Morgan Stanley is being sued by the American Civil Liberties Union, for alleging racial discrimination over packaging sub-prime mortgage loans into securities, Monday.
According to Reuters, this is the first suit that has directly accused any investment bank of making risky loans that goes against the federal civil rights law.
The suit states that Morgan Stanley influenced a unit of New Century Financial Corp, now bankrupt, to target black borrowers with overpriced loans. This plan was expected to go wrong, throwing a lot of black borrowers under the bus.
The ACLU said the investment bank collected significant fees from packaging the loans into securities that were sold to institutional investors, while those who borrowed from them faced high and difficult risks, Reuters reported.
"It is literally the first case of Main Street holding Wall Street accountable," ACLU Executive Director Anthony Romero said.
These high risks faced by the borrowers caused many of them to lose their homes.
Rejecting the accusations, Morgan Stanley's spokeswoman, Mary Claire Delaney said in an email, "We believe these allegations are completely without merit and plan to defend ourselves vigorously."
The suit was filed in the U.S. District Court in Manhattan on behalf of five Detroit residents. The residents accused the bank of going beyond the traditional role followed by others to fund loans made by New Century.
The ACLU asked the court to categorize this case as a class action.
"It said as many as 6,000 black homeowners in the Detroit area may have suffered similar discrimination as a result of being offered loans that many could not afford," Reuters confirmed.
If successful, the lawsuit can change the securitization process that has been boosting Wall Street's profits since the financial crisis.
