What Is an Adverse Action?
In finance, the term "adverse action" refers to a type of notice given by a lender when a borrower's credit application has been denied. They are typically delivered within seven to 10 business days following the decision to deny the loan application, usually in writing, although they may be communicated verbally as well. Banks and other lenders are required to provide adverse action notices in order to comply with consumer protection legislation.
Besides its meaning in finance, the term "adverse action" can have a second connotation regarding employment and the workplace. Thus, in the hiring process, adverse action means a company may stop the applicant's hiring process or withdraw their offer. This decision is based on the findings uncovered on a consumer report or background check.
- An adverse action notice is intended to inform borrowers of the reasons why their loan application was rejected.
- It contains information regarding the causes of rejection as well as the processes in place to address disputes.
- Borrowers who receive adverse action notices are entitled to a complimentary credit report if requested within 60 days of the receipt of the notice. Lenders are prohibited from considering demographic or personal factors such as the borrower's race, ethnicity, gender, or sexual orientation when deciding whether to accept or reject their loan application.
- Adverse action has a separate meaning regarding employment and the hiring process: a company may withdraw its offer to a potential candidate basing its decision on an adverse consumer report or background check.
- Federal law requires sending the candidate an adverse action letter: a written notice that informs the job applicant they will not be hired for a particular position.
Understanding Adverse Action in Finance
The purpose of an adverse action notice is to inform would-be borrowers that their loan application has been denied, while also providing information about what factors influenced that decision. At the same time, adverse actions are included on a borrower's credit report and might therefore negatively impact the borrower in subsequent loan applications.
Typically, the factors cited in an adverse action note relate to poor credit history as revealed on the borrower's credit report, such as failing to make debt payments in a full or timely manner. In rare cases, however, an application might be denied due to identity theft.
No matter the reason for the denial, adverse action notices can help loan applicants better understand what they need to do in order to enhance or repair their creditworthiness. If the borrower believes that the denial was due to inaccurate information drawn from their credit report, then they have the option of initiating a dispute resolution process. This process can be especially useful in cases of fraud, where the borrower may have been unaware of the fraudulent transactions affecting their credit score.
Those receiving an adverse action notice will have a 60-day period in which to request a copy of their credit report. This report is given free of charge, to better enable the borrower to understand and correct the problems identified in the notice. In order to protect against discrimination, the report will also include language from the Equal Credit Opportunity Act (ECOA) stating that factors such as the borrower's race, religion, nationality, or sexual orientation were not taken into consideration for the purposes of assessing the loan application.
The borrower's credit score can be cited as one of the reasons why their loan application was denied. In such circumstances, the lender is obligated to provide up to two examples of specific issues on the borrower's credit report that contributed to the decision to reject their application.
Understanding Adverse Action in Employment
In an employment situation, adverse action is anything that changes your employment situation in a negative way. The term is mostly applied to the hiring process, when the employer decides against hiring a candidate due to information discovered in an employment background check or even in a consumer report.
In this scenario, federal law requires sending the candidate an adverse action notice or adverse action letter. This is a written notice delivered in hard copy or electronic form that informs the job applicant they will not be hired for the selected position because of the negative findings in a background check.
Although adverse action refers mostly to the hiring process, anything unrequested that changes a worker's current employment status in a negative way can be considered an adverse action. These actions include discharging the worker; demoting the worker; reprimanding the worker; committing harassment; creating a hostile work environment; laying the worker off; failing to hire or promote a worker; blacklisting the worker; transferring the worker to another job; altering the employee’s responsibilities and duties; denying overtime; lowering pay; denying benefits; making threats; intimidating the worker, and making a constructive discharge.
If you feel that there has been an adverse action taken against you by your employer, your first step should be to consult with an employment attorney. They can help you understand your rights and the laws that protect workers in the case of adverse action.
Examples of Adverse Actions
Let's say Peter recently applied for a loan at XYZ Financial. Within the next few weeks, he received an adverse action notice in the mail stating that his loan application was denied.
In the adverse action notice, XYZ stated that the rejection was based on a number of negative events drawn from his credit report. Specifically, the report listed two examples of recent issues affecting Peter's credit score.
The first of these issues consisted of a missed credit card payment that occurred several weeks ago. The second issue, however, seemed much more serious. Apparently, someone used Peter's personal information to lease an expensive vehicle in a state where Peter does not even reside.
Concerned, Peter contacted XYZ to initiate the dispute resolution process and to inform them that he appears to be a victim of identity theft due to the unauthorized vehicle lease. He also contacted the credit reporting agency to request a complimentary copy of his credit report, in order to scrutinize whether any other suspicious transactions may have occurred.
Mandy is a sales associate at a retail store. After being in the same position for several years, she decides to apply for a promotion to be assistant store manager. During her interview process, she mentions that she just found out she's pregnant and will take maternity leave (the right to take up to 12 months’ leave on giving birth) in the near future.
Mandy knows she's highly qualified for the job, but a few days later her employer lets her know that she won't be promoted. Mandy doesn't receive any explanation about this decision, but she believes that her pregnancy is the reason why her employer has withdrawn the promotion. This constitutes an adverse action. Mandy immediately contacts an employment lawyer to be informed of her rights.
What Is a Pre-Adverse Action Letter?
A pre-adverse action letter is a written notice informing a job candidate that the information found on their background report may negatively affect the employer's decision on their hiring status. By law, the notice must contain a copy of the background report. A pre-adverse action letter gives the applicant the opportunity to respond to the information contained in the background report.
How Should You Respond to a Pre-Adverse Action Letter?
If you have applied for a position, and you receive a pre-adverse letter from your potential employer, these tips may help you:
- Make sure your background report is attached.
- Check the background report to make sure it’s accurate.
- If you find any inaccuracies, make note of them and gather any evidence you have to help resolve the errors.
- If the report details your past criminal history or convictions, address those points with honesty. Explain what you learned from the experience. Highlight the fact that your past actions don't affect your current attitude and qualifications for the position.
- Go into detail describing any skills or training that may be helpful in your new position.
Does an Adverse Action Letter Mean You Won’t Get Hired?
Yes. The purpose of an adverse action letter is to inform the candidate that they won't be hired based on information uncovered in the background report. The situation is different if the applicant receives a pre-adverse action letter. This gives the candidate an opportunity to respond to the information contained in the background report, and thus they may affect the employer's final decision.