# Petition — Household Finance Corp. v. United States

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_1182%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1980
- **Citation:** 444 U.S. 1044

## Text

Y .
7 I hi
= ,
—_ --—- —
;

IN THE if

NOV ]

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

OCTOBER TERM, 1979

* 79.705

HOUSEHOLD FINANCE CORPORATION,
HFC AMERICAN, INC., and
AMERICAN INVESTMENT COMPANY,
Petitioners,

Ve

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

ee a raccccenccbicsarvssvtsesesercensnese ili
Dee i ccuvonsasencnseeccorse ]
ia can dasataUvasssncecasbexeccooss ]
cso sneséassvseseearesees 2
Nee i cccasccasapiccaserecsecsconees 2
Nee ni cssecsscesvrcnsscees 2
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

il

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

22
31

la
lb

le

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

iv

PAGE
"Ph 1868) ce
United States v. Philadelphia National Bank, 374 U:S.

SER CEDGR) cavcnsessiscesscceannomatonminncsea eee 15, 16, 18
"$50 (1910) ee
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,
Ve

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).

2
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

3

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.

4
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

5)

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.

6
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

7

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

8

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

9

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

10

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

11

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

12

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.

13

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

14

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.

15

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.

16

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

17

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.

18

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).

19

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

20

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.

21

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.

22
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.

23

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

24

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

25

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).

26

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.

27

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

28

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.

29

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.

30
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.

31
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

la

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

v.

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,

2a

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.

3a

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

ta

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:

5a

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

ba

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%.

7a

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.

Sa

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

Ya

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

la

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,

V

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

lb
APPENDIX B

In the

United States Court of Appeals
FOR THE SEVENTH CIRCUIT

No. 79-1313

UNITED STATES OF AMERICA,
Plaintiff-A ppellant,
v,
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.

2b

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.

I

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

3b

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

4b

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.

5b

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.

I]

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.

6b

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.

7b

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.”

Sb

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.

9b

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”

A

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

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_1182%3A1. Public record. Not legal advice.