An adverse action notice is a document which pertains to a negative reaction that’s reported to a business or an individual. Normally, this document pertains to a denial of employment, insurance, credit or other types of benefits. A notice of adverse action can come from the government, a business or a lender and it’s based on information they’ve gathered from public records or credit reports.

Adverse Action Notices

What is the meaning of adverse action?

As adverse action refers to an action which a lender or any other entity takes against you. This may happen as a response to how you behaved, after reviewing your credit scores and reports or because of any changes in policies. In terms of credit cards, common adverse actions include:

  • Credit denials
  • Reductions on credit limit
  • Increases in interest rates

When you apply for a credit card, you need to make sure that your credit meets the issuer’s standards. Otherwise, you might receive an adverse action letter which indicates the denial of your application. Or if you have an existing account, but the issuer notices a degradation in your credit, he might decide to either increase your interest rates or reduce your credit limit.

When it comes to credit, there are two primary federal laws which govern adverse actions. These are the Equal Credit Opportunity Act or ECOA and the Fair Credit Reporting Act or FCRA. If you own a credit card, remember that the issuer will regularly check on your credit to ensure that you’re always meeting the standards.

The ECOA deals with both businesses and consumers. It requires all lenders to provide a description of the reasons on why they take adverse action against a person. The lenders need to include this in the adverse action notice. This covers any credit applications and increases on credit limit on the existing accounts.

Conversely, the FCRA deals with all consumer transactions. It requires the lenders to give notice that they based the adverse action on negative information. Again, they have to indicate this on the notice of adverse action. This covers credit applications and any other applications like government and employment licenses.

Adverse Action Letters

Contents of an adverse action notice

Just like the issuers of credit cards, lenders should provide an explanation on why they send an adverse action notice. This is part of the adverse action notice requirements. For instance, a lender has to state if he used the person’s credit score or credit report as the adverse action’s basis. In such a case, the law requires the lender to provide the person with a formal notice which contains information about his credit. Most of the time, lenders send the adverse action letter via email.

As per the ECOA, a lender should send the adverse action notice within 30 days after taking an action. The only exception to this rule is when a person applies for credit then the lender gives him a counteroffer which he doesn’t accept. In such a case, the lender may send the notice within a period of 90 days. As part of the adverse action notice requirements, all notices should contain:

  • The specific reasons why the lender took adverse action.
  • Information about the credit score used as the basis for the adverse action. It should also contain reason codes which explain the significant factors which affect your score.
  • The agency where the lender took your credit report and the contact details of that agency.
  • Your right to get a copy of the credit report which the lender used (take note that you must request for this report within a period of 60 days).
  • Your right to dispute any of the information written on the credit report.

Although there are other adverse action notice requirements, these are the most important. If you want to make a dispute, you can contact the credit reporting agency which provided your credit report. This is one of your rights under the FCRA.

Since July of 2011, if a lender made use of your credit score to make his decision, he should include that score in the adverse action notice. If the lender used different scores, he should disclose at least one of them.

There are some cases where a lender takes negative action against a person which doesn’t involve credit checks. In such a case, the person still receives an adverse action letter with an explanation of the reasons. But the difference is that it doesn’t have to include the credit information.

This kind of situation may happen if the person had been a very bad customer to the lender. For instance, he may have defaulted on his debts or made late payments. The notice may also come from a background check for an employment application which may or may not involve the person’s credit.

Notices Of Adverse Action

Reasons for receiving an adverse action notice

If a person applies for credit and the application gets denied, the creditor must tell the person why it got denied as required by the federal law. This explanation comes in the form of a notice of adverse action. Although receiving this notice can be a disappointing experience, you can also learn a lot from the document. Use it as your reference to improve your credit profile before your next application.

Keep in mind that each denied application causes your credit scores to dip temporarily. So, you need to make sure that you recover first and get in better shape if you want to get approved the next time. Here are some common reasons why you would receive an adverse action notice:

  • Your income is too low or you have too much debt
    Card issuers and creditors don’t just look at the likelihood that you’ll repay based on your past actions. But they also check if you have sufficient funds to pay for any new obligations.
  • Your income can’t support the payments you have to make
    If your debt-to-income ratio is too high, this indicates that the debts you already have leave little to no room in your current budget to make any new payments. If your ratio is less than 20%, this is an excellent value. But if it’s 50% or more, especially if most of that debt comes from credit card transactions, this is an indication that you should try applying for options for debt relief instead of taking on more obligations.
  • You’re a co-signer on a credit card or a loan
    This is another probable cause for getting denied. Even if the person you co-signed for makes his payments on time, creditors may still see this as one of your debt obligations. Therefore, they will include this in your debt-to-income ratio.
  • Other reasons include:
    You have minimal or no employment history.
    You have a seasonal or irregular income.
    You’re making excessive credit inquiries which they may see as an indication of your financial distress.
    You have a history of bankruptcy or late payments.

What should you do after receiving an adverse action notice?

After you have received an adverse action letter, you can request for a copy of your free credit report. Review the report to check its accuracy. If you find any errors, file your dispute with the credit bureau. Upon doing this, the credit bureau will perform an investigation to clear up the error.

If you don’t find any errors, then just make use of the information in the notice so you can better understand why your application got denied. The notice can help you understand what steps you should take, so you get approved the next time you apply.

Pre Adverse Action Letters

How long do you have to send an adverse action notice?

After receiving the consumer report, you need to send a pre-adverse action notice within three business days. That way, the applicant can still dispute any findings in the report if needed. The FCRA states that the applicant receives a “reasonable period of time” for him to raise disputes if he finds any errors.

Although the FCRA doesn’t mention a specific time frame for the applicant to respond, it’s a good practice to wait for at least 5 business days. If the applicant doesn’t make a dispute, then you can send the adverse action notice within 5 business days from the date you sent the pre-adverse action notice.

What does pre-adverse action notice mean?

Often, employment consumer reports may contain inaccurate information which might have adverse consequences for the person who receives an adverse action. Before you take adverse action against a person based on a consumer or credit report, the FCRA requires you to first send a pre-adverse action notice.

This is a document which primes the person that he is about to receive an adverse action. The pre-adverse action letter includes:

  • a copy of the consumer or credit report
  • a summary of all your rights under the FCRA

The primary purpose of this pre-adverse action letter or notice is to give you time to check and verify all of the information in the report. If needed, you can dispute any inaccurate information or make clear any misunderstanding caused by the report.

TemplateLab March 13th, 2019