U.S. v. Household Finance Corp., 79-1313

• Decision Date: 13 September 1979
• Docket Number: No. 79-1313,79-1313
• Citation: 602 F.2d 1255
• Parties: 1979-2 Trade Cases 62,799 UNITED STATES of America, Plaintiff-Appellant, v. HOUSEHOLD FINANCE CORPORATION, HFC American, Inc., and American Investment Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1255

602 F.2d 1255

1979-2 Trade Cases 62,799

UNITED STATES of America, Plaintiff-Appellant, v. HOUSEHOLD FINANCE CORPORATION, HFC American, Inc., and American Investment Company, Defendants-Appellees.

No. 79-1313.

United States Court of Appeals, Seventh Circuit.

Argued May 31, 1979.

Decided Aug. 10, 1979.

Rehearing and Rehearing En Banc Denied Sept. 13, 1979.

Bruce E. Fein, Dept. of Justice, Washington, D. C., for plaintiff-appellant.

George D. Reycraft, New York City, for defendants-appellees.

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 of 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 the extension of loans. The district court found that personal 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 competition in the making of "direct cash loans" by finance companies in numerous sections of the country.

On February 5 the parties agreed to the following stipulation 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 acquisition 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 constitute a line of commerce in the United States generally, 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 consumer 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 market as was once deemed to be the exclusive province of the consumer finance companies."

Various facts were relied on by the district court in support of this conclusion. First, the court cited statistics demonstrating the increasing involvement of commercial banks, credit unions, and savings and loan associations in the consumer installment market. Whereas the finance company market share, based on dollar amount of loans, decreased between 1967 to 1978 from 30.9 percent to 19.6 percent, the market share of banks increased from 41.7 percent to 49.9 percent and the market share of credit unions increased from 11.3 percent to 16.8 percent. The court also cited figures which, after adjustment for inflation, showed that real dollar amounts of bank credit during this period increased 99.8 percent; of finance company 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 advantage 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, ¹ the court found that these cards have had a "major" impact on the credit market and have served as "the vehicle for permitting 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 found, however, that as much as 50 percent of the population 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 government 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 companies 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. Accordingly, the district court dismissed the complaint.

II

Although the district court did not explicitly set out the legal standard by which it should be determined whether the business engaged in by finance companies is a distinct line of commerce, it is clear what that standard should be. The Supreme Court has repeatedly held that a financial institution comprises a separate product market if it offers to a "significant" number of consumers a "cluster of products and services" that competing financial institutions do not. United States v. Connecticut National Bank,418 U.S. 656, 664, 94 S.Ct. 2788, 41 L.Ed.2d 1016 (1974); United States v. Phillipsburg National Bank, 399 U.S. 350, 360, 90 S.Ct. 2035, 26 L.Ed.2d 658 (1970); United States v. Philadelphia National Bank, 374 U.S. 321, 356-57, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963). Thus, for example, Connecticut National Bank concluded that banks were a separate 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 commercial loan market (1 billion dollars versus 26 million dollars) 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, 94 S.Ct. 2788. Accordingly, if, as the government alleges, finance companies provide loans, counseling and other financial services to lower-income, higher-risk customers which other financial institutions do not, the standards set out by the Supreme Court would compel a finding that cash loans by finance companies constitute a line of commerce within the meaning of section 7. ² 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 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, 90 S.Ct. at 2041, but in determining the effect of competition in mergers of one type of...