What is Reverse Redlining (And is Morgan Stanley Guilty of It)?

by John Kiernan on October 17, 2012

What do you call a card-carrying member of the American Civil Liberties Union (ACLU) who shows up at your door?  Well, if you’re a Morgan Stanley executive, you might not call him anything given the shock of hearing the words, “You’ve been served.”

morgan stanleyThe renowned advocacy group filed suit against the investment giant in New York district court on Monday on behalf of five Detroit residents, alleging that Morgan Stanley violated federal civil rights laws by engaging in a process known as reverse redlining.

This, of course, begs the question:  What is reverse redlining?

Well, redlining, as you may have learned in a History or American Studies course along the way, is the process of companies discriminatorily withholding loans, credit, and/or insurance from certain groups or those living in particular geographic areas.  Reverse redlining is therefore the targeting of predatory financial products to these same segments.  Black consumers are particularly susceptible to these tactics precisely because they were historically the primary victims of redlining, as it was a practice employed to discourage integration.

Both redlining and reverse redlining are against federal law, as Title VIII of the Civil Rights Act of 1968 – also known as the Fair Housing Act – prohibits discrimination in the sale, renting, and financing of housing accommodations based on race, color, nationality, religion, sex, handicap, or familial status.  It was put in place to supplement the Civil Rights Act of 1866, which prohibited housing discrimination based on race, but contained no provision for federal penalties.

Much like redlining wasn’t limited to the height of the Civil Rights Movement, there is a long history of reverse redlining in the United States.  Morgan Stanley’s case is merely the latest high-profile example.

In case you don’t know the specifics, Morgan Stanley is said to have “discriminated against black homeowners and violated federal civil rights laws by providing strong incentives to a subprime lender to originate mortgages that were likely to be foreclosed on,” according to a release posted to the Federal Reserve’s website.  The suit alleges that Century Mortgage was forced to target black communities for high-risk home loans in order to meet Morgan Stanley’s demand for mortgages they could bundle and sell, which resulted in consumers being more likely to suffer the ill effects of these products if they were black.  Elizabeth J. Cabraser, a co-counsel for the plaintiffs, added that, “The targeting of communities of color for loans that unfairly raises the risk of default and foreclosure is the quintessential ‘reverse-redlining’ outlawed by the Federal Fair Housing Act.”

The ACLU’s goal is to get the case – the first to go after an investment bank, rather than a loan originator, for mortgage impropriety – certified as a class action in order to represent the interests of the estimated 6,000 black Detroit homeowners and countless other minorities across the country who were allegedly wronged.

While Morgan Stanley has expectedly denied any wrongdoing, the odds are that the embattled financial services company will settle rather than go through a prolonged legal fight where they would undoubtedly be perceived as adding insult to the injury experienced by a vulnerable group during the past few years.  The ACLU’s suit would therefore add to a growing list of successful legal challenges against financial companies that engaged in mortgage impropriety prior to the real estate bubble bursting.  Bank of America and Wells Fargo have already settled cases for $335 and $175 million, respectively, and the ACLU anticipates more legal action in the future.

Ultimately, this action should also give us a sense that the housing market collapse and the resulting recession will not soon be put in the rearview mirror.  As time passes, new details will emerge as they always do with matters of historical importance and the cases to be made against those responsible will have time to take shape.  The ACLU is therefore correct to predict more lawsuits to come, and the rebuilding process is really just getting started.


Please let us know in the comments below if you know of any other recent examples of either redlining or reverse redlining.

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