Morgan Stanley has been sued by the American Civil Liberties Union for allegedly discriminating against black homeowners through its bundling of subprime mortgage loans.
The lawsuit, filed in a New York court on Monday, claims the bank helped fuel risky loans made to black borrowers in Detroit by financing New Century Mortgage Corp, the subprime lender that filed for bankruptcy just before the financial crisis.
Morgan Stanley allegedly pressed New Century to “provide a high volume of loans that became increasingly risky”, and which could be securitised into mortgage-backed securities and sold on to other investors, the ACLU said in a statement.
Banks have been accused of racism and predatory lending in the run-up to the crisis before. President Barack Obama in 2010 set up a specialised unit of the Department of Justice to investigate unfair lending practices.
However the ACLU lawsuit “is the first that connects racial discrimination to the securitisation of mortgage-backed securities, which were sold to institutional investors and pension funds”, the union said. “It is also the first case where a prospective class of victimised homeowners is suing an investment bank directly rather than the subprime lender whose loans the bank bought.”
Morgan Stanley said in a statement: “We believe these allegations are completely without merit and plan to defend ourselves vigorously.”
The bank agreed in 2010 to to pay $102m to settle a Massachusetts investigation into allegations of its involvement in similar unfair lending practices. The state attorney-general’s office also claimed Morgan Stanley provided funding to New Century, and that the subprime lender then unfairly targeted low-income borrowers.
Risky loans were “disproportionately” sold to black borrowers in the Detroit area, the ACLU claimed, in violation of the Fair Housing Act, which bans such discrimination.
The ACLU said that the law suit has so far been filed on behalf of five Detroit-area residents who secured home mortgages from New Century. The union plans to ask for class action status and said it estimates “there are approximately 5,000 to 6,000 people in the Detroit region who were affected by these practices”.
Morgan Stanley is the latest bank to be sued in recent weeks over subprime-related practices, as lawyers rush to file suits before statute of limitations deadlines are reached.
Last week, federal prosecutors sued Wells Fargo over allegedly it had “reckless” lending practices that defrauded a government insurance programme. Bear Stearns, now part of JPMorgan, was also sued by the New York attorney-general earlier this month for allegedly misleading buyers of mortgage-backed securities.
New Century was one of the first subprime lenders to file for bankruptcy. During the subprime boom, it helped originate mortgages that found their way into complex securities created by banks including Morgan Stanley and Goldman Sachs.
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