The "assurance of discontinuation" filed in state District Court in Las Vegas resolves an investigation into Morgan Stanley's role in buying and securitizing about 3,000 subprime mortgages in Nevada.
"Morgan Stanley's deceptive practices hurt Nevada homeowners and played a role in our economy's decline," Attorney General Catherine Cortez Masto said in a written statement. "This is the first step in the right direction to protect consumers and put an end to this financial firm's egregious behavior."
Nevada leads the nation in foreclosures, bankruptcies and unemployment in the wake of the Great Recession.
Between 600 and 700 consumers will be entitled to relief from Morgan Stanley through refunds or adjusted interest rates, the attorney general said. The total value is estimated between $21 million and $40 million.
Morgan Stanley declined to comment on the settlement. In the court filing, the New York company neither admitted nor denied any wrongdoing.
The investigation focused on potential misrepresentations by lenders, including New Century Financial Corp., to Nevada borrowers who took out loans that Morgan Stanley later bought and packaged into securities for investors.
State investigators alleged borrowers were lured with low "teaser" interest rates without proper disclosure that rates would adjust and to what level. They also alleged some borrows were deceived about the appraised value of their property.
Investigators examined whether Morgan Stanley was aware of the alleged deceptive loan practices and if the mortgage backer substantially assisted the subprime lenders by financing and purchasing those loans.
Under the settlement, Morgan Stanley will cap the interest rate at a fixed level that doesn't exceed the initial teaser rate on the mortgage. If interest rates have already adjusted, borrowers will receive a refund on interest payments made above the initial rate.
Payments also will be made to eligible borrowers who defaulted on loans and lost their homes after the interest rate reset, as well those whose loans exceeded the appraised value of their property by more than 5 percent.
Additionally, $7.2 million from the company will be used to help prevent foreclosures and mortgage fraud in Nevada, the attorney general said.