr. Boczar explained that his study did not show that two

out of three customers would necessarily get loans from

banks nor that one out of three could not. It merely

showed that using risk as a measure of analysis failed to

Support the proposition that the market was segmented.®

Second, the court of appeals also misconstrued a study

that compared the credit scoring systems of HFC, Security

Pacific Bank and the VISA Division of the First National

Bank of Chicago. (App. B, pp. 13b-14b) That study

showed that HFC accepted 40% of its recent applicants for .

consumer loans whereas, using their own credit scoring

systems, Security Pacific Bank would have accepted 56%

of the same applicants and given each a $1,000 line of credit

while the First National Bank of Chicago would have

accepted 35% of the same applicants and given each a

9. In response to a government question, Dr. Boczar testified: “Now

you can’t have it both ways. Now if you are going to make me say that, in

point of fact I don’t know whether two out of three of them could get loans

from banks. Then there is no way you could make me say that the other

one-third couldn’t get a loan at a bank.” (Trial Tr. 1212)

Similarly, Murphy concluded as follows: ‘However, the multivariate

analysis of the successful and unsuccessful borrowers in this study sup-

ports Benston’s work. That is, in terms of the characteristics that were

available and which are typically used in credit scoring models, there does

not seem to be a systematic relationship between denials and the mea-

sures reflecting credit worthiness. Finally, when the group of successful

applicants is disaggregated by the type of institution making the loan,

there is little evidence to support the hypothesis of market risk segmenta-

tion. Jt is still not possible to predict which loans would be made, let

alone by which institution.... This inability to distinguish among the

transactions made by the various institutions would indicate that, in

Maine, banks, credit unions, and finance companies are real alternative

suppliers and they compete in the same product market.” (HX 204, p.

122) (emphasis added; citations omitted).

VISA card with a $1,000 or $2,000 line of credit. In inter-

preting this study, the court of appeals erroneously con-

cluded that the 56% accepted by Security Pacific and the

35% accepted by the First National Bank of Chicago repre-

sented percentages of applicants HFC had accepted. Those

figures actually represented the percentage of all of HFC’s

recent applicants — HFC itself only accepted 40% of these.

The court’s conclusion that “65% of those able to obtain

loans at Household Finance apparently would be unable to

obtain a VISA card from the First National Bank of Chi-

cago, and slightly under one-half would have been able to

obtain loans from Security Pacific” (App. B, pp. 13b-14b) is

not only “clearly erroneous”, but is blatantly incorrect.'°

The court of appeals also curtly dismissed the significant

effect that bank credit cards have had on the consumer

credit market. There was evidence in the record that 50%

of finance company customers have bank credit cards. The

court of appeals, using a reverse-negative type of logic,

concluded that the remaining 50% of finance company

customers could not obtain such credit cards.’ The court

ignored the absence of any evidence in the record to support

such a proposition. It also dismissed evidence to the effect

that only approximately 35-50 percent of the population of

the country as a whole have credit cards and that, in this

regard, finance company customers simply reflect the popu-

lation as a whole. The court ignored also the testimony of

10. Even more significantly, the HFC study showed that Security

Pacific Bank would have accepted 49% of the applicants that HFC

rejected and First National Bank of Chicago would have accepted 28% of

such rejects.

James L. Smith, senior vice-president of Security Pacific, testified that

in the first nine months of 1978, the Security Pacific credit scoring system

approved approximately 154,000 applicants for personal loans. Of this

number, only six were subsequently rejected for loans.

11. The repeated use of this reverse logic by the court of appeals only

serves to accentuate the complete failure of plaintiff to bear its burden of

proof.

a government witness who indicated that 80% of the cus-

tomers of a finance company subsidiary of Citibank would

have been eligible for a bank credit card issued by Citibank.

Similarly the court of appeals ignored the testimony of a

large number of bankers and finance company officers who

testified that banks and finance companies use the same

credit standards. The vast majority of these witnesses

testified that banks and finance companies apply the same

credit standards and that there is no significant market

segmentation on the basis of risk.

Finally, the court of appeals disputed the district court’s

findings that a significant number of finance company bor-

rowers actually have credit outstanding from banks and

credit unions. Deserving particular attention is the court

of appeals’ treatment of an HFC study of the last 50 loan

applications of each of HFC’s 426 offices throughout the

country and which dealt with over 42,000 loan applica-

tions. The Court of Appeals misunderstood this study to be

an analysis of only the last 426 loans issued by HFC (App.

B, p. 15b). That study showed that of the 21,472 accepted

loan applications, 31.94% had existing balances on auto

loans from banks, 23.27% had existing balances on non-auto

loans from banks and 31.94% had existing balances on bank

credit cards. The court of appeals, again using a reverse-

negative type of logic, assumed that all other HFC appli-

cants were ineligible for bank credit and probably had

never been eligible for such credit. All the study actually

showed were those individuals who had existing balances

on loans from banks. It did not show which applicants

actually could have obtained additional credit from a com-

mercial bank and it certainly did not show the percentage

which could not obtain such credit. The court of appeals

also ignored the fact that of the 20,663 applicants who were

rejected by HFC, 26.21% had existing auto loans from

banks, 18.27% had existing non-auto loans from banks and

20.81% had existing balances on bank credit ecards.

After attempting to discredit the evidence relied upon by

the district court, the court of appeals outlined the evidence

that it relied upon for the finding that the consumer credit

market is segmented on the basis of risk. The evidence was

of three types: studies of eligibility of finance company

customers for bank loans; varying chargeoff and delin-

quency rates between banks and finance companies; and

Studies of the demographics of borrowers at both institu-

tions. Petitioners submit that such evidence provides no

basis for the conclusion of market segmentation.

The court referred to certain “studies” dealing with the

eligibility of finance company borrowers to obtain loans

from banks. The first was a “study” performed by Wil-

liam Whitesell, a government witness. Whitesell testified

that he evaluated the portfolio of a finance company thata

bank wished to acquire and he concluded that 60% of the

finance company customers would not have qualified for a

loan from that bank. Whether Whitesell ever prepared a

written version of this study is unclear, but no such study

was ever introduced into the record. The Federal Reserve

order (HX 256) approving the particular acquisition that

Whitesell described shows that it involved the acquisition

of a one-office finance company with loans outstanding of $1

million by a one-branch bank in rural Pennsylvania. Such

a study based on a one-office finance company is hardly

probative of the characteristics of finance company custom-

ers On a nationwide basis.

The second eligibility study relied upon by the court was

performed by a vice-president of Citicorp, John Reed.

Reed testified that only 46% of a sample of 175 customers of

Nationwide Finance Company, a subsidiary of Citicorp,

would be eligible for a loan from the bank. Reed also

12. Using the logic of the court of appeals, this particular study could

be used to show that banks provide credit to certain high risk individuals

who are unable to obtain credit from finance companies.

testified, however, that 80% of the customers of that

finance company would have been eligible for a Citicorp

credit card. The court of appeals completely ignored this

latter portion of Reed’s testimony."

The third study relied upon by the court of appeals dealt

with finance company borrowers in the State of Texas.

Actually, the court confused two different studies dealing

with Texas borrowers that were prepared by the same

author, Dr. Thomas Durkin. (This accounts for the appar-

ent contradictory references to these studies made by the

court of appeals in its opinion. (App. B. p. 17b)). The

first Durkin study dealt with what was known in Texas as

the small, small loan act which regulates loans of $100 or

less. That study, as the district court recognized, simply

has no application to the issues in this ease. The court of

appeals also ignored the testimony of Dr. Durkin that the

second study used 1973 data and that, based on his continu-

ing research in the area, Dr. Durkin did not believe that

there was any group of consumers to whom finance compa-

nies are the primary or sole source of credit.

