ACLU Files Suit Against Morgan Stanley for Alleged Discrimination

The ""American Civil Liberties Union"":http://www.aclu.org/ (ACLU) announced it has filed a suit against ""Morgan Stanley"":http://www.morganstanley.com/ on the grounds of loan discrimination.

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The ""complaint"":http://www.aclu.org/files/assets/10-15-12-filed_complaint_re_morgan_stanley.pdf, filed by the ACLU, the ""National Consumer Law Center"":http://www.nclc.org/, the ""ACLU of Michigan"":http://www.aclumich.org/, and ""Lieff Cabraser Heimann & Bernstein"":http://www.lieffcabraser.com/home, alleges Morgan Stanley discriminated against black homeowners and violated civil rights laws by providing incentives to a subprime lender to originate mortgages that were likely to be foreclosed on.

According to a release from the ACLU, as many as 6,000 black homeowners in Detroit may have suffered similar discrimination. The complaint asks the court to certify the case as a class action.

Five homeowners in the suit received their loans from the now-defunct New Century Mortgage Corp. As Morgan Stanley built up its mortgage-backed securities business starting in 2004, it became New Century's largest subprime loan buyer.

Morgan Stanley provided funds to New Century to originate the loans and dictated the terms of the loans it wanted. The complaint alleges Morgan Stanley pushed New Century to issue certain loans with no concern for risk. ""Because minority residents in and around Detroit have been subjected to decades of housing and lending discrimination, and had fewer alternative sources of credit, they were natural targets for these predatory loans,"" the ACLU's release says.

""Morgan Stanley actively encouraged the proliferation of irresponsible subprime mortgage loans, the complaint charges, in order to feed its hunger for purchasing, pooling, and securitizing mortgage debt for sale to investors,"" said Elizabeth J. Cabraser, partner at Lieff Cabraser Heimann & Bernstein and co-counsel for the plaintiffs. ""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 Fair Housing Act.""

The lawsuit also alleges Morgan Stanley violated the Equal Credit Opportunity Act, which bans discrimination for credit transactions, including consumer loans like mortgages.

According to the press release, one plaintiff, Rubbie McCoy, said her mortgage broker ""falsified information on her loan application even though she objected."" The release says the broker also omitted details, including the fact that after two years, New Century would no longer pay the taxes or insurance on her loan.

The lawsuit is the first to connect racial discrimination to the securitization of mortgage-backed securities, the ACLU said. It is also the first case in which a prospective class of victimized homeowners is suing an investment bank directly rather than the subprime lender whose loans the bank bought.

While the case deals with lending discrimination in Detroit, ACLU executive director Anthony D. Romero said these practices were common throughout the financial services industry.

""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 and in our economy,"" Romero said. ""Illegal practices surrounding mortgage-backed securities robbed people of their homes, violated our civil rights laws and left all Americans holding the bag as our economy teetered on the brink of another Great Depression.""