ACLU, others file suit against Morgan Stanley over subprime lending

Specifically, the suit has been filed on behalf of five Detroit homeowners who the groups charge were "victimized" by lending practices, but the case has the potential to grow into a class-action suit. Between 5,000 and 6,000 Detroit-area homeowners were similarly affected, the groups estimated.

The loans were actually made by the now-bankrupt New Century Financial Corp., a subprime lender that Morgan Stanley principally financed. However, the complaint charges that Morgan Stanley pushed the lender to make a large amount of extremely risky subprime mortgages.

While there have been other legal complaints filed against banks for actions during the subprime mortgage bubble, this new suit makes specific discriminatory claims, charging that the lending practices at work discriminated against black borrowers. To support their claim, the groups point to mortgage lending data that shows black borrowers in Detroit were 70 percent more likely to get a subprime mortgage instead of a prime one, when compared to white borrowers.

The suit claims that the bank violated the Fair Housing Act and the Equal Credit Opportunity Act. The complaint asks for Morgan Stanley to disgorge profits stemming from the practices, as well as individual damages for the five individual plaintiffs.

The bank dismissed the charges when contacted by The Hill.

"We believe these allegations are completely without merit and plan to defend ourselves vigorously," said Mary Claire Delaney, a spokeswoman for the bank.

Morgan Stanley previously agreed to pay $102 million to settle an investigation by Massachusetts Attorney General Martha Coakley over the lending and packaging of mortgages through New Century.

The suit marks the latest in what has been a series of legal challenges filed against banks for actions pumping up the subprime mortgage bubble. Earlier this month, New York Attorney General Eric Schneiderman filed a suit against JPMorgan Chase, charging it with widespread fraud in the marketing and selling of mortgage-backed securities loaded with risky mortgages. Schneiderman is also the head of President's Obama's task force on mortgage fraud. JPMorgan plans to contest the charges, and points out that the complaint is targeted at the actions of Bear Stearns, which JPMorgan acquired in the heat of the financial crisis.

Meanwhile, the Justice Department has filed a civil suit against Wells Fargo, alleging that the bank wrongfully certified the quality of roughly 100,000 mortgages. The home loans were guaranteed by the government based on that certification, but in reality were too risky and ended up costing the government hundreds of millions of dollars when they defaulted. Wells Fargo, too, has vowed to fight the charges.