The court of appeals also relied upon the differences it

perceived in delinquency rates and chargeoff rates of banks

and finance companies to support the proposition that

finance companies offer a service unique to high risk cus-

tomers. However, as described in Note 1, supra, there is

actually no difference whatsoever in delinquency rates of

finance companies and banks and the difference in charge-

off rates is relatively minor.

Finally, the court, relying on a study performed for

HFC, found that finance companies serve a higher percent-

age of lower income and blue collar workers whereas banks

serve a larger percentage of higher income and white collar

13. The court also overlooked Reed's testimony that Citibank has used

and is continuing to use its finance company subsidiary and credit cards

to expand its consumer loan operations nationwide. During the past year

Citibank sent oui 26 million letters soliciting credit card applications

throughout the country.

workers.‘ One table of that study did in fact show that

borrowers from banks had a higher average income than

borrowers from finance companies and that a higher por-

tion of finance company customers were blue collar workers

rather than white collar workers. However, Table IB of

that very same study showed that for borrowers in every

income level (i.e., under $7,000, $7,000-$9,990, ete.) banks

serve more than twice as many borrowers as finance compa-

nies. Thus, although finance companies serve 24.4% of

debtors making less than $7,000 a year, commercial banks

serve 06.3% of such debtors. Similarly, banks serve 00.1%

of blue collar borrowers and finance companies only 18.2%.

This study, as with the other evidence relied upon by the

court of appeals, simply does not support the proposition for

which it was cited nor does it support the overall conclusion

of market segmentation.

14. The court of appeals obviously equated low income and a blue

collar profession with high risk while ignoring the fact that individuals in

such categories may constitute excellent credit risks whereas a high

income, white collar worker may be on the verge of bankruptcy.

CONCLUSION

The court of appeals’ decision should be reviewed because

it sets forth a type of antitrust analysis that is totally at

variance with judicial and regulatory precedent. More-

over, the court of appeals’ holding will lead to further

confusion concerning the correct indicia to be applied in

defining a line of commerce under Section 7 of the Clayton

Act. Finally, this case presents this Court with a unique

opportunity to enunciate its basic antitrust principles as

well as the principles for appellate review. The petition

for a writ of certiorari should be granted.

Dated: November 1, 1979

Respectfully submitted,

GEORGE D. REYCRAFT

HAVEN C. ROOSEVELT

J. DAVID OFFICER

One Wall Street

New York, New York 10005

Attorneys for Petitioners,

Household Finance

Corporation and HFC

American, Inc.

LEWIS R. MILLS

720 Olive Street

St. Louis, Missouri 63101

Attorney for Petitioner,

American Investment

Company

Of Counsel

CADWALADER, WICKERSHAM & TAFT

PEPER, MARTIN, JENSEN, MAICHEL & HETLAGE

THOMAS J. O’CONNELL

APPENDIX A |

IN THE |

Wnited States District Court

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

No. 79 C 80

THE UNITED STATES OF AMERICA,

Plaintiff

HOUSEHOLD FINANCE CORPORATION,

HFC AMERICAN, INC., and

AMERICAN INVESTMENT COMPANY,

Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

On January 9, 1979, plaintiff, United States of America,

filed a complaint seeking to prevent defendant Household

Finance Corporation from acquiring the stock or assets of

American Investment Company, for the reason that such |

acquisition would constitute a violation of §7 of the Clayton |

Act.

The plaintiff's prayer for relief was a request that the

court enjoin the acquisition by Household Finance Corpora-

tion of American Investment Company, the acquisition of |

any stock in the American Investment Company by House- |

hold Finance Corporation directly or indirectly, and the |

divestiture of existing stock owned by Household Finance |

Corporation in American Investment Company. Finally,

the complaint sought an injunction against future acquisi-

tion by Household Finance Corporation of the assets of

American Investment Company directly or indirectly

without the approval of the Department of Justice or of the

court.

On February 5, 1979, all the parties agreed to the follow-

ing Stipulation for the purpose of narrowing the issues to be

tried in this case.

1. The only issue to be tried in this case is

whether the business of making direct cash loans by

finance companies is a line of commerce within the

meaning of §7 of the Clayton Act.

2. If the court finds that the business of making

direct cash loans by finance companies is a line of

commerce in the United States generally, the acqui-

sition of AIC by HFC would constitute a violation of

§7 of the Clayton Act in various sections of the

country and a permanent injunction against the

acquisition of any stock in AIC by HFC directly or

indirectly should be entered.

3. Such injunction should require divestiture of

the existing stock ownership in AIC by HFC and

prohibit the acquisition of any finance company

assets of AIC by HFC directly or indirectly without

the approval of the Department of Justice or of the

court.

4. If the court finds that the business of making

direct cash loans by finance companies does not con-

Stitute a line of commerce in the United States gen-

erally, the acquisition of AIC by HFC would not

constitute a violation of §7, and an order of the court

dismissing this action should be entered.

Accordingly, findings of fact and conclusions of law are

proposed solely with regard to the relevant line of com-

merce in this case.

Findings of Fact

Historically, the consumer finance needs of the lower-

income wage earner segment of the population have been

served by the small loan industry. Until the early 1960’s,

it could truly be said that consumer finance companies

engaged in the making of direct consumer loans and the

servicing of retail sales finance contracts, were serving a

lower-income and higher-risk consumer market than the

commercial banks, savings and loan associations, and other

lending institutions. It is apparent that the position

adopted by the government (that the business of making

direct cash loans by finance companies is a distinct line of

commerce in the United States) is a correct statement and

description of conditions existing in the consumer finance

industry in 1960. It remains true that the major activity of

consumer finance companies, including the defendants, is

the making of cash loans to individual customers. Such

loans are made, as they necessarily have been during all

the relevant periods covered by the evidence in this litiga-

tion, under applicable laws of the various states which

govern the interest rates charged, the size of such loans, the

maturity periods, collateral required, and other terms of

the loan contract.

But there have been significant changes in the character

of the consumer finance industry, most particularly in the

upward direction of the average amount of loans, and in the

market expansion of that aspect of the business referred to

during the trial as second mortgage lending, a service

offered by the consumer finance companies involving larger

average amounts loaned and loans collateralized by an

interest in real estate.

In addition to these changes in the character of the con-

sumer finance industry, an even more significant change

has been the rapid growth since 1960 of competition in the

consumer loan market from other financial institutions

heretofore not active in the consumer loan field. The three

principal aspects of such increased competition are the

aggressive entry into this market by the commercial banks,

the real competition provided the small loan industry by

the explosion in recent years in the numbers of bank credit

card holders, the rapid growth of credit unions which com-

pete with consumer finance companies direvily, and the

lesser, but not insignificant entry into this area of savings

and loan associations.

So that while it is substantially true that the major busi-

ness of the consumer finance industry continues to be cash

loans to individual customers at high, but regulated, inter-

est rates, and in generally small amounts, aggressive entry

into competition with the consumer finance companies by

the variety of other financial institutions above described,

has created a very substantial overlap of a number of com-

petitors seeking and serving the same consumer market as

was once deemed to be the exclusive province of the con-

sumer finance companies. This broad overlap and aggres-

Sive competition compels a reassessment of the once-

distinct submarket served by the consumer finance compa-

nies, a submarket which can no longer be recognized as a

distinct or identifiable line of commerce within the mean-

ing of §7 of the Clayton Act.

In support of these general conclusions thus enunciated

as the findings and conclusions of this court, the following,

more particular, findings of fact are made.

1. During the past decade, the finance companies’ share

of the consumer installment credit market has decreased by

one-third while the market shares of commercial banks and

credit unions have increased dramatically.

