A landmark discrimination lawsuit, which alleges Morgan Stanley (MS) violated the Fair Housing Act by encouraging lenders to push high-risk mortgage loans on African-American borrowers, can move forward, a federal court ruled. 

The investment bank’s motion to dismiss the case was denied in part by Judge Harold Baer with the U.S. District Court in theSouthern District of New York.

In October, the lawsuit was filed by The American Civil Liberties Union, the ACLU of Michigan, the National Consumer Law Center and the firm of Lieff Cabraser Heimann & Bernstein. The suit was filed on behalf of Michigan Legal Services as well as five African-American homeowners in Detroit who were alleged victim’s of the bank’s practice of purchasing and financing predatory mortgages, which were later bundled into mortgage-backed securities. 

"Targeting communities of color with predatory loans is not acceptable. Morgan Stanley is not above the law," said ACLU Executive Director Anthony D. Romero. "Today’s ruling affirms that Wall Street banks must comply with civil rights laws, and that they will be held accountable if they do not."

Not only is this the first lawsuit to connect racial discrimination to the securitization of mortgage-backed securities, it is also the first case where the plaintiffs are suing an investment bank directly rather than the subprime lender whose loans the bank bought, the plaintiffs allege. 

As the principal financier of the now-defunct New Century Mortgage Corp., Morgan Stanley orchestrated New Century’s focus on dangerous loans that placed many homeowners on a path to foreclosure, according to the suit.  

One plaintiff in the case, Rubbie McCoy, described how her mortgage broker guided her toward a predatory New Century loan. The loan placed her home as well as her family’s well-being in jeopardy. The mother of four is a prime example of the firsthand devastation that banks such as Morgan Stanley have wreaked upon largely African-American neighborhoods, now chock-full of abandoned and stripped homes. 

"I am happy the judge is allowing the case to move forward," McCoy said. "This was and continues to be my dream home and neighborhood, yet because of banks' unfair targeting of people like me this has turned into a living nightmare. Anyone with children knows how important it is that they live in a stable environment. There is nothing stable about having your family uprooted or living beside vacant homes."

In his ruling, Baer noted that, "Detroit’s recent bankruptcy filing only emphasizes the broader consequences of predatory lending and the foreclosures that inevitably result." The judge ruled that "Morgan Stanley—as a loan purchaser and mortgage securitizer—falls within the scope of the FHA. And as such, the FHA prohibits Morgan Stanley both from discriminating in 'making available' real-estate related transactions as well as discriminating 'in the terms or conditions of such a transaction.'"

"This ruling gives us the opportunity to present our civil rights claims under the Fair Housing Act against Morgan Stanley in further judicial proceedings. We look forward to proving that investment banks, like Morgan Stanley, cannot maximize their profits at the expense of communities which are victimized by the toxic loans which the banks funded," said Stuart Rossman, director of litigation at the National Consumer Law Center

The case, Adkins et al. v. Morgan Stanley, was filed in the U.S. District Court for the Southern District of New York.

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