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.
- 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.
Understanding Adverse Actions
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 credit-worthiness. 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.
Example of an Adverse Action
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.