2. The total outstandings of consumer installment

credit by holder in 1967 and again, a decade later, in 1978 is

illustrated by the following tables:

CONSUMER INSTALLMENT CREDIT BY HOLDER

(in millions of dollars)

1967 Oct., 1978

ee eT eR EAS $33,152 $132,457

PF ORROD COTTON, sis cs sentevsesvevssvecsesssseoavaeyns 24,576 51,984

Re a NE sacs isn esaiedesrcnestnnvemocentoenels 9,003 44,635

NS to es 11,484 22,464

RENN Palicchcttcaoacseauicuseiascstcaleusaaereubete ant 1,213 14,036

$79,428 $265,576

* Includes savings and loan associations and mutual savings banks.

PERCENTAGE OF CONSUMER INSTALLMENT CREDIT

HELD BY VARIOUS INSTITUTIONS

1967 Oct., 1978

RMRINOUE TIMID ichstssarccresbrassedicvcooeeenacatons 41.7% 49.99%,

NE WIIG Soest ciccrsstynsscansoisteateeonions 30.9 19.6

RD MEMINONUD a lisetncsconcaspicartxnspeianieinwnich nanan: 11.3 16.8

RANE ssdastitea ste tes ocsecptvuceatechswsee Diewnenisonnccieinea teens 14.5 8.5

NOUN ain peu cvededen sie voladintad navy tlan ican atalen tales, 1.5 5.2

CONSUMER INSTALLMENT CREDIT IN 1967 DOLLARS BY

HOLDER

(in millions of dollars)

% Change

1967.

1967 Oct., 1978 Oct., 1978

Commercial Banks .............0... $33,152 $ 66,229 + 99.8%

Finance Companies ............. 24,576 25,992 + 5.8%

TORE CIOIB, voces crosavecsorvcevencss 9,003 22,318 + 147.9%

NN atch sta csinst cb iccanigiecanccodec 11,484 11,232 — 2.9%

RI ar a at 1,213 7,018 + 478.6%

Te $79,428 $132,788 + 67.2%

* Includes savings and loan associations and mutual savings banks.

These tables reveal that the share of the consumer

installment credit market held by finance companies has

decreased by approximately one-third during the past dec-

ade, while the market shares of commercial banks and

credit unions have increased significantly. These tables

show further that, during the past decade, the amount of

consumer installment credit held by finance companies has

increased in real dollars by only 5.8%, while that of com-

mercial banks has increased by 99.8%, that of the credit

unions by 147.9%, and the “other” category, which

includes savings and loan associations and mutual savings

banks, by 478.6%.

3. One aspect of the expanding and aggressive com-

petition of the commercial banks with the consumer

finance industry is revealed in a comparison of bank revolv-

ing credit (including credit cards) with personal loans

made by commercial banks and finance companies (exclud-

ing automobile, mobile home, and home improvement

financing) in 1970 and 1978.

COMPARISON OF BANK REVOLVING CREDIT WITH

PERSONAL LOANS IN 1967 DOLLARS (EXCLUDING

AUTOMOBILE, MOBILE HOME AND HOME IMPROVE-

MENT FINANCING) BY COMMERCIAL BANKS AND

FINANCE COMPANIES

(in millions of dollars)

% Change

Jan., 1970-

Jan., 1970 1978 Qst., 1978

Commercial Banks ............... $12,994 $20,483 + 57.6%

Unsecured Credit

Finance Companies ............... 15,970 14,910 —- 66%

Unsecured Credit

Bank Revolving ..........ccccc 3,438 11,083 + 222.4%

Unsecured Credit

As the above table reveals, the personal loans made by

commercial banks have increased by 57.6% in real dollars,

the total outstandings in bank revolving credit have

increased by 222.4% in real dollars, and, in contrast,

finance companies’ personal loans during this period have

decreased in real dollars by 6.6%.

This decrease in the finance companies’ share of the con-

sumer credit market has been directly due to the increased

competition from commercial banks, credit unions and

thrift institutions.

4. Among the reasons for the increase in the commercial

banks’ and credit unions’ share of the consumer credit mar-

ket is the increasing awareness by consumers of the relative

interest rates charged by various types of lending institu-

tions as the result of the Truth-in-Lending Act and the

disclosures required by that Act, as well as various actions

by the Federal Reserve Board.

The 1977 Consumer Credit Survey, published by the Fed-

eral Reserve Board (GX 175), reveals that consumers at

each educational level, within each age category, and

within each income grouping have become increasingly

aware of the actual cost of their credit. As other financial

institutions have aggressively sought customers once

thought to be the exclusive market of the consumer finance

companies, they have had the significant competitive

advantage of a growing consumer awareness of their lesser

interest rates.

do. Among the means used by the commercial banks to

expand their consumer credit lending operations at the

expense of consumer finance companies has been the adop-

tion by the commercial banks of finance company tech-

niques, and the hiring away of former finance company

personnel as an aid to competing with the consumer finance

companies.

6. Another significant advantage enjoyed by the com-

mercial banks and credit unions is the lower cost to them of

funds, in comparison to the fund cost to the consumer

finance companies. Consumer finance companies obtain-

ing funds in the public market are at a disadvantage vis-a-

vis depository institutions such as banks and credit unions.

7. The use of bank credit ecards and other forms of

revolving credit by commercial banks has had a major,

nationwide impact on the consumer credit market in recent

years, and has been the vehicle for permitting commercial

banks to move aggressively into the consumer credit mar-

ket and to attract consumers who formerly turned to con-

sumer tinance companies for their cash loan needs.

8. Bank credit cards are used by holders for two pur-

poses. Their principal use is to facilitate retail purchases

on credit, and the secondary use is as a source of cash credit.

Applicants can obtain credit cards with a credit limit as

low as $300 or as high as $10,000. The most prevalent lines

of credit extended by the First National Bank of Chicago

on its bank credit card average between $1,000 and $2,000

(Tr. 1374).

9. Credit card holders are enabled to utilize their credit

cards to purchase items the acquisition of which would

have required an installment cash loan before the advent of

the widespread use of credit cards. The holders of bank

credit cards may also obtain direct cash loans from the

bank by using the cash advance feature of the credit card.

The amount of cash thus available is limited only by the

credit limit for the card. This cash is available to credit

card holders at the prevalent 18 percent interest rate for

outstanding balances on such ecards. This use of the cash

advance feature of a credit card is more convenient to

obtain modest amounts of cash than a cash loan from a

finance company.

10. In addition to credit card-related arrangements for

direct cash loans, most commercial banks now also offer

lines of credit connected to checking accounts maintained

ata particular bank. Once a line of credit is approved, the

consumer may overdraw his checking account by any

amount up to the maximum line of credit. The writing of

such check constitutes a direct cash loan.

11. Both the cash available on demand by credit card

holders and the overdraft features on checking accounts are

substitutes for and competitive with the unsecured cash

installment loans of the consumer finance company, which

have been the traditional bulk of their business.

12. An additional, significant and growing factor in the

consumer finance field is the impressive growth in the

United States of credit unions. Credit unions have

recently grown in membership by more than one million

people per year, to the point where half of the adult popula-

tion is now a member of or has access to a credit union (Tr.

1931).

13. Credit unions have financial advantages which

other financial institutions do not enjoy. Federal credit

unions are not taxed by the federal government and most

state credit unions are not taxed by state governments.

Corporations and labor unions have an incentive to set up

credit unions for their employees and their members as an

additional inducement to employment or membership.

The credit union normally obtains direct access to mem-

bers’ paychecks through payroll deductions, and credit

union inserts in payroll envelopes provide an easy and

inexpensive advertising access to the potential

membership.

14. Credit unions enjoy a competitive advantage over

finance companies and even over bank credit cards because

of their lower interest rates, a competitive advantage

which, in recent years, they have aggressively exploited.

