The ACLU, along with the National Consumer Law Center and the law firm of Lieff, Cabraser, Heimann & Bernstein, has filed a lawsuit in federal district court in Manhattan to hold Morgan Stanley accountable for its collaboration with the subprime lender New Century, which supplied Morgan Stanley with a steady stream of irresponsible, high-risk loans issued in communities of color that were particularly vulnerable to economic ruin. Although practices like these inflicted damages in low and middle-income communities across the nation, Detroit was particularly vulnerable.
Rubbie McCoy, Plaintiff
The plaintiffs in the case are African-American residents of Detroit, Mich., who have been harmed by Morgan Stanley’s practice of purchasing and financing predatory home mortgage loans to be included in mortgage-backed securities.
In the years leading up to the foreclosure crisis, Wall Street became inextricably linked to individual homeowners, as investment banks like Morgan Stanley created vast amounts of mortgage-backed securities. At its core, this process, known as securitization, involved investment firms purchasing mortgage loans from lenders and turning them into investment products.
Hoping to realize large profits from the securitization of extremely risky mortgages, Morgan Stanley worked hand-in-glove with New Century, encouraging it to issue mortgages that ignored all of the most basic fair lending principles in order to create a large number of mortgages that could be processed and sold as securities.
Although by no means the only institution that engaged in predatory practices, Morgan Stanley was the architect of a volatile and discriminatory structure of mortgage-backed securities, whose consequences are still being felt in Detroit’s hardest-hit neighborhoods.
Morgan Stanley systematically disregarded basic guidelines for safe lending and signaled its willingness to purchase loans that placed borrowers at elevated risk of foreclosure. In fact, Morgan Stanley often purchased loans containing multiple high-risk factors, and the bank’s appetite for extremely risky loans incentivized New Century to favor predatory loans – high-cost loans, sometimes made fraudulently, with risky features and unreasonably high chances of foreclosure.
Plaintiffs in the case received loans that were not designed to be economically viable. Rather, those loans extracted short-term fees and costs while diminishing their wealth and exposing them to an elevated risk of foreclosure. Borrowers in the Detroit region were more likely to receive these loans if they were African American or lived in African-American neighborhoods.
Morgan Stanley’s policies and practices led directly to predatory lending that, in the Detroit region, disparately impacted African American borrowers. We will argue that those policies and practices violated the Fair Housing Act.
UPDATED March 2016: The Second Circuit Court of Appeals will hear arguments June 24, 2016. The issue in the appeal is whether all affected borrowers can collectively challenge Morgan Stanley's practices that led the now-defunct lender New Century Mortgage to issue discriminatory subprime loans.