The American Civil Liberties Union sued financial giant Morgan Stanley on Monday Oct. 15, charging that the firm discriminated against minority homeowners and violated federal civil rights by providing funding for risky mortgages.
The suit, filed in U.S. District Court in New York, is the first discrimination case to go after investment banks that funded the subprime mortgages, rather than the subprime lender whose loans the bank bought.
The suit was filed on behalf of five Detroit residents and Michigan Legal Services and asks the court to certify the case as a class action. As many as 6,000 Black homeowners in the Detroit area may have suffered similar discrimination.
“With this lawsuit, real victims of the subprime lending scandal are stepping forward to hold investment banks like Morgan Stanley accountable for the devastation the banks wrought in their lives,” said ACLU Executive Director Anthony D. Romero.
According to Romero, lending abuse practices were common throughout the financial services industry and victimized Black and Latino neighborhoods nationwide.
Morgan Stanley denied the allegations.
“We believe these allegations are completely without merit and plan to defend ourselves vigorously,” the Wall Street firm said in a statement.
The five homeowners in the suit received their loans from non-defunct New Century Mortgage Corp., who was considered a major player in subprime lending.
The ACLU’s suit alleges that during the housing bubble years – between 2004 and 2007 – Morgan Stanley ramped up its funding of subprime and other high-risk mortgages, becoming the principal financing source for New Century.
The ACLU claims that Morgan Stanley pushed New Century to issue certain types of loans with no concern about risk, because it made its profit at the outset when the mortgage-backed securities were created and sold.
“The targeting of communities of color for loans that unfairly raises the risk of default and foreclosure is the quintessential ‘reverse-redlining’ outlawed by the Federal Housing Act,” said Elizabeth J. Cabraser, a partner at Lieff Cabraser Heimann & Bernstein and co-counsel for the plaintiffs.
Rubbie McCoy is among those homeowners who were affected.
She said her mortgage broker falsified information on her loan application even though she objected. The broker also omitted details such as the fact that after two years, New Century would no longer pay insurance or taxes on the loan. Those added costs have prevented her from making a payment since 2011.
“I’ve seen firsthand the devastation that banks like Morgan Stanley have caused in communities like mine. When I first moved into my home, I knew every neighbor and most of the homes were occupied. Today, the majority of homes stand abandoned and stripped,” said McCoy.
“I don’t like to say that I am losing my home, instead I tell my family that I am fighting for my home. The truth is I’m afraid that today will be the day a sheriff kicks us out. No one should live with this fear.”
--Reported by Ayana Jones