The American Civil Liberties Union filed a class-action lawsuit on behalf of Detroit area homeowners alleging that investment bank Morgan Stanley (MS) violated discriminatory lending laws by encouraging lender New Century Financial to write, high-risk toxic mortgages in predominantly African-American neighborhoods.

These mortgages were allegedly originated to wrap into private-label securitizations.

The plaintiffs say the case is the first brought by homeowners against investment banks for their alleged role in the securitization of high-risk mortgages that impacted minority neighborhoods in Detroit.

In its suit, the ACLU claims Morgan Stanley securitized the loans to turn profits on mortgages that were packaged and sold off to investors, with little regard to the risk.

Mary Claire Delaney, executive director for Morgan Stanley, told HousingWire, "We believe these allegations are completely without merit and plan to defend ourselves vigorously."

But the ACLU, which made this the first case against an investment bank, made several allegations of discriminatory lending.

"Hoping to realize large profits from the securitization of extremely risky mortgages, Morgan Stanley worked hand-in-glove with New Century, encouraging it to issue mortgages that ignored all of the most basic fair lending principles in order to create a large number of mortgages that could be processed and sold as securities," the ACLU said in a statement.

At the height of the housing boom, New Century was the second-largest subprime mortgage originator.

The suit alleges Morgan Stanley incentivized and even partly funded New Century's push to write high-risk mortgages.

The key plaintiffs are African-Americans who claim the investment bank and lender targeted vulnerable individuals with loans that were at high risk of default and foreclosure.

The ACLU complaint accuses Morgan Stanley of racial discrimination in violation of the Equal Credit Opportunity Act, discrimination as a violation of the Fair Housing Act and race discrimination as a violation of the Michigan-Elliott Larsen Act.

The ACLU's executive director Anthony Romero acknowledged in a conference call with journalists that "by no means was Morgan Stanley the only actor in the subprime debacle." He added that if more had been done to deal with the behavior of the banks, additional litigation may not have been needed, but he felt that was not the case.

"We begin with Morgan Stanley," he said.

One of the plaintiffs, Rubbie McCoy, was part of the conference call and broke out in tears, saying she did not understand what had occurred in the lead up and fall out of the housing bust. She did say that at one point her and her four children were "excited about becoming homeowners."

kpanchuk@housingwire.com