Adverse Action Notice Explained (with Example)

What Is an Adverse Action Notice (with Examples)

An Adverse Action Notice is a written, verbal, or electronic disclosure that lenders must issue to borrowers once their credit-based application is denied or they are faced with any other negative credit-related action. The main aim of sending adverse action notice to consumers is to communicate credit denial reasons.

Under the Fair Credit Reporting Act (FCRA), lenders and any other financial institutions must issue consumers with an adverse action notice in the following scenarios:

  • When a borrower’s credit application is denied
  • If a consumer’s credit is not extended in the amount or terms that he/she wanted.
  • When negative changes are made to a borrower’s credit account terms due to their credit report’s information.

Receiving Time for Adverse Action Notices

In most cases, a borrower should expect to receive an adverse action notice within 30 to 90 days, depending on the action’s nature. The creditor should issue the notice to a consumer within:

  • 30 days of  receiving a comprehensive credit application from a borrower
  • 30 days of receiving an unfinished application
  • 30 days after taking action on a prevailing credit account
  • 90 days after making a counteroffer to an application for credit, if the consumer of credit does not accept or use the credit that the creditor offered

For example,  

if borrower A has an excellent credit score and he/she applies for a new credit card but accidentally submits an incomplete application. In this case, the creditor automatically denies the credit application. Now suppose borrower A was unaware that he/she did not fill out the application as required; he might be left wondering why his application was denied.  Fortunately, under the Fair Credit Reporting Act, borrower A can expect to receive an adverse action notice within 30 days of credit denial, notifying why he was denied credit. In this case- the application was incomplete.

With this information, a consumer can overcome denial and take the necessary precautions to avoid such slipups when they apply for credit next time. When an applicant is granted credit, but with significantly worse terms than the most favorable terms received by a considerable number of other consumers based on information on the applicant’s credit report, the applicant is bound to receive a separate disclosure known as a Risk-Based Pricing Notice.

Elements of an Adverse Action Notice

The contents included in an Adverse Action Notice depends on the information that was used to take action against a given consumer- namely, whether the consumer was denied credit due to information in a credit report from a Credit Reporting Bureau/ Consumer Credit Reporting Agency, or because of information from an external source other than a Credit Bureau.

Denial due to credit report information

If facts in a credit report from a credit bureau are the reasons an adverse action notice is issued against a consumer, the notice will indicate the name of the Credit bureau agency that provided the credit report used in the decision along with the bureau’s contact information including the address and phone number.

Secondly, the notice must state that the credit bureau was not involved in the decision and that the bureau is in no position to explain to a consumer why their credit application was denied. Nevertheless, the reasons as to why credit was denied will be listed in the Adverse Action Notice.

Common reasons that may trigger a creditor to deny a credit application may include:

  • Consumers accidentally submitting an incomplete credit application
  • Insufficient Consumer Income
  • Unverifiable employment
  •  Restricted credit or no credit
  • An insufficient number or invalid type of credit references
  • Previous or current delinquent accounts
  • Bankruptcies
  • Repossessions or foreclosures.

Thirdly, the notice must list, among other factors, the consumer’s credit score, range of probable credit scores, as well as four factors that contributed to the credit score. If one of the factors contributing to the credit score is the total number of inquiries into the credit report, the lender must list at least five factors.

Notice of adverse action based on information from a credit report should also communicate the consumer’s right to a free copy of the report from a credit bureau listed in the notice for purposes of reference. This report is given free of charge, and it is intended to enable the borrower to understand better and correct the notice’s problems.

Remember: Usually, the consumer will be allowed a grace period of 60 days to order this credit report.

Further, an adverse action notice due to information in a credit report from a credit bureau will also include a disclosure of the borrower’s right to dispute any inaccurate or incomplete data in their credit report. For this reason, a consumer needs to contact the credit bureau and order a copy of their free credit report to enhance or repair their creditworthiness. If the borrower is convinced that the denial was due to inaccurate information drawn from their credit report, then they have the chance to initiate a dispute resolution process. This process can be beneficial in fraud cases, where the borrower might be unaware of the fraudulent activities affecting their credit scores or identity theft cases.

Lastly, to protect against discrimination, the report will also include language from the Equal Credit Opportunity Act (ECOA). This notice states that it is illegal to deny an applicant’s loan/credit application due to factors such as religion, nationality, race, gender, marital status, age (provided a consumer is of legal age to sign a contract), participation in a public assistance program, or the exercise of an applicant’s Consumer Credit Protection Act rights.

Adverse Action Notice for Other Reasons

Suppose a consumer’s credit card or loan application is denied due to information other than data from the consumer’s credit report or due to other reasons. In that case, he/she will still receive an adverse action notice.

In this scenario, the adverse notice will list the name, address, phone number of the outside source, the borrower’s credit score, and probable credit score ranges. Besides, the notice will provide the ECOA statement notice at the end of the adverse action notice. Since a credit bureau was not involved, the adverse action notice will not provide any credit bureau’s contact details or how the consumer can obtain a free copy of the credit report.

As an alternative, the notice will inform the consumer of their right to file a written appeal for the nature of the outside information that the creditor used to issue an adverse action notice against the consumer. The consumer will also have 60 days to make this request.

How to Respond to Adverse Action Notice

If a borrower is denied credit based on information in the borrower’s credit report from a consumer credit reporting agency, they should order a free copy of their credit report by following the instructions listed in the adverse action notice. The consumer should carefully review their credit report for accuracy and consistency, and if there are any errors identified, they should dispute. In most cases, the credit bureau will investigate any disputes presented by consumers and, if valid, clear up the errors.

On the other hand, if information from outside sources other than a credit report from a credit bureau is the reason for credit denial, the consumer is advised to request the information concerning the outside source using the comparable contact information provided in the notice.

In both instances, it is essential to use the information provided in the notice of adverse action to understand the reasons for denial better. No matter the reason for denial, carefully evaluating an adverse action notice can help borrowers take the appropriate steps to enhance their chances of getting approved the next time they apply for credit.

Understanding Adverse Action Notice

The following is a case study example that elaborates more on adverse action notices to help borrowers or consumers understand how adverse action notices work:

A borrower Y recently applied for a loan at ABC Financial Limited. In the next few weeks, she received an adverse action notice electronically stating that her loan application was denied.

In the notice of adverse action, ABC ltd stated that the rejection was due to several adverse events drawn from borrower Y’s credit report. To be precise, the notice stated that there were two examples of recent issues affecting borrower Y’s credit score.

The first issue indicated a missed credit card payment that occurred 1 year ago. The second issue seemed much more damaging, as it indicated identity theft. Apparently, someone else had used borrower Y’s personal information to register several delinquent accounts in her name.

Surprised, borrower Y decided to contact ABC Financial ltd to initiate a dispute resolution process and inform them that the information provided in the report is inaccurate. She appears to be a victim of identity theft as she is unaware of the fraudulent activities. Borrower Y further contacted the credit bureau agency via the contact information provided in the notice to request her free complimentary copy of the credit report, to scrutinize if any other suspicious transactions might have occurred behind her back.

Conclusion

An adverse action notice is intended to inform borrowers of the reasons why their credit application was denied. The report on an adverse action notice contains information regarding the causes of rejection and the necessary process to initiate and address any disputes that may arise. Borrowers who receive adverse action notices are entitled to a complimentary credit report if requested within 60 days of receipt of the notice. Complying with the requirements of the FCRA and ECOA concerning adverse action notices and decisions helps lenders to provide their consumers with timely information and avoid discrimination when deciding whether to accept or reject borrowers’ credit applications.