Detroit Homeowners Sue Morgan Stanley Over Racially Biased Predatory Lending Practices

Meet the plaintiff

While there have been a number of lawsuits against mortgage lenders for allegedly steering minority borrowers into subprime mortgages, even when they qualified for standard loans, a new lawsuit filed against Morgan Stanley by the ACLU on behalf of five Detroit residents is the first such complaint against an investment bank.

The lawsuit, filed today in a U.S. District Court in Manhattan, claims that Morgan Stanley encouraged the now-bankrupt New Century Financial Corp to place a disproportionate number of black borrowers into subprime, adustable-rate mortgages.

While Morgan Stanley made a bundle off these high-risk mortgages by packaging them and selling them off to investors as securities, the people pushed into these loans were at risk for foreclosure.

Additionally, the plaintiffs allege that Morgan Stanley took a special interest in the New Century loans by helping to fund the mortgages, setting loan volume goals and establishing terms.

“It’s reverse red-lining. It violates the Fair Housing Act,” claims a co-counsel for the plaintiffs referring to the more common practice of systematically refusing loans to minorities and people in low-income areas. “These loans were mass produced and they were built to order, not to serve homeowners.”

While the lawsuit has five named plaintiffs, it’s believed that the class could grow to as large as 6,000 people, which is still only a fraction of the 67,000 foreclosures in Detroit since the collapse of the housing market.

A rep for Morgan Stanley tells Reuters, “We believe these allegations are completely without merit and plan to defend ourselves vigorously.”