NEW YORK (Reuters) - A federal judge on Thursday approved a lawsuit accusing Morgan Stanley of discrimination for encouraging a subprime mortgage lender to target black homeowners in Detroit.
In the ruling, U.S. District Judge Harold Baer in New York made a connection between predatory lending in the run-up to the financial crisis in 2008 and Detroit's bankruptcy petition last week.
"Detroit's recent bankruptcy filing only emphasizes the broader consequences of predatory lending and the foreclosures that inevitably result," Baer wrote in a 13-page opinion. "It is not difficult to conclude that Detroit's current predicament, at least in part, is an outgrowth of the predatory lending at issue here."
The plaintiffs include five black homeowners in Detroit who accuse the bank of discrimination for giving New Century Mortgage Company incentives to issue loans, including loans with balloon payments, that were likely to fail.
The bank did this by routinely purchasing loans unlikely to be repaid and packaging them in securities that were then sold, providing funding that helped New Century stay in business until it filed for bankruptcy in 2007, according to the plaintiffs.
"These high-risk loans as opposed to better loans or even no loan at all caused Plaintiffs a concrete injury," Baer wrote in his ruling on Thursday. "Thus, Plaintiffs have adequately pled injury in fact."
The ruling allowed the plaintiffs to move ahead with their claims under the Fair Housing Act.
However, Baer dismissed claims they had brought under the Equal Credit Opportunity Act and Michigan's Elliot-Larsen Civil Rights Act.
The plaintiffs brought the proposed class-action lawsuit with assistance from the American Civil Liberties Union in October 2012.
Laurence Schwartztol, a staff attorney in the ACLU's racial justice program, said Thursday that he was pleased with the decision.
"The decision today vindicates our clients' ability to pursue their civil rights claims," Schwartztol told Reuters. "What the decision today does is affirm a crucial principle, which is that when a Wall Street investment bank like Morgan Stanley uses policies that have a discriminatory effect, the people who are harmed by that discrimination will have a meaningful way to assert rights under the federal anti-discrimination laws."
Wesley McDade, a spokesman for Morgan Stanley, declined to comment.
The case is Adkins et al v. Morgan Stanley et al, U.S. District Court, Southern District of New York, No. 12-cv-07667.
Reporting by Bernard Vaughan