15. Credit unions in recent years have been authorized

to issue revolving charge cards such as Visa and Mas-

terCharge, and many are now offering share draft accounts

10a

Whereby a member is able to draw a check on these share

accounts. They are also authorized to make first mort-

gages. All of these circumstances make them highly effec-

tive competitors with the consumer finance companies for

the wage earner market.

lé. To a lesser extent than the commercial banks, but

still significantly, savings and loan associations have, in

recent years, become competitors with consumer finance

companies. Savings and loan associations have entered

into the field of home improvement loans and home equip-

ping loans; depositors and thrift institutions may also bor-

row against their passbook deposits, and thrift institutions

now have the power to issue bank revolving credit cards

such as Visa and MasterCharge in certain states, and are

attempting to broaden this capability.

17. Home refinancing through second mortgages or refi-

nancing of first mortgages has become an increasingly

important part of the consumer credit market, and the

proceeds of such mortgages are being used for a wide vari-

ety of consumer purposes. Consumer finance customers

have become aware in rapidly growing numbers of the

potential borrowing power created by the equity they have

in their homes. Consumer finance companies, commercial

banks, savings and loan associations, have all moved

aggressively and competitively into this field.

ls. The average size of personal, unsecured loans from

the finance companies has tended in recent years to

increase. The average size of commercial loans and loans

from other competing institutions has tended to decrease as

they reach aggressively into the lower-income borrowing

market. Thus, the average size of the consumer finance

company loan and those of the commercial banks tend to

lla

approach each other (Tr. 2144), and this trend is appar-

ently destined to continue. The same trend can be noted in

the average maturities of the various types of loans.

19. The average delinquency rates of consumer finance

companies are progressively declining and the average

delinquency rates of personal loans of commercial banks

have been increasing as these two types of institutions

move into competition in one another’s market area (Tr.

2176). Similar trends are manifest in the charge-off rates

of the two types of lenders (Hett aff. p. 9).

20. As commercial banks and other institutions move

into the consumer finance field in growing numbers, the

interest rates charged by these institutions on this type of

loan tend to increase (Tr. 1371). As consumer finance

companies react to this new and intense competition from

other financial institutions, the interest rates charged by

consumer finance companies tend to decrease (Tr. 1297).

The laws of many states have been changed to permit both

banks and finance companies to make loans within the

same range of interest rates.

21. Although it may have been true in th: past, statis-

tics today demonstrate that there is no significant market

segmentation on the basis of risk with regard to the making

of loans by various types of financial institutions. Studies

of the credit scoring systems of the various competing insti-

tutions reveal a broad and significant overlap in the credit

scoring systems used by the various competing institutions.

Finance companies, banks, and credit unions all use sub-

stantially the same criteria in making credit decisions, and

finance companies in the main do not have a higher or

lower credit standard than other types of financial institu-

tions. Neither do finance companies lend to any signifi-

cant percentage of their customers who would be ineligible

to borrow from other types of institutions. An analysis of

the several studies available in the field reveals that signifi-

cant percentages of finance company borrowers are eligible

for or actually have non-mortgage loans at banks, that the

majority of customers of consumer finance companies have

bank credit cards.

22. In addition, statistical studies reveal a substantial

overlap between customers of finance companies and credit

unions, thrift institutions, and retailers (Tr. 1004, GX 144,

HX 210).

23. A significant indicia of the competition for the con-

sumer loan market and the loss of market share by finance

companies to commercial banks is found in the attempt of

the small loan industry to recapture some of the customers

taken away by the commercial banks adopting many of the

same types of programs which have cost them their custom-

ers to the commercial banks. Several finance companies

have begun to offer their own individual credit card. Some

are offering Visa and MasterCharge cards. Finance com-

panies are also making revolving lines of credit available

through a check system whereby the amount of the check is

debited against the consumer’s account in the loan office.

Finance companies also participate in retail revolving

credit on a private label basis in the same manner as com-

mercial banks.

24. The Federal Reserve Board, which is charged with

evaluating the competitive effects of acquisitions by bank

holding companies and other types of financial institutions,

consistently has held that the relevant product market to

consider in the acquisition of a finance company by a bank

holding company is the making of personal cash loans, and

that finance companies and commercial banks do compete

in the making of such loans (HX 181).

l3a

25. The Antitrust Division of the Department of Justice

has taken the position that finance companies and the com-

mercial banks compete in the granting of consumer credit

(HX 223, 224, 255, 264, 299). The Department of Justice

has stated:

Clearly, the structure of the retail finance indus-

try will be changed by such combinations, and, as a

consequence, long-term competition between banks

and finance companies will be reduced, while non-

affiliated finance companies may have increased dif-

ficulty in attracting funds in times of credit

shortage.

Today, banks and finance companies compete in

supplying retail credit needs for consumers; this is

present in various forms of consumer loans and

credit card transactions. In the long run, with the

emerging electronic technology, banks and finance

companies are likely to become competitors for con-

sumer services on an even broader scale.

(Department of Justice letter re acquisition of

GHC Finance by Bank America Corporation,

6/26/73. HX 123)

26. The Comptroller of the Currency also requires an

analysis of finance company competition with regard to the

merger of national banks or of a state bank into a national

bank.

27. In summary, finance companies and commercial

banks compete with one another in the granting of con-

sumer credit. Finance companies and credit unions com-

pete with one another in the granting of consumer credit.

Finance companies and thrift institutions compete with

one another in the making of consumer loans. And finance

companies and large credit-oriented retailers compete with

one another in the area of consumer credit.

l4da

Conclusions of Law

1. The relevant product market (“line of commerce’)

within the meaning of §7 of the Clayton Act is consumer

installment credit. Finance companies face substantial

direct competition from commercial banks, credit unions,

thrift institutions, and retailers in offering consumer

installment credit and no realistically distinct submarket

ean be said to exist.

2. The consumer installment credit market consists of

the consumer loan activities of commercial banks, credit

unions, thrift institutions, finance companies and retailers.

3. If the line of commerce were to be held to be the

business of making direct cash loans, finance companies

face substantial direct competition from commercial banks,

credit unions, and thrift institutions in making direct cash

loans and no realistically distinct submarket can be said to

exist.

t. The market for the business of making direct cash

loans consists of the consumer loan activities of commercial

banks, credit unions, thrift institutions and finance

companies.

3. The plaintiff has not established that the business of

making direct cash loans by finance companies is a line of

commerce within the meaning of §7 of the Clayton Act.

6. The merger in issue here cannot be said to have a

probably anticompetitive effect or to threaten the sub-

stantial lessening of competition.

7. Therefore, the complaint is dismissed with prejudice

and judgment entered for defendants.

ENTER:

/s/ FRANK J. McGARR

ebb bbb dbo bi dbo abhr rrr ititirLtixviririririrtrrirerrrTiTyTTT

UNITED STATES DISTRICT JUDGE

DATED: March 22, 1979

l5a

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

No. 79 C 80

THE UNITED STATES OF AMERICA.

Plaintiff,

HOUSEHOLD FINANCE CORPORATION,

HFC AMERICAN, INC., and

AMERICAN INVESTMENT COMPANY.

Defendants.

JUDGMENT ORDER

Pursuant to Findings of Fact and Conclusions of Law

entered this day, the complaint is dismissed with prejudice

and judgment is entered for defendants.

ENTER:

/s/ FRANK J. McGARR

aad clei heath nin aren ieiiii iit ir Lt eT Thre Tree rer Tere

UNITED STATES DISTRICT JUDGE

DATED: March 22, 1979

APPENDIX B

In the

United States Court of Appeals

FOR THE SEVENTH CIRCUIT

No. 79-1313

UNITED STATES OF AMERICA,

Plaintiff-A ppellant,

HOUSEHOLD FINANCE CORPORATION,

HFC AMERICAN, INC., and

AMERICAN INVESTMENT COMPAN a,

Defendants-A ppellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE

NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION.

No. 79 C 80-FRANK J. McGARR, JUDGE,

ARGUED May 81, 1979-DecipEp AuGuUST 10, 1979

Before SwYGERT, Circuit Judge, GEWIN, Senior Circuit

Judge,* and SPRECHER, Circuit Judge.

