On October 15, 2012, a private law firm, the American Civil Liberties Union and the National Consumer Law Center filed a potentially path-breaking class action against Morgan Stanley. The named plaintiffs in Adkins v. Morgan Stanley, minority homeowners in the Detroit metropolitan area, allege that the defendant committed racial discrimination under the Fair Housing Act, the Equal Credit Opportunity Act and Michigan law by “enabl[ing]” the now-defunct New Century Mortgage Co. (N.C.) to originate excessively costly and risky residential mortgages targeted at African-American borrowers. Based on a disparate-impact theory, the Adkins complaint asserts that these toxic loans disproportionately harmed blacks, who were much likelier than whites to receive them. If N.C. had not gone bankrupt, the plaintiffs could have sued the obvious wrongdoer. But as it is, they must surmount the obstacle of forging a persuasive link between their injuries and the behavior of Morgan Stanley, an entity with which they had no dealings.
It is clear that during the housing bubble, N.C. served as one of the main purveyors of subprime (basically, high-cost) loans with a number of high-risk elements. As defined by the Adkins plaintiffs, such “combined-risk” mortgages included at least two of the following features: issuance based on the borrower’s stated rather than verified income, a practice conducive to “liars’ loans”; a debt-to-income ratio of more than 55 percent, which meant that after normal expenses all income would go to repay debt; a loan-to-value ratio of at least 90 percent; an adjustable interest rate, which shot up after the first few years; “interest only” provisions; negative amortization; a “balloon” payment, unaffordable unless the owner could refinance or sell his property; and prepayment penalties.
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