A new lawsuit filed in a New York court claims that the subprime lending crisis, in which consumers were given home loans they couldn’t afford with the expectation they would default on them, was caused at least in part by a lender discriminating against minority borrowers.
The American Civil Liberties Union recently filed a suit against mortgage issuer Morgan Stanley claiming that its lending practices unfairly discriminated against African-American and Latino homeowners, and therefore violated civil rights laws, according to a report from the consumer advocacy organization. In particular, it claims the company’s practices gave subprime lenders a large incentive to originate mortgages despite the fact that they knew the borrowers were likely to be foreclosed upon.
“With this lawsuit, real victims of the subprime lending scandal are stepping forward to hold investment banks like Morgan Stanley accountable for the devastation the banks wrought in their lives and in our economy,” said Anthony Romero, executive director of the ACLU. “Illegal practices surrounding mortgage-backed securities robbed people of their homes, violated our civil rights laws and left all Americans holding the bag as our economy teetered on the brink of another Great Depression.”
The case particularly focuses on practices in the Detroit, Michigan, area, where many African-American homeowners were unfairly given mortgages their lenders knew they couldn’t afford, the report said. Though there are only five homeowners involved in the suit itself, as many as 6,000 such consumers may have been affected by this type of discrimination, which largely involved falsifying mortgage documents so that an otherwise unqualified borrower would be approved for the massive line of credit.
The practices stand in violation of a number of different laws, the ACLU claims. The first is the Fair Housing Act, which prohibits discrimination in home loan and other housing transactions. Another is the Equal Credit Opportunity Act, which does not allow for discrimination in any credit transactions. The group further claims that these practices were encouraged by Morgan Stanley so that it could continue packaging and selling bad mortgages to investors ahead of the housing bubble burst.
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The real estate market is slowly improving today, for a number of reasons, but experts believe it will be some time yet before the industry is anywhere close to the levels seen prior to the collapse.
Image: Alex E. Proimos, via Flickr