LITTLE ROCK — The American Civil Liberties Union accused Morgan Stanley of racial bias in a lawsuit filed Monday accusing the bank of urging a home lender to target black borrowers with high-risk mortgages so it in turn could profit from buying and securitizing the loans.
Five black Detroit-area homeowners sued Morgan Stanley in New York for violating civil-rights laws covering housing and credit.
The plaintiffs claim the bank encouraged New Century Financial Corp., a now bankrupt mortgage company, to make “combined-risk loans” to borrowers who couldn’t pay.
“Though profitable for Morgan Stanley, these combined-risk loans put borrowers on a path toward default and foreclosure,” the plaintiffs said in a complaint filed in federal court in Manhattan.
The plaintiffs seek to represent thousands of black borrowers in the Detroit area who received the combined risk loans from New Century from 2004 to 2007. They seek unspecified damages, an injunction against Morgan Stanley and a monitor to ensure the bank complies with any court orders.
“These allegations are completely without merit,” Sandra Noonan, a spokesman for Morgan Stanley, said in an e-mailed statement. The bank will fight the claims, she said.
Morgan Stanley packaged the loans made by New Century and sold them to pension funds and other large investors. But, the lawsuit claims, the bank went beyond the traditional role of an investment bank by requiring that the mortgage company churn out the wildly profitable loans that came with “dangerous” characteristics.
For example, the lawsuit says, many of the loans ultimately sold to investors were “stated income” loans, in which borrowers could estimate their incomes without having to provide supporting documentation.
The ACLU suit, which will seek class-action certification, claims that Morgan Stanley violated the Fair Housing Act and the Equal Credit Opportunity Act.
Rubbie McCoy, one of the five named plaintiffs in the lawsuit, took out a loan from New Century in 2006 with an adjustable rate starting at 12.14 percent, which could not fall below 10.75 percent. It came with “excessive fees and costs,”the suit said.
McCoy, a single mother, said she could not afford the payments, but the broker told her to “fudge” her income, the suit says. Now, she is fighting to save the Detroit home that she shares with her four children.
“Having a house was a way to keep my kids grounded,” McCoy said.
The action against Morgan Stanley follows a series of lawsuits brought by investors and federal and state officials against some of the nation’s largest banks.
Last week, in an action against another bank, federal prosecutors in New York sued Wells Fargo, the country’s largest mortgage lender, saying it made “reckless” loans for more than a decade that soured, and subsequently left them to the government’s insurance program to pay.
Earlier this month, a federal mortgage task force formed by the Justice Department sued Bear Stearns & Co., currently a unit of JPMorgan Chase, accusing the company of widespread misconduct during the heady days of the housing boom in the packaging and sale of mortgage securities.
Morgan Stanley came under fire from the Massachusetts attorney general in 2010 for its packaging of New Century mortgage loans. In June 2010, the bank agreed to pay $102 million to close an investigation by the attorney general, Martha Coakley, into questionable lending practices.
Coakley said the bank ignored warning signs about the quality of New Century’s loans and tried to court the lender’s business by lowering its loan standards.
The ACLU’s complaint says, “Morgan Stanley actively encouraged lending tactics that increased the levels of risk associated with individual loans.”
The subprime loans cited in the suit were made from 2004 to 2007. New Century, one of the country’s most prolific subprime lenders, went bankrupt in March 2007. Based on lending data from 2005 through 2007, the suit says, the Office of the Comptroller of the Currency determined that New Century was responsible for the greatest share of loans in foreclosure in the 10 metropolitan areas blighted by the highest foreclosure rates.
A former employee who testified in a separate civil suit against Morgan Stanley said that bank officials knowingly bought loans in which borrowers’ debt levels were more than 50 percent of their total income, according to the ACLU lawsuit.
The bank, according to one former employee, typically did not require New Century to conduct a second appraisal of homes, fearing that the second look would result in a lower assessment and prevent the loans from being securitized, the suit says.
While other investment banks purchased New Century’s loans, the lawsuit claims that Morgan Stanley “purchased a greater proportion of New Century’s loans than any other institution.”
The loans generated by New Century disproportionately targeted black borrowers, the lawsuit claims.
Blacks living in the Detroit area were 70 percent more likely to wind up with a subprime loan than were white borrowers with similar financial characteristics, according to an analysis, contained in the lawsuit, of New Century loans made between 2004 and 2006.
The Justice Department has accused two major banks of discriminating against black and Hispanic customers.
A settlement in one case was announced in July, when Wells Fargo agreed to pay $175 million to settle claims that the bank steered roughly 34,000 minority-group customers into subprime mortgages, even though they could have qualified for mortgage with lower fees and less risk.
The largest settlement of a residential fair-lending violation came last December, when Bank of America agreed to pay the Justice Department $335 million to put to rest claims that its Countrywide unit discriminated against minority group borrowers.
Information for this report was contributed by Jessica Silver Greenberg of The New York Times and Bob Van Voris of Bloomberg News.
Business, Pages 25 on 10/16/2012