The American Civil Liberties Union filed a lawsuit against Morgan Stanley (MS) on Monday, accusing the investment bank of encouraging a subprime lender to make risky loans to African-American borrowers in Detroit.
The lawsuit claims that Morgan Stanley provided funds to New Century Financial to originate loans and then pressured the subprime lender to make extremely risky but profitable loans. Morgan Stanley then purchased these loans for securitized pools and sold them to institutional investors and pension funds, the ACLU said Monday. The loans disproportionately targeted African-American borrowers, which the ACLU said violated the Fair Housing Act and the Equal Credit Opportunity Act.
"We believe these allegations are completely without merit and plan to defend ourselves vigorously," Morgan Stanley said in an email to American Banker.
The suit was filed by the ACLU, the ACLU of Michigan, the National Consumer Law Center and Lieff Cabraser Heimann & Bernstein, a law firm based in San Francisco, in the U.S. District Court in New York on behalf of five Detroit residents and Michigan Legal Services.
The groups are seeking class certification and as many as 6,000 African-American homeowners in the Detroit area may have been affected, the ACLU said.
Morgan Stanley previously faced criticism from Massachusetts attorney general Martha Coakley over its packaging of mortgage loans from New Century. In 2010, the investment bank agreed to pay $102 million to end an investigation by Coakley into its lending practices, the New York Times
New Century went bankrupt in 2007.
