Judge: Mortgage Stanley Discrimination and MBS Lawsuit Can Proceed

JUL 26, 2013 11:31am ET

A discrimination lawsuit against Morgan Stanley that alleges the investment bank violated the Fair Housing Act by encouraging lenders to push high-risk mortgage loans on African-American borrowers was granted by a federal court to proceed.

The lawsuit was filed in October by the American Civil Liberties Union, the ACLU of Michigan, the National Consumer Law Center, and the firm of Lieff Cabraser Heimann & Bernstein on behalf of Michigan Legal Services and five African-American homeowners in Detroit who claimed to be victims of Morgan Stanley’s practice of purchasing and financing predatory mortgages, which were later bundled into mortgage-backed securities.  

This lawsuit represents the first that connects racial discrimination to the securitization of mortgage-backed securities. It is also the first case where the plaintiffs are suing an investment bank directly rather than the subprime lender whose loans the bank bought.

Morgan Stanley, based in New York, was the principal financier of the now-defunct New Century Mortgage Corp. and handled the majority of loans that placed many homeowners at-risk of foreclosure.

“Targeting communities of color with predatory loans is not acceptable. Morgan Stanley is not above the law,” said Anthony Romero, executive director of the ACLU.

In his ruling, Judge Harold Baer of the Federal District in the Southern District of New York said Morgan Stanley acting as a loan purchaser and mortgage securitizer needs to follow FHA guidelines, which prohibits them from discriminating in “making available” real estate related transactions as well as discriminating “in the terms or conditions of such a transaction.”

Kary Moss, executive director of the ACLU of Michigan, said the judge’s decision is an “important step forward” for the people of Detroit who have been victimized by predatory lending practices.

“This case shows that Detroit’s economic woes cannot simply be blamed on Detroit’s residents and that enforcement of our civil rights laws can be an important tool in Detroit’s economic recovery,” Moss added.

The case, Adkins et al. v. Morgan Stanley, was filed in U.S. District Court for the Southern District of New York.

Morgan Stanley declined to comment regarding the judge's decision.

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