Morgan Stanley headquarters in Times Square. (Photo: AP)

Several organizations are suing Morgan Stanley (MS) over alleged discrimination against black homeowners and violations of federal civil rights laws affecting up to 6,000 individuals in the Detroit area.

The suit, filed Monday, names five homeowners and claims that Morgan Stanley provided “strong incentives to a subprime lender to originate mortgages that were likely to be foreclosed on.”

While the case concerns lending abuses in Detroit, these practices were “common throughout the financial services industry and victimized black and Latino neighborhoods nationwide,” said Anthony D. Romero, American Civil Liberties Union (ACLU) executive director, in a statement.

“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,” Romero said.

Morgan Stanley, though, denies the charges raised in the lawsuit. “We believe these allegations are completely without merit and plan to defend ourselves vigorously,” the company said in a statement on Monday.

According to the ACLU, the lawsuit, filed in the U.S. District Court of New York, is the first to link racial discrimination to the securitization of mortgage-backed securities, which were sold to institutional investors and pension funds.

In addition, it is the first case in which a prospective class of homeowners is suing an investment bank directly rather than the subprime lender whose loans the bank bought.

The lawsuit was filed by the American Civil Liberties Union, the ACLU of Michigan, the National Consumer Law Center, and Lieff Cabraser Heimann & Bernstein, a San Francisco-based law firm, on behalf of five Detroit residents and Michigan Legal Services.

The five homeowners in the suit received their loans from now-defunct New Century Mortgage Corp., a once- major player in subprime lending. As Morgan Stanley ramped up its mortgage-backed securities business starting in 2004, it became New Century’s largest buyer of subprime loans, says the ACLU.

“Morgan Stanley actively encouraged the proliferation of irresponsible subprime mortgage loans, the complaint charges, in order to feed its hunger for purchasing, pooling, and securitizing mortgage debt for sale to investors,” said Elizabeth J. Cabraser, a partner at Lieff Cabraser Heimann & Bernstein, and co-counsel for the plaintiffs, in a press release.

Rubbie McCoy, who says her mortgage broker falsified information on her loan application even though she objected, maintains that the broker also omitted critical details, including the fact that after two years, New Century would no longer pay the taxes or insurance on her loan.

“I’ve seen firsthand the devastation banks like Morgan Stanley have caused in communities like mine,” she added in the release. “When I first moved into my home, I knew every neighbor and most of the homes were occupied. Today, the majority of homes stand abandoned and stripped.”