Landmark Lawsuit First to Link Bundling of Mortgage-Backed Securities and Racial Discrimination; Suit Charges Violation of Fair Housing Act
ACLU press release, October 15, 2012
The lawsuit, filed in U.S. District Court in New York, is the first that connects racial discrimination to the securitization of mortgage-backed securities, which were sold to institutional investors and pension funds. It is also the first case where a prospective class of victimized homeowners is suing an investment bank directly rather than the subprime lender whose loans the bank bought.
The lawsuit was filed by the American Civil Liberties Union, the ACLU of Michigan, the National Consumer Law Center, and Lieff Cabraser Heimann & Bernstein, a San Francisco-based law firm, on behalf of five Detroit residents and Michigan Legal Services. The complaint asks the court to certify the case as a class action. As many as 6,000 black homeowners in the Detroit area may have suffered similar discrimination.
While the case concerns lending abuses in Detroit, these practices were common throughout the financial services industry and victimized black and Latino neighborhoods nationwide, according to Anthony D. Romero, ACLU executive director.
The five homeowners in the suit received their loans from now-defunct New Century Mortgage Corp., a one-time major player in subprime lending. As Morgan Stanley ramped up its mortgage-backed securities business starting in 2004, it became New Century’s largest buyer of subprime loans.
Morgan Stanley provided funds to New Century to originate the loans, and dictated the terms of the loans it wanted and ultimately purchased for its securitized pools. It pushed New Century to issue certain types of loans with no concern about risk, because it made its profit at the outset, when the securities were created and sold. Because minority residents of the Detroit region have been subjected to decades of housing and lending discrimination, and had fewer alternative sources of credit, they were natural targets for these predatory loans.
First enacted in 1968, the Fair Housing Act prohibits discrimination in housing transactions, including unfair lending practices. The lawsuit also alleges violations of the Equal Credit Opportunity Act, which bans discrimination for credit transactions, including consumer loans such as mortgages.
Among those affected is Rubbie McCoy, who said her mortgage broker falsified information on her loan application even though she objected. The broker also omitted critical details, including the fact that after two years, New Century would no longer pay the taxes or insurance on her loan. Those added costs have prevented her from making a payment since 2011.
To see the complaint, go to: www.aclu.org/racial-justice/adkins-et-al-vs-morgan-stanley-0