SPRECHER, Circuit Judge. The issue raised by this

appeal is whether the business of making direct cash loans

by finance companies is a line of commerce within the

meaning of section 7 >f the Clayton Act, 15 U.S.C. § 18.

More specifically, the issue is whether finance companies

effectively compete with other financial institutions, e.g.,

banks, credit unions, and Savings and loan associations, in

* Walter P. Gewin, Senior Circuit Judge of the United States Court of

Appeals for the Fifth Circuit. is sitting by designation.

the extension of loans. The district court found that per-

sonal loans from finance companies do not constitute a

separate line of commerce. We hold, however, that the

district court in reaching this conclusion both incorrectly

applied legal standards and made clearly erroneous

findings of fact. Accordingly, we reverse.

On January 9, 1979, the United States filed a civil action

against Household Finance Corporation (HFC), one of its

subsidiaries, and American Investment Company (AIC).

The complaint alleged that a proposed merger between

HFC’s subsidiary and American Investment Company

would violate section 7 of the Clayton Act, 15 U.S.C. § 18.

This violation was premised on the fact that the proposed

acquisition would allegedly lessen substantially competi-

tion in the making of “direct cash loans” by finance compa-

nies in numerous sections of the country.

On February 5 the parties agreed to the following stipu-

lation for the purpose of narrowing the issues to be tried.

1. The only issue to be tried in this case is

whether the business of making direct cash loans by

finance companies is a line of commerce within the

meaning of § 7 of the Clayton Act.

2. If the court finds that the business of making

direct cash loans by finance companies is a line of

commerce in the United States generally, the acqui-

sition of AIC by HFC would constitute a violation of

§ 7 of the Clayton Act in various sections of the

country and a permanent injunction against the

acquisition of any stock in AIC by HFC directly or

indirectly should be entered.

3. Such injunction should require divestiture of

the existing stock ownership in AIC by HFC and

prohibit the acquisition of any finance company

assets of AIC by HFC directly or indirectly without

the approval of the Department of Justice or of the

court.

4. If the court finds that the business of making

direct cash loans by finance companies does not con-

Stitute a line of commerce in the United States gen-

erally, the acquisition of AIC by HFC would not

constitute a violation of § 7, and an order of the

court dismissing this action should be entered.

The issues having been thus narrowed, the district court

conducted a 13-day trial. During this trial testimony was

introduced from various government officials who regulate

financial institutions, executives and managers of financial

institutions, and professional economists. The district

court then made its findings of fact and concluded that the

making of direct cash loans by finance companies was not a

separate line of commerce.

The district court opinion begins by conceding that at

one time consumer finance companies served a distinct con-

sumer population consisting of “a lower-income and higher-

risk consumer market than |was served by] the

commercial banks, savings and loan associations, and other

lending institutions.” However, the district court believed

that recent expansions by other institutions in lending

activity with respect to this lower-income, higher-risk

group “has created a very substantial overlap of a number

of competitors seeking and serving the same consumer mar-

ket as was once deemed to be the exclusive province of the

consumer finance companies.”

Various facts were relied on by the district court in sup-

port of this conclusion. First, the court cited statistics

demonstrating the increasing involvement of commercial

banks, credit unions, and savings and loan associations in

the consumer installment market. Whereas the finance

company market share, based on dollar amount of loans,

decreased between 1967 to 1978 from 30.9 percent to 19.6

percent, the market share of banks increased from 41.7

percent to 49.9 percent and the market share of credit

unions increased from 11.3 percent to 16.8 percent. The

court also cited figures which, after adjustment for

inflation, showed that real dollar amounts of bank credit

during this period increased 99.8 percent; of finance com-

pany credit, 5.8 percent; and of credit union credit, 147.9

percent. The court sought to explain these alterations in

market shares by finding that consumers were increasingly

aware of interest rates, thereby giving a competitive advan-

tage to lower-cost forms of credit.

Next, the court analyzed the competitive inroads made

on consumer finance company business by credit cards and

credit unions. Although the court made no findings as to

how many customers of consumer finance companies could

obtain, or had obtained, credit cards on which there were

sufficient balances to meet the consumer’s credit needs,' the

court found that these cards have had a “major” impact on

the credit market and have served as “the vehicle for per-

mitting commercial banks to move aggressively into the

consumer credit market....” Further, the court found

that obtaining cash advances through credit cards was

more convenient than, and a substitute for, obtaining a

cash loan from a finance company. As to credit unions, the

court found that they have experienced “impressive”

growth and have been effective competitors with finance

companies because of their lower rates as well as their

ability to utilize payroll deductions. The court further

1. The court did erroneously find, see pp. 9, 13-15, that a majority of

the customers of consumer finance companies possessed bank credit cards.

However, it did not find what portion of those cards had sufficient remain-

ing balances.

found, however, that as much as 50 percent of the popula-

tion had no access to credit unions.

The court then proceeded to find that, in terms of several

general indicia, finance company loans and bank loans

were becoming increasingly similar. The average amount

of finance company loans was found to be increasing while

the higher average amount of a bank loan was decreasing.

Likewise, finance company delinquency and charge-off

rates were declining while the lower bank rates were

increasing. Interest rates were said to be converging as

well. Further, the credit scoring systems used by banks

and finance companies to determine loan eligibility overlap

so that “finance companies in the main do not have higher

or lower credit standard {sic} than other types of financial

institutions.” The court also found a “substantial overlap

between customers of finance companies and credit unions,

thrift institutions, and retailers.”’

Finally the district court relied on findings by govern-

ment agencies that banks and finance companies compete.

Both the Federal Reserve Board and the Justice

Department have taken the position in evaluating bank-

finance company mergers that banks and finance compa-

nies compete.

Based on these findings the district court concluded that

the making of direct cash loans by finance companies was

not a line of commerce within section 7 of the Clayton Act.

Thus, under the terms of the stipulation, the proposed

merger would not have an anticompetitive effect. Accord-

ingly, the district court dismissed the complaint.

Although the district court did not explicitly set out the

legal standard by which it should be determined whether

the business engaged in by finance companies is a distinct

line of commerce, it is clear what that standard should be.

The Supreme Court has repeatedly held that a financial

institution comprises a separate product market if it offers

to a “significant” number of consumers a “cluster of prod-

ucts and services” that competing financial institutions do

not. United States v. Connecticut National Bank, 418 U.S. 656,

664 (1974); United States v. Phillipsburg National Bank, 399

U.S. 350, 360 (1970); United States v. Philadelphia National

Bank, 374 U.S. 321, 356-57 (1963). Thus, for example,

Connecticut National Bank concluded that banks were a sepa-

rate line of commerce because they could provide services to

commercial customers more effectively than savings and

loan associations. The factors supporting this conclusion

were the overwhelming dominance of banks in the commer-

cial loan market (1 billion dollars versus 26 million dol-

lars) and the inability of savings and loan associations,

even under pending legislation, to offer checking accounts

to commercial customers. 418 U.S. at 664-66. Accord-

; ingly, if, as the government alleges, finance companies pro-

vide loans, counseling and other financial services to lower-

income, higher-risk customers which other financial insti-

tutions do not, the standards set out by the Supreme Court

would compel a finding that cash loans by finance compa-

nies constitute a line of commerce within the meaning of

section 7.°. Furthermore, Phillipsburg National Bank and

Connecticut National Bank made it clear that the fact that

banks and other financial institutions compete with finance

companies in the provision of other services, such as the

extension of loans to moderate or low risk consumers, is not

relevant to the inquiry here. These other service areas

2. The availability of loans to high risk consumers has been explicity

recognized by the Supreme Court as a unique service:

For some customers, full-service banking makes possible access

to certain products or services that would otherwise be unavailable

to them; the customer without significant collateral, for example,

who has patronized a particular bank . .. is more likely to be able

to obtain a loan from that bank... .

