A credit denial letter is an official notification written by lenders to inform an individual or business of the rejection of their loan request.
It is usually sent for applications for loans, mortgages, credit cards, and business credit lines. It also informs the applicant why their application was rejected.
Typically, lenders will deny loan requests if the applicants are not creditworthy, which can result from multiple factors such as incomplete documents, insufficient income, bankruptcy, poor credit score, etc. The letter also communicates the applicant’s credit score, the credit reporting agency used, and the process to obtain their credit report.
Lenders can use templates that include all the information required to produce formal credit denial letters. It is important to note that lenders are expected to reassess their decision to decline an application should the applicant object to it. They should also cite legitimate reasons, such as errors and inaccuracies in the report. Review multiple samples of such letters to understand the different reasons a lender can use to legally deny credit to their clients.
The letter is a legal requirement under the ECOA and the Fair Credit Reporting Act. It provides information to the borrower, protects the lender’s reputation, and complies with legal requirements. Also, it is professional to be transparent about the decision-making process. Online templates are practical tools that can help lenders write such letters.
This article will discuss reasons to reject credit applications and how to write a letter notifying the applicant of such a decision by providing a sample. It also educates lenders on certain legal factors they should know before sending a letter of denial to a credit application.
Reasons for Denying a Credit Request
Letters to notify applicants of refusals of their credit requests serve a valuable purpose by providing individuals with insights into the factors considered by lenders when assessing creditworthiness. By exploring the common reasons for credit denial, we can understand the criteria that financial institutions use to evaluate applicants, empowering individuals to make informed decisions and take proactive steps toward improving their credit standing.
This section discusses the key factors that can influence a credit denial decision:
Credit score
A credit score is a measure or numerical ranking of creditworthiness. Using a standardized formula, you can calculate it from credit information such as length of credit history, payment patterns, credit utilization, and outstanding debt. The higher scores indicate a lower level of risk, making it more likely for such applicants to secure loans at favorable terms. On the other hand, the lower scores may result in credit denial or less favorable loan terms, as they suggest a higher risk of defaulting on payments.
Employment history
Employment status and history are criteria used to determine an applicant’s suitability for loans because they determine their capacity to pay back the loan. So, you need to consider whether an applicant is employed, how long they have been employed, and their current and previous jobs. Having a stable job and career may indicate that they have a reliable source of income and are less likely to default. However, if their employment situation is unstable, it raises concerns about their ability to fulfill financial obligations and is a legitimate basis for refusing their loan request.
Insufficient income
One crucial factor that lending institutions carefully scrutinize when assessing loan applications is the applicant’s income. For lenders, the ability of borrowers to repay their debts is of paramount importance to mitigate the risk of defaults. Therefore, income serves as a critical indicator of an individual’s capacity to meet their financial obligations. When an applicant’s income is deemed insufficient, it can be a compelling reason for denial.
Debt-to-income ratio
The debt-to-income ratio compares an individual’s monthly debt payments to their income. If the ratio is too high, it indicates that a significant portion of income is already allocated towards existing debts, and lenders may perceive the applicant as having a higher credit risk and reject the loan request.
Payment history
Payment history is a reliable criterion for determining an applicant’s eligibility for a loan. If an applicant has a history of late payments or defaults with a specific financial institution, it can significantly impact their chances of getting approved for new credit from that institution.
Unstable housing situation
Lenders might have a negative opinion of housing instability, such as frequent moves or a lack of a permanent address. It can be an indicator of financial uncertainty and affect an applicant’s creditworthiness.
Inaccurate information on a credit report
You can reject an application if the credit report results are inaccurate. The report will indicate the borrowing history, current and previous addresses, bank accounts, employment history, etc. Incorrect information, such as accounts that do not belong to the applicant or inaccurate payment records, can be particularly detrimental.
The accuracy and reliability of this information are of utmost importance in determining an applicant’s creditworthiness. Unfortunately, mistakes or inaccuracies on the reports can occur, and they have the potential to significantly impact an individual’s credit standing. From a lender’s perspective, such errors pose risks and can be a valid reason for credit denial.
Multiple loan applications
You can deny credit to individuals or businesses that have applied too many times in a short period of time. This will often indicate that the applicant is struggling financially and in desperate need of money, which poses a risk of inability to repay once approved.
How to Write a Letter to Notify Rejection of Credit Application
As most applicants will be distressed by the news, it is important to approach the rejection professionally. Your communication must be objective and clearly explain the situation. Using a template can be helpful in properly organizing information and ensuring the decision is effectively conveyed to the client.
The information required in a letter to formally notify applicants that they are ineligible for credit is presented below:
Specify the date
The first element on the letter is the date it was written or issued. The date is needed for reference and filing purposes. A proper format should be used, for example, March 24, 2023.
Include the borrower’s information
Secondly, it must be clear to whom the letter is addressed, i.e., the applicant. Your letter must have the borrower’s name, mailing address, account number, and application ID.
For example, this information can be presented as follows:
Jack Geller
103 City Park Road
New York City, NY 8007
Account No: 1234 4567 7890
Application ID: JG009282NY
Tip: A subject line indicating the purpose of the letter can be included if you are sending an email. For example, RE: Credit Denial Letter for Application ID-2363. This should be followed by a formal greeting such as Dear Mr. Schumacher.
Mention the reason for the denial
Next, indicate the letter’s purpose for rejecting the application and provide a valid reason. You can begin by acknowledging the borrower’s interest in the opening statement before stating that their application is being rejected.
