Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Oct 16, 2012

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The American Civil Liberties Union (ACLU) has filed a lawsuit accusing Morgan Stanley of encouraging low income African-Americans to take out home loans they could not afford.  Filed in federal court in October, the ACLU suit alleges that the billions of dollars Morgan Stanley lent to the now defunct subprime lender, New Century Financial Corporation came with pressure to offer loans to African-American borrowers who would likely default on them.

The ACLU alleges that New Century, under Morgan Stanley’s guidance, aggressively sold subprime loans to African-Americans in low-income neighborhoods in violation of the Fair Housing Act and the Equal Credit Opportunity Act, which make it illegal for lenders to target racial minorities for subprime loans.  Regardless of whether or not the borrowers made payments, Morgan Stanley profited by purchasing subprime loans from New Century, and bundling them for sale to investors and pension funds.

Racial Discrimination in Subprime Lending

ACLU’s lawsuit has been filed in behalf of five homeowners who claim they were misled and pressured into purchasing loans from New Century.  Rubbie McCoy, one of the ACLU’s plaintiffs, claims that New Century lenders encouraged her to “fudge” her income by overstating how much she received in child support, and that the process required very little documentation.   Ms. McCoy wanted to purchase the home to provide a positive environment for her kids, and says that the repayment schedule quickly became too difficult for her to keep up with. 

All of the plaintiffs represented by the ACLU in this case are all black, highlighting the racial discriminatory practices the lawsuit claims.   The ACLU points to data suggesting that African-Americans living in the Detroit area were 70% more likely to receive subprime loans than white borrowers were, and argues that New Century targeted racial minorities.  The ACLU argues that black borrowers were identified as being vulnerable to subprime lending tactics, and as such were targeted.  

Morgan Stanley has not yet issued a response to the alleged racially discriminatory practices, so it is unclear how the company intends to rebut the ACLU’s evidence of discrimination.  Even if the company did not explicitly command New Century to target African-Americans, discrimination lawsuits can be succesful if the plaintiff demonstrates a particular law or policy had a significant negative effect on members of one particular race.  The data presented by the ACLU suggests that the lending policies instituted by New Century and Morgan Stanley had a stronger impact on black borrowers than it did on whites.  It is unlikely Morgan Stanley had a policy clearly targetting racial minorities, but it looks like the predatory lending practices had a discriminatory, and illegal, impact on African-Americans.

The Subprime Loan Fallout

The subprime loan problem received a great deal of attention for contributing to the collapse of the housing market, which helped trigger the economic collapse in the late 2000’s.  Subprime loans like the ones purchased by these plaintiffs required very little money down, were available regardless of credit, and were often made without verifying income or showing concern for the borrower’s ability to pay.  Lenders, who could repackage the loans and sell them to investors, profited regardless of whether or not the borrower could repay.

During the subprime fallout, large banks and lending institutions were accused of targeting racial minorities thinking that they could easily be sold on an unaffordable home loan.  The Justice Department has already settled cases against Wells Fargo and Bank of America discriminating against black and Hispanic customers, and has issued a new lawsuit against Bear Stearns & Company alleging discriminatory lending. 

Lawsuits against major players in the home loan industry have already revealed a troubling lack of integrity from lenders, and the current action by the ACLU will likely expose further problems.   While the people targeted for subprime loans may never fully recover, the lawsuits forcing large payouts from lenders like Morgan Stanley offer hope that discriminatory and misleading subprime lending practices are a thing of the past.