Phillipsburg Nat'l Bank, 399 US. at 360.

may be relevant “in analyzing the effect on competition

between a commercial bank and another type of financial

institution,” Phillipsburg National Bank, 399 U\S. at 360, but

in determining the effect of competition in mergers of one

type of institution, it is the effect in any area of unique

services that must be considered.’ Phillipsburg National

Bank, 399 U.S. at 360-61; Connecticut National Bank, 418 U.S.

at 663 n.3.

It should also be noted, as an introductory matter, that,

although the Supreme Court may not have fully considered

and finally concluded the matter, it has stated in two of the

cases cited above that banks do not compete with finance

companies in the extension of cash loans. Thus, in Phila-

delphia National Bank the Court declined to include banks

and finance companies in the same market. The Court

stated:

Some commercial banking products or services

are So distinctive that they are entirely free of effec-

tive competition from products or services of other

financial institutions; the checking account is in this

category. Others enjoy such cost advantages as to

be insulated within a broad range from substitutes

furnished by other institutions. For example, com-

mercial banks compete with small-loan companies

in the personal-loan market; but the small-loan com-

panies’ rates are invariably much higher than the

banks’, in part, it seems, because the companies’

Pp p

3. Thus the Federal Reserve Board, the Comptroller of the Currency

and the Justice Department have considered competition in these over-

lapping markets when analyzing the effects of mergers between different

types of financial institutions, e.g., between banks and financial institu-

tions. (HX 181, 255, 264,299). In such mergers it is obvious that the

important inquiry revolves around concentration in jointly provided serv-

ices, since any lessening of competition will occur, if at all, only in those

areas. It is this confusion about which submarkets to consider which

underlies most of the district court’s position that finance companies are

not a distinct line of commerce because at least with respect to many

customers finance companies and other financial institutions in fact

“compete.”

working capital consists in substantial part of bank

loans.

374 U.S. at 356.4 This passage was cited with approval in

Phillipsburg National Bank, 399 U.S. at 361 n.4. The record

before us substantiates that banks continue to offer loans at

a lower cost than finance companies, thus making cur-

rently applicable the Supreme Court’s finding that personal

loans made by banks are “insulated” from competition by

finance companies and that the two thus constitute separate

product markets.

Applying the “unique product or service” standard, an

examination of the record before us further supports the

conclusion that the extension of cash loans by a finance

company constitutes an independent line of commerce. We

note first that very few of the district court’s findings affect

this conclusion. Most of the district court findings merely

indicated a trend for banks to increase their loan activity

with respect to some customers who formerly had been

serviced only by finance companies. As was made clear in

Connecticut National Bank, a trend towards an overlap in

services in and of itself is not sufficient to support a finding

that sufficient overlap currently exists to preclude a finding

4. The Court further elaborated this position in a footnote:

As one banker testified quite frankly in the instant case in

response to the question: ‘‘Do you feel that you are in substantial

competition with these institutions [personal-finance and sales-

finance companies] that you lend... such money to for [sic] loans

that you want to make?” - “Oh, no, we definitely do not. If we did,

we would stop making the loans to them.”’ (R. 298.) The reason

for the competitive disadvantage of most lending institutions vts-

a-vts banks is that only banks obtain the bulk of their working

capital without having to pay interest or comparable charges

thereon, by virture of their unique power to accept demand

deposits.

374 US. at 356 n.33.

5. The National Commission on Consumer Finance found that the

average interest rate charged by consumer finance companies was 26

percent, whereas 13 percent was the average rate for banks. (Tr. 625).

No testimony was offered at trial to rebut these figures.

that one type of institution offers a “unique cluster of pro-

ducts and services .”” Thus, although we do not dispute the

district court’s findings of increasing market shares of

banks, savings and loan associations, and credit unions or

of converging interest rates, write-off rates and loan

amounts, we do not believe these findings to be legally

sufficient to support a conclusion that finance companies are

not engaged in a distinct line of commerce.

Only one finding was made by the district court that

would satisfy the “unique service” standard. The district

court stated:

Although it may have been true in the past, statis-

tics today demonstrate that there is no significant

market segmentation on the basis of risk with

regard to the making of loans by various types of

financial institutions .... Finance companies,

banks, and credit unions all use substantially the

same criteria in making credit decisions, and

finance companies in the main do not have a higher

or lower credit standard than other types of

financial institutions. Neither do finance compa-

nies lend to any significant percentage of their cus-

tomers who would be ineligible to borrow from other

types of institutions. An analysis of several stud-

ies available in the field reveals that significant per-

centages of finance company borrowers are eligible

for or actually have non-mortgage loans at banks,

that the majority of customers of consumer finance

companies have bank credit cards.

6. As the Court stated in Connecticut National Bank:

To be sure there is a large measure of similarity between the

services marketed by the two categories of banks. In our view,

however, the overlap is not sufficient at this stage in the develop-

ment of savings banks .. . to treat them together with commercial

banks .... Despite the strides that savings banks . . . have made

toward parity with commercial banks, the latter continue to be

able to provide a cluster of services that the former cannot... .

418 US. at 663-64.

10b

We believe, however, that the district court erred as a mat-

ter of law in concluding that no significant market segmen-

tation exists.’

The thrust of the district court’s conclusion, thus, is that

although concededly some customers are uniquely served

by finance companies, the number of such customers is

insignificant. Obviously evaluating this conclusion is

made difficult by the failure of the district court to specify

precisely how large that group is or to detail the bases on

which it concluded that this group is insignificant.

Examining the record we find only the following bases

for such a conclusion: two multivariate analyses of risk

characteristics of bank and finance company customers, a

comparison of several bank and finance company credit

scoring systems, opinion testimony by bankers and finance

company Officials concerning credit practices, and figures

showing the number of finance company customers with

various types of bank credit. We will examine each of

these bases in turn.

First, the defendants introduced at trial two mul-

tivariate analyses of the risk characteristics of a sample of

individuals who were borrowers at either banks or con-

sumer finance companies. In these analyses the authors

examined several hypothesized variables of risk and

attempted to determine if those variables were correlated

with whether the individuals in the sample borrowed from

a bank or a finance company. Based on that analysis, a

model was derived which would predict whether a given

7. The defendants in their brief to this court characterize this conclu-

sion as a “finding of fact’’ and argue that the district court may be

reversed only if we find this conclusion to be clearly erroneous. We think,

however, that whether the group of customers uniquely served by finance

companies is significant enough to constitute a line of commerce within

§ 7 is a legal question. Certainly, the Supreme Court treated this as a

legal question in Connecticut National Bank when it concluded simply

that “the District Court overestimated the degree of competitive overlap .

...” 418 US. at 656.

1lb

borrower, depending on his risk characteristics, was a bor-

rower from a bank or a consumer finance company. That

model was then applied to the sample from which it was

derived to determine how well it would classify the sample

members. In both studies, the authors noted some diffi-

culty with the ability of such an equation to accurately

classify members as bank or finance company borrowers.

Neil Murphy, author of one of the studies, merely testified

that the equation was “not able to classify the borrowers

into categories terribly well.” Tr. 1508. Gregory Boczar

testified that when his model equation predicted that a

sample member was a bank debtor, it would be right nine

out of ten times. However, when his equation predicted

that asample member would be a finance company debtor it

would be right only one out of three times. (Tr. at 1126-

28). Both authors therefore concluded that there was no

risk segmentation by banks and finance companies.

We do not believe that these studies support the proposi-

tion that there is not a significant class of consumers whose

only alternative in the credit market is a consumer finance

company. Certainly, the Boczar study demonstrates that a

large number of consumer finance customers, specifically

two-thirds, have risk characteristics which appear to make

them theoretically eligible for bank loans. However, such

a conclusion necessarily entails the related conclusion that

one-third of those customers have characteristics which

suggest that they would probably not be bank customers.

