ACLU sues Morgan Stanley over subprime loans

Rubbie McCoy (left) reacted while describing her housing situation at a press conference in New York.
Mark Lennihan/Associated Press
Rubbie McCoy (left) reacted while describing her housing situation at a press conference in New York.

NEW YORK — The American Civil Liberties Union accused Morgan Stanley Monday of violating civil rights laws by encouraging a lender to push more expensive and risky mortgages on black neighborhoods in Detroit.

The ACLU and others filed the lawsuit on behalf of five home­owners who took out loans from New Century Mortgage Corp., a subprime lender that has since collapsed. Morgan Stanley said the allegations were ‘‘completely without merit.’’

The lawsuit says Morgan Stanley pushed New Century to make the risky loans because Morgan made its profit at the start of the process and sold the loans before they could go bad.


The investment bank took the subprime loans from New Century and bundled them into mortgage bonds, which were then packaged into other securities and delivered to big investors all over the world.

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Because Morgan Stanley bought more of New Century’s loans than any other firm did, it ‘‘effectively dictated the types of loans that New Century issued,’’ the suit said. It described the loans as destined to fail.

The plaintiffs argue that Morgan Stanley encouraged New Century to make ‘‘stated-income’’ loans, in which borrowers provided no verification of their income when they applied for mortgages. Those loans allowed mortgage brokers to inflate borrowers’ income and make them appear more credit-worthy.

Black borrowers in the Detroit area ‘‘were more likely to receive these categorically harmful loans than white borrowers,’’ the complaint said. In and around Detroit, a black borrower was 70 percent more likely to wind up with a high-cost subprime loan from New Century than a white borrower with similar income and financing needs, it said.

Roughly a third of the company’s mortgages were made in neighborhoods where blacks and other minorities account for at least 90 percent of the people.


The lawsuit is the latest against a bank for lending practices during the real estate boom leading up to the 2008 financial crisis.

Last week, the federal government sued Wells Fargo for hundreds of millions of dollars. The government said Wells falsely asserted that more than 100,000 loans made between 2001 and 2005 were eligible for federal mortgage insurance.

One of the Detroit plaintiffs named in the Morgan Stanley suit, Rubbie McCoy, said her mortgage broker falsified her loan application in 2006 and pressured her into buying the house she was renting. Her landlord had put her in contact with the broker.

Morgan Stanley’s own analysis showed that 45 percent of the loans it bought from New Century had high debt-to-income ratios, the lawsuit said.

Morgan Stanley said in a statement: ‘‘We believe these allegations are completely without merit and plan to defend ourselves vigorously.’’