Investment banks are learning about reputation risk the hard way. First we had Bear Stearns winding down two troubled hedge funds it would have rather cut loose and let sink on their own. Then Lehman was pilloried in the Wall Street Journal, in “How Wall Street Stoked the Mortgage Meltdown, for its particularly close relationship with First Alliance, a subprime “sweat shop” that led to Lehman’s conviction in a federal court for defrauding lenders. Less than six weeks after this article ran, Lehman was the first large investment bank to shutter its subprime business.
The National Community Reinvestment Coalition has filed a civil rights complaint against Morgan Stanley and certain affiliates, the first time a securitizer has been charged with redlining under the Federal Fair Housing Act.
From the press release by the the National Community Reinvestment Coalition:
The complaint states that Morgan Stanley’s lending policies contain three discriminatory types of exclusion, often characterized as “redlining.” The first type includes policies that restrict the availability of loans by requiring applicants to satisfy minimum property values. These policies, for example, prevent many borrowers whose homes are valued at less than $100,000 from obtaining a loan from Morgan Stanley, regardless of their credit worthiness. The second type of discrimination includes policies that deny loans to residents of Puerto Rico, Guam and the Virgin Islands, while the third type prohibits lending to Native American communities.
The complaint, which will be available at http://www.NCRC.org, illustrates the impact of these policies using demographic maps.
NCRC contends in the complaint that there is no legitimate business justification for any of Morgan Stanley’s discriminatory lending policies. Under Morgan Stanley’s minimum property value policies, applicants who meet traditional lending criteria, such as a strong FICO or other credit score, steady income, significant assets, and low loan-to-value ratios, are excluded from consideration for a mortgage loan based solely on the value of their home or the home they are purchasing. Likewise, under its other restrictive policies, Morgan Stanley automatically rejects applicants and loans on the secondary market based solely on the applicant’s location without regard to traditional lending criteria.
Housing Wire, picking up on a Reuters story, noted that it was novel for a redlining suit to be filed with the SEC as well as HUD. I imagine that the SEC will beg off, saying it has no jurisdiction, but from the NCRC’s perspective, it’s a low cost strategy that may pay off.