For example:
“Thank you for your inquiry about a credit card with B&G Platinum. We are honored by your interest in our company and our services. Unfortunately, we regret to notify you that your application was declined as your debt-to-income ratio is too high and a principal concern for our team.”
Provide credit reporting agency information
Lenders are usually obligated to inform applicants about the credit reporting agency (or agencies) they used to assess their creditworthiness. This section provides details of the agency’s name, contact information, and instructions on how to obtain a free copy of the report for further review. Note that while this information is necessary for a consumer credit application, it is not needed for a commercial application. This is because, in such situations, it is not a requirement of the FCRA.
For example, this section can be written as follows:
“After a thorough search, we determined that your total debt is above $150,000. When compared to your assets, this amount indicates that you have a credit score of 450, which is lower than the 650 required for eligible candidates.”
Specify the adverse action reasons
The letter should include a section detailing the specific adverse action reasons, which are the key factors that contributed to the denial decision.
To comply with regulatory requirements, for example:
“The decision was based specifically on the key adverse action reasons that influenced our decision a poor credit history and insufficient income.”
Right to obtain a free report
Lenders typically highlight the recipient’s right to access a free copy of their report within a specified timeframe. This provision allows individuals to review the report for inaccuracies or discrepancies that may have impacted the credit decision.
For example:
“We understand that credit denial can be disappointing, and we encourage you to review your credit report, which you can obtain free of charge from [credit reporting agency’s name], to ensure its accuracy and address any areas that may require improvement.”
Your contact information
The letter for denial should be concluded by providing your contact information, including your name and contact details such as phone number, email address, and mailing address. This information is meant to facilitate future correspondence if the borrower has questions about the denial or future applications.
For example:
Charles Majors
Jenkins Micro-Finance Company
Downhill Avenue
Augusta, Maine 00328
Charlesm200@email.com
(0288) 3630-8999
Free Templates
To simplify the writing process, you can use the free downloadable templates for these letters provided in this article. They can be customized to suit your needs and preferences. Also, they are professionally designed to create legible and presentable letters that protect a financial institution’s reputation.
Sample Credit Denial Letter
Hillary Bane
33 South Park Street
Columbia, WA 3900
Acc. No: 9038 9911 334
Application ID: 6738WA
March 13, 2023
RE: Credit Card Request Refusal Notice
Dear Mr. Bane,
We appreciate your interest in our credit card services at Pins Express Bank; however, regrettably, I want to notify you that we cannot approve your application. Our decision is based on a thorough review of your application and creditworthiness assessment. We understand the importance of credit facilities, and we appreciate the time and effort you invested in applying with us.
After careful consideration, it was determined that the current status of your employment, specifically the recent termination from your previous job, contributes to our decision to deny your credit card application. As an institution committed to responsible lending practices, we carefully evaluate various factors, including income stability, when assessing credit applications.
To arrive at this decision, our bank officer carefully reviewed your application and conducted a comprehensive assessment of your creditworthiness. We utilized the credit information provided by [Credit Reporting Agency’s Name], a recognized and reputable credit rating agency. We encourage you to obtain a free copy of your credit report from [Credit Reporting Agency’s Name]. Reviewing your credit report will provide you with valuable insights into your credit profile, allowing you to identify areas for improvement and address any potential discrepancies that may have influenced our decision.
If you have any further questions, please feel free to contact our loan department at [ phone number]. Thank you for considering Pins Express Bank for your credit requirements.
Sincerely,
Jeremy Hughes
Pins Express Bank
Central Business Street
Princeton, AZ 04999
(022) 5555-0939
Legal Requirements for Credit Denial Letters
As mentioned earlier, you are legally required to send the letter to inform the applicant why their application was denied. These include:
- Fair Credit Reporting Act (FCRA): FCRA mandates you to notify applicants of any information, such as credit scores and reports, used as a basis for credit refusal. Also, it gives the applicant the right to reevaluate the credit report and appeal the decision if any inaccuracies are identified. According to the FCRA, borrowers should request the credit report within 60 days of being notified of the refusal.
- Equal Credit Opportunity Act (ECOA): ECOA prohibits discriminating against applicants based on race, gender, age, religion, marital status, or receipt of public assistance.
- Truth in Lending Act (TILA): TILA promotes transparency in lending. It requires the lenders to disclose the terms credit terms, costs, and fees to consumers. While credit refusal may not directly be governed by TILA requirements, lenders must still maintain compliance with other TILA provisions when extending credit to consumers.
- State-Specific Regulations: Each state may have additional laws or regulations that govern the content and delivery of credit refusal letters. It is crucial for lenders to familiarize themselves with state-specific requirements to ensure compliance.
Conclusion
You can deny credit applications as long as you have valid and lawful reasons. However, you must issue a letter to explain with clarity the reasons for the refusal. Compliance with legal requirements, such as the Fair Credit Reporting Act and Equal Credit Opportunity Act, is crucial to avoid legal issues and maintain ethical lending practices. By understanding the importance of effective communication and adherence to regulations, lenders can ensure fair treatment of applicants while protecting their institution’s reputation. The most common reasons for credit denial are a high debt-to-income ratio, a poor credit score, and a poor payment history. You can use templates to save time and effort when writing this type of letter. Consider reviewing sample letters of this type to learn the proper format and language to use when writing one.
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