Thus, this study does not negate the existence of a group of

consumers whose credit needs are exclusively met by

finance companies.

Indeed, we do not understand Mr. Boczar’s conclusion

that no market segmentation exists to negate the existence

of this group given his definition of market segmentation.

In his study, Mr. Boczar states that market segmentation

hypothesis as follows: ‘“|b]anks supposedly serve low-risk

12b

borrowers while finance companies cover the highrisk bor-

rowers.” Thus after having found that finance companies

contain a substantial number of low-risk borrowers in their

eustomer base, Boczar appropriately rejected the market

segmentation hypothesis. Boezar admitted that his rejec-

tion of the market segmentation hypothesis was largely

premised on the mutual accommodation of low-risk eustom-

ers by both banks and finance companies: “The ‘results

showed that there was substantial overlap in borrower

characteristics between the two industries, largely due to

the fact that finance companies served borrowers whose

risk-related characteristics ... were similar to... { those | of

bank borrowers.” (HX 2300). Thus, Boczar’s rejection of

market segmentation does not entail a conclusion that cer-

tain higher-risk customers remain exclusively tied to

finance companies.

The Murphy study also does not support the position that

there is no group of borrowers uniquely served by finance

companies. The sample involved in this study was a group

of borrowers in Maine that had previously been accepted

for loans by finance companies, but because of changes in

Maine law were not given loans by these companies. Mur-

phy’s study then sought to determine whether postulated

risk characteristics would predict whether these borrowers

would ultimately be accommodated by another lending

institution. The analysis proved that there was a statisti-

cally significant difference in the risk profiles between

those customers able to receive loans and those that were

not. This, of course, means that for statistical purposes the

groups were not completely identical. Murphy, however,

concluded that there was an extreme overlap between the

group because he was only able to predict unsuccessful

borrowers 64 percent of the time and successful borrowers

52 percent of the time. Nonetheless, these figures demon-

strate that for unsuccessful borrowers almost two out of

three had risk characteristics that predicted they would be”

13b

unable to geta loan. Admittedly, these risk characteristics

are less helpful in determining which borrowers will be

successful, but this only means that financial institutions

will not necessarily accommodate customers simply

because they are low-risk. It is, for the purpose of our

market analysis, only important that the study shows that

previous finance company customers possessed risk charac-

teristics making it unlikely that they would receive a loan

from an institution.®

The second possible basis for the district court’s conclu-

sion was a study comparing credit-scoring systems. The

defendants introduced a study in which recent applicants

for loans from Household Finance were evaluated under

the credit scoring system of the Security Pacific Bank and

the VISA division of the First National Bank of Chicago.

That study showed that 56 percent of the accepted HFC

applicants would have satisfied the credit scoring require-

ments of Security Pacific and 35 percent would have satis-

fied the requirements of VISA. Of the declined applicants,

49 percent would have been acceptable to Security Pacific,

whereas 28 percent would have been acceptable to VISA.

(Tr. 1789-91). This study, however, runs directly contrary

to the defendant’s position: 65 percent of those able to

obtain loans at Household Finance apparently would be

unable to receive a VISA card from the First National

8. Both of these studies also appear seriously flawed in another respect.

Obviously it is important that all major risk characteristics be utilized in

the model, otherwise the predictive value of the model will be diminished

and the degree of overlap between finance company and bank customers

will be exaggerated. Boczar admits this in his study (HX 200 at 246),

and Murphy conceded as much in his testimony at trial. (Tr. at 1547).

Both studies left out a number of important risk variables. Neither

included the borrower’s total outstanding indebtedness, a factor which

Boczar indicated would have been helpful. (HX 200 at 249 n.8).

Additionally, the Murphy study excluded the following risk variables:

time on job, time in community home ownership, rent and mortgage

payments. The evidence in this case clearly demonstrated that all these

factors were frequently used in credit scoring models used by financial

institutions themselves to measure risk.

14b

Bank of Chicago, and slightly under one-half would have

been able to obtain loans from Security Pacific. Even

though this study shows some overlap between credit stan-

dards, it nevertheless also shows a significant number of

customers who would be served only by finance companies.

The third basis for the district court’s conclusion was

opinion testimony that banks and finance companies apply

the same credit standards. Two bank officials from Penn-

sylvania banks testified that they believed that their banks

applied the same credit standards as finance companies,

although neither, of course, could testify as to how many

other banks utilized similarly liberal standards. Indeed

there was testimony from an executive vice-president of the

First National Bank of Chicago that his bank’s cash loan

program was principally directed at executives and profess-

ionals (Tr. 1402) and that his bank had recently tightened

its credit card operations to include only those eligible for

$1,000 credit limits, thereby excluding people previously

eligible for credit. (Tr. 13874, 1390). The defendants also

introduced testimony from the chief executive officer of

Beneficial Finance Company that his company was apply-

ing similar standards as other financial institutions, but

even he was forced on cross-examination to admit that some

customers are relegated to finance companies as their only

source of loans. (Tr. 1305).

Finally, the court also attempted to support its conclu-

sion that there was no risk segmentation among financial

institutions by finding that a significant percentage of

finance company customers are eligible for or actually have

non-mortgage loans at banks and that a majority of the

customers of consumer finance companies have bank credit

ecards. Even accepting these findings on their face, they

have little bearing on whether risk segmentation exists.

Even if a “significant” percentage are eligible for bank

loans, the remainder-conceivably also a “sigificant” per-

centage—are not. Similarly by the terms of these findings

15b

up to 50 percent of consumer finance company customers do

not possess any bank credit cards.

Notwithstanding that these findings are not relevant to

whether these are indeed high-risk customers served only

by finance companies, we cannot find support for these

statements in the record. The defendants introduced a

study of recent HFC applicants in a Chicago loop office

which showed that of 50 accepted applications, only 36

percent had outstanding bank loans of any kind, only 14

percent had loans from credit unions and that none had

any loans from savings and loan associations. A similar

study by the defendants on a nationwide sample of 426

customers showed that more than 75 percent of accepted

HFC customers did not have bank credit other than auto

loans and that approximately 70 percent did not have even

auto loans. Likewise, only about 25 percent of the accepted

customers had loans from credit unions and less than 3

percent had loans from savings and loan associations.

(HX 209; Defendant’s App. at 186). The chief executive

officer of Beneficial Finance, another defense witness, testi-

fied that only 27.2 percent of Beneficial customers had

loans from a bank and 16.4 percent had loans from credit

unions. (Tr. 1317). The final evidence on this matter was

the testimony by an officer of the target company in this

ease, American Investment Company, that 50 percent of

American’s customers had bank credit and that at least 15

percent of those without such credit would not even obtain

that credit under any circumstances. (Tr. 1620-21).

These figures do not support the district court’s finding that

finance companies do not lend to a significant percentage

ineligible to borrow from other types of institutions, since

even accepting the American executive’s admitted specula-

tion that at least 15 percent of those without bank loans

could not obtain them, this still concedes the existence of a

cognizable number of borrowers relegated to consumer

finance companies.

16b

The district court’s finding that a majority of consumer

finance customers had bank ecards is even more difficult to

support. There was evidence that 80 percent of the custom-

ers at one office had bank ecards; ® however nationwide HFC

figures showed that only 32.percent of Household’s custom-

ers had bank ecards. (HX M90 Likewise, only 32 percent

of Beneficial Finance customers have bank cards. (Tr.

1318). '

Not only was the evidence of non-segmentation inade-

quate, but also the record contained overwhelming evi-

dence that risk segmentation does in fact exist among

financial institutions.’"” This evidence took three forms:

studies of eligibility of finance customers for bank loans,

varying charge-off and delinquency rates between banks

and finance companies, and studies of the demographics of

borrowers at both institutions.

