Consumer Protection

Morgan Stanley Mortgage Discrimination

Result: $16 million settlement
Year: 2008

Five African-American residents of Detroit, Michigan, joined by Michigan Legal Services, have brought a class action lawsuit against Morgan Stanley for discrimination in violation of the Fair Housing Act and other civil rights laws.

The plaintiffs charge that Morgan Stanley actively ensured the proliferation of high-cost mortgage loans through the company New Century Mortgage Corporation (“New Century”) with specific risk factors in order to bundle and sell mortgage-backed securities to investors. Morgan Stanley was the principal financier of the now-defunct New Century, and orchestrated New Century’s focus on dangerous loans that placed many homeowners on a path to foreclosure.

Because minority residents in the Detroit region were historically subject to housing lending discrimination, they were especially vulnerable to such predatory loans. The lawsuit is the first to seek to hold a bank in the secondary market (the securitizer of pooled loans as opposed to the initial lender, in this case New Century) accountable for the adverse racial impact of such policies and conduct.

Plaintiffs seek certification of the case as a class action for as many as 6,000 African-American homeowners in the Detroit area who may have suffered similar discrimination. Lieff Cabraser serves as plaintiffs’ counsel with the American Civil Liberties Union, the ACLU of Michigan, and the National Consumer Law Center.

Court Rules Lawsuit Can Proceed

On July 25, 2013, U.S. District Court Judge Harold Baer, Jr., denied in part Morgan Stanley’s motion to dismiss the lawsuit, allowing plaintiffs’ claims that the investment bank violated the Fair Housing Act to proceed. The Court stated:

Plaintiffs here have met their pleading burden. First, they have identified the policy that they allege has a disproportionate impact on minorities. That policy consisted of Morgan Stanley (1) routinely purchasing both stated income loans and loans with unreasonably high debt-to-income ratios, (2) routinely purchasing loans with unreasonably high loan-to-value ratios, (3) requiring that New Century’s loans include adjustable rates and prepayment penalties as well as purchasing loans with other high-risk features, (4) providing necessary funding to New Century, and (5) purchasing loans that deviated from basic underwriting standards. Plaintiffs go on to state that these policies resulted in “New Century aggressively target[ing] African-American borrowers and communities … for the Combined-Risk Loans.” (Compl., ¶ 81.)

Indeed, Plaintiffs allege in detail the effect that New Century’s lending had upon the African-American community in the Detroit area. (Compl., ¶¶ 115-122). That lending, according to Plaintiffs, was a direct result of Morgan Stanley’s policies. Indeed, Plaintiffs allege in detail the effect that New Century’s lending had upon the African-American community in the Detroit area. (Compl., ¶¶ 115-122). That lending, according to Plaintiffs, was a direct result of Morgan Stanley’s policies. And while Plaintiffs do not allege that they qualified for better loans, they allege discrimination based only upon the receipt of these predatory, toxic loans placed them at high financial risk. These risks exist regardless of Plaintiffs’ qualifications. On a motion to dismiss, these allegations are sufficient to demonstrate a disparate impact.

Earlier in the opinion, the Court further observed:

Detroit’s recent bankruptcy filing only emphasizes the broader consequences of predatory lending and the foreclosures that inevitably result. Indeed, by 2012, banks had foreclosed on 100,000 homes [in Detroit], which drove down the city’s total real estate value by 30 percent and spurred a mass exodus of nearly a quarter million people. The resulting blight stemming from 60,000 parcels of vacant land and 78,000 vacant structures, of which 38,000 are estimated to be in potentially dangerous condition, has further strained Detroit’s already-taxed resources. And as residents flee the city, Detroit’s shrinking ratepayer base renders its financial outlook even bleaker. Id. Given these conditions, it is not difficult to conclude that Detroit’s current predicament, at least in part, is an outgrowth of the predatory lending at issue here (Internal quotations and citations omitted).

Commenting on the Court’s decision, Lieff Cabraser lawyer Rachel Geman stated,

African-American homeowners harmed by Morgan Stanley’s securitization policies now have the chance to develop evidence to support their classwide claims of discrimination and to request the disgorgement of the bank’s ill-gotten gains. A bank cannot cause the sale of toxic mortgage loans as a future profit stream for itself and then avoid any potential responsibility whatsoever for the disastrous impact of those loans on actual homeowners.

The case, Adkins v. Morgan Stanley, was filed in the U.S. District Court for the Southern District of New York. Visit the ACLU’s website to learn more about the Morgan Stanley Fair Housing Discrimination lawsuit.