We turn first to the four eligibility studies that were

introduced. Dr. William Whitesell, an economics pro-

fessor and former Federal Reserve Board economist, testi-

fied that he had done a study for a commercial bank seeking

to acquire a finance company and found that 60 percent of

9. This was the figure given at trial. Our examination, however, of the

exhibit on which this testimony was based reveals that this figure was

erroneous. HX 210 showed that only 27 of 50 accepted Household cus-

tomers, or 54 percent, had bank cards. Further, the office surveyed was

located in the Chicago loop with a customer base of office and retail

employees, a group that is not likely to be representative of HFC’s entire

customer base. (Tr. 1419).

10. The rest of our analysis concerns only whether finance companies

serve a consumer base which is not served by commercial banks. We have

limited this analysis because the record clearly demonstrates that banks

are the only substantial alternate source of credit for finance company

borrowers. Bank credit cards, as we have found, are not a significant

alternative since almost two-thirds of all finance company borrowers do

not possess such cards. Likewise, credit unions are not a significant

alternative since the district court found, and we accept its finding, that

one-half of all consumers do not have access to such an institution.

Finally, savings and loan associations are generally restricted by state law

principally to loans relating to, and secured by, real estate. The record

below illustrated that only a minute percentage of finance company loans

fell within this category.

17b

the finance company customers would not have qualified

for a loan at the bank considering the acquisition. (Tr.

115). An executive vice-president of CitiCorp testified that

his examination of the files of 175 customers of Nationwide

Finance Company, a subsidiary of CitiCorp, revealed that

only 46 percent of them would be eligible for a loan from

CitiBank, another subsidiary of CitiCorp. A study of Tex-

as finance company borrowers, made by two economies

professors revealed that, among the borrowers of small

amounts, 25 percent had been refused loans by banks and 20

percent had been asked for too much collateral. (Tr. 486).

Among the remaining borrowers, 30 percent replied that

they had been refused by banks or that the banks required

too much collateral." The government also introduced a

follow-up study on borrowers in Maine that had been

accepted by finance companies for loans but later refused

_ these loans because of a subsequent change in Maine law.

Of those borrowers, 50 percent never received a loan from

any source and only one-third of those who received loans

(or about 16 percent of the entire sample) received a loan

from a bank. Finally, it should be recalled that even the

two defense studies, which we discussed earlier, lend some

Support to the conclusion that at least one-third of finance

company customers have risk characteristics which sug-

gest that they would be ineligible for bank loans. Thus, all

these studies give a concrete demonstration of the existence

of a significant class of borrowers, ranging from 20 to 50

percent of all finance company customers, who are able to

obtain loans only from finance companies.

Evidence of delinquency and charge-off rates at banks

and finance companies further supports a finding that

finance companies offer services to a unique strata of

11. There was testimony at trial that customers who replied that the

bank had required too much collateral had effectively been refused credit

since that answer could have indicated that the bank had requested more

collateral than the applicant could post. (Tr. 543). In any event, of this

30 percent, half were denied credit regardless of collateral. (Jd.).

18b

higher-risk customers that are not serviced by commercial

banks. The testimony at trial was unequivocal and

uncontradicted that finance companies charged off some-

where around 2 percent of their loans in terms of total

dollars outstanding whereas banks charged off approxi-

mately 0.7 to 0.8 percent of their personal loans. (Tr.

1055). Several witnesses testified that this differential

‘ indicates that consumer finance companies serve some cus-

tomers that are a higher risk than those served by banks.”

Finally, support for the existence of risk segmentation

can be found in demographic studies conducted by the

defendants. The defendants introduced evidence that

showed that whereas the average income of those borrowers

who exclusively used banks was $14,260, the average

income for exclusive customers of finance companies was

$9,050. Further, only 19.3 percent of consumer finance

company customers were white collar, whereas white collar

12. Two defense witnesses gave different constructions to the differen-

tials. An executive from Mellon Bank attributed the difference, at least

as far as his own bank and its finance company subsidiary were concerned,

to lack of experience among finance company officers in granting loans.

This does not deny, however, that finance company borrowers, for what-

ever reason, may turn out to be a greater risk. Gregory Boczar, a defense

expert, characterized the difference as follows:

there was a difference, no question about it, and. . . this is very

judgmental, but it was my view that the numbers were not so

different as to suggest that commercial banks were only serving

the very well to do and the finance companies were just taking the

poor fellow who can’t get a loan anywhere else. The issue, how-

ever, is not whether there is a total division between the types of

customers of banks and finance companies but whether, notwith-

standing any overlap in customer bases, finance companies service

some customers unable to obtain bank credit. Mr. Boczar never

denied that these figures certainly suggest the latter, less extreme

position. Indeed, in one of the articles on which his testimony was

based he concludes that “fiance companies appear willing to

service poorer risk borrowers than banks.” (HX 212). Finally,

defense testimony suggested that the charge-off rates exhibit a

converging trend. But even that testimony revealed that finance

company charge-off rates had declined only to slightly below 2

percent.

19b

workers comprised 37.3 percent of bank borrowers. Con-

versely, only 17.5 percent of bank borrowers were blue

collar, as opposed to 28.7 percent of consumer finance bor-

rowers. (Tr. 832-33).

In summary, we conclude that the record below supports

the proposition that finance companies offer unique prod-

ucts and services to a class of higher-risk customers than

are serviced by other financial institutions. All the evi-

dence suggested that these customers constituted any where

from 15 to 50 percent of the finance company clientele.

The district court never disputed these figures or suggested

that they were lower. Indeed, even if these customers

constituted a far lesser percent of the finance company

clientele, we would still find that group significant. Thus,

the finding of the district court that finance companies do

not have a significant unique clientele was erroneous, and

accordingly, the judgment below must be reversed.

REVERSED

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

APPENDIX C

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

September 13, 1979

BEFORE

Hon. LUTHER M. SwyG_ERrtT, Circuit Judge

Hon. WALTER P. GEWIN, Senior Circuit Judge*

Hon. ROBERT A. SPRECHER, Circuit Judge

UNITED STATES OF Appeal from the United

AMERICA States District Court for

Plaintiff-A ppellant the Northern District of

No. 79-1313 Illinois, Eastern Division.

VS.

HOUSEHOLD FINANCE No. 79 C 80

CORPORATION, HFC Frank J. McGarr, Judge

AMERICAN, INC., AND

AMERICAN INVESTMENT

COMPANY

Defendants-A ppellees.

ORDER

On consideration of the petition for rehearing by the

Court in the above-entitled matter filed by defendants-

appellees, and no member of the panel and no judge in

regular active service having requested that a vote be taken

on the suggestion for an en banc rehearing, and the panel

having voted to deny a rehearing,

IT IS ORDERED that, the petition for rehearing in the

above-entitled cause be, and the same is hereby, DENIED.

Judge Philip W. Tone did not particiyate in the

consideration of the petition for rehearing en banc.

* Walter P. Gewin, Senior Circuit Judge of the United States Court of

Appeals for the Fifth Circuit, is sitting by designation.

Certificate of Service

I, HAVEN C. ROOSEVELT, hereby certify that I have

today served three true and exact copies of the Petition for

a Writ of Certiorari upon all counsel of record.

/s/ HAVEN C. ROOSEVELT

SOOM H THEE HOT EEEH THEE EETEEEE EEE HEHEHE HES ES EE EEEEES

Haven C. Roosevelt

Sworn to before me this

Ist day of November, 1979

/s/ BETTY YPUNG

FOOTE HEHEHE EEE EHH EEE EEER EES ES EE EEE EES

Notary Public

BETTY vere

Notary Public, State of New York

No. 31-4604067

Qualified in New York County

Commission Expires March 30, 1981

‘Seal |

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