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What is an Adverse Action Notice?

Kimber Severance

If you've received an adverse action notice in the mail, you might be wondering what it means.

When someone takes out a loan, they need to fill out a loan application. Once this loan application is submitted, the lender will process the application and overview all the information to decide whether they can fund the loan or not. Lenders let you know whether your application was approved or denied by sending what’s called an adverse action. 

What is an Adverse Action?

An adverse action is a notice that lets someone know their application was denied. You could receive this notice in the form of a letter or an email. 

When you apply for credit, a job, an installment loan, or insurance coverage and those applications are denied, the person or business that received your application might send you a formal "adverse action" notice or letter. This formal letter lets the applicant know their application did not get approved. 

An adverse action notification can apply to many instances of denial or termination. You could receive an adverse action if you were denied a job, if your loan application was denied, or if you are being dropped from any other kind of contract or benefit. 

The person or business that sends the adverse action will often have their own requirements that applicants must meet. The adverse action will usually outline which requirements you lacked or any other reasons why you weren't approved for the job, raise, promotion, or loan. 

For instance, if you apply for a loan, your application might be denied because your credit score isn't high enough to meet the lender's credit score requirements. 

Likewise, a job application might be denied due to something in your background check, like criminal history. In both instances, the company might send an adverse action as a way to let you know your application was denied. 

What is on an Adverse Action Letter?

The content of your adverse action letter includes information about why your application was not approved. Companies might not list every reason you were denied, but they will list a few of the main reasons you were denied. 

Here are some examples of reasons your application might not get approved, resulting in an adverse action notice:

  • the application you submitted was incomplete
  • your application for credit was denied 
  • the special credit terms you requested were denied 
  • the lender has a counteroffer
  • something in your credit history doesn't meet their requirements 
  • something in your background check doesn't meet their requirements 
  • you don't meet minimum age requirements 
  • you don't meet minimum income requirements 
  • your overall debt is too high 
  • you have too many recent credit applications 
  • you don't have enough credit history 
  • your credit score is too low 
  • you have a history of late payments 

The adverse action will have some other basic information on it as well:

  • applicant's name and address
  • applicant's credit score
  • official reasons for the application's denial
  • contact information for the consumer or credit report agency that was used
  • an explanation that the credit agency was not responsible for the denial and thus doesn't have answers about why the application was denied
  • an explanation that the client has a right to get a free copy of the consumer or credit report
  • an explanation that the client also has the right to dispute any inaccuracies of any kind in the report

With the information found on an adverse action, you can now better understand where your credit score stands and how you might be able to improve your credit. 

Examples of an Adverse Action

You can receive a notice of adverse action from many places and for many reasons. Here are a few examples of adverse action: 

  • a landlord denies your rental application or is evicting you from the premises
  • a lender denies your application for a loan or line of credit
  • an employer denies your application for employment

The adverse action will look different based on who is sending it. 

If the adverse action is from your landlord then the notice will have the name of the property, the landlord, the landlord's signature, and bulleted lists outlining why your rental application was denied. 

If the adverse action is from a financial institution, it will look similar, but the bulleted items will be financial requirements that applicants must meet, and not rental requirements that tenants must meet. 

FCRA Adverse Action Requirements

The Fair Credit Reporting Act (FCRA) is an act that helps protect consumers and regulates credit, loans, and credit reporting. One of the things they help regulate are adverse action notice letters, how they should be sent, what should be on them, and when they need to be sent.  For example, according to the FCRA an adverse action letter should be given orally, in writing, or electronically. The letter must then include the following requirements found on FTC.gov.
  • the name, address, and phone number of the CRA (including a toll-free number for nationwide CRAs) that supplied the report
  • a statement that the CRA didn’t make the adverse decision and can’t explain why the decision was made
  • notice of the consumer's right to a free copy of their report from the CRA if they ask for it within 60 days (FCRA 612)
  • notice of the consumer's right to dispute the accuracy or completeness of any information provided by the CRA (FCRA 611)
  • the consumer’s credit score, if a score was used
To read more about the Fair Credit Reporting Act and adverse action requirements, read the act at Fair Credit Reporting Act.

What is a Pre Adverse Action Letter?

What is a pre adverse action letter? 

A pre adverse action is a notice that comes before the official decision has been made. Pre adverse actions are used most often during the hiring process to let an applicant know that something failed in their background check. 

A pre adverse action is not an official denial though. It simply informs the applicant that the company is considering denying or withdrawing their job offer and why that is the case. 

Just like an official adverse action, a pre adverse action notice contains the following information: 

  • an explanation that a full adverse action is being considered
  • a copy of the report that contains the information causing an adverse action to be considered
  • the contact information for the reporting agency
  • an outline of all the applicant's rights from the Fair Credit Reporting Act (FCRA)

The reason some employers will send a pre adverse action is to give the applicant time to dispute the application denial before the denial is official. This is especially helpful in the case of a failed background check. 

When Do You Get an Adverse Action Notice?

There are many reasons you might receive an adverse action. When you get an adverse action you will most likely receive it electronically or in writing. 

For example, many adverse actions will come to you in the mail or via email. 

When you get an adverse action, you can expect to get it anywhere around 7 to 10 business days after you've been denied. 

Here are just a few examples of the instances when you might get an adverse action: 

  • when you want to get a loan 
  • when you want to get a credit card 
  • when applying for a new apartment 
  • when applying for a job 

There are also some rules and guidelines for applications set by the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA) that businesses must follow when approving and denying applications. 

Be aware of your rights so you know when a denied application was justified or not. 

For example, no one can deny you credit or employment because of your race, color, religion, national origin, sex, marital status, age, or because you get public assistance. 

What to Do if You Get an Adverse Action Notice

So you got an adverse action. You're probably wondering what to do now. 

The first thing you need to do when you get an adverse action is understand your rights

For example, when your application is denied based on your credit, consumer, or criminal history then the party that denied your application is legally obligated to send you a formal adverse action, outlining why you were denied. 

They also need to provide the contact information of the agency they used to get your credit, consumer, or criminal history so you can also access that information. 

Once you understand your rights, get your own credit report to see your credit score and credit history for yourself. 

Now that you have your own credit report in hand, check your credit history for any errors. If you do find an error, an inaccuracy, an instance of fraud, or an incomplete area, dispute it directly with the credit agency to get it fixed. 

After taking care of any potential errors on your credit report, you can use insights from your credit report to work on improving your credit score

A typical credit report includes your payment history, amounts owed, the length of your credit history, credit mix, and any new credit. So if you are frequently late making payments you'll see this information here and can work on making this part of your credit history better. 

By working to better your credit score, you can eventually apply again with more confidence, knowing that the reasons you were denied have improved. 

How to Avoid an Adverse Action

An applicant's credit history is very informative for the people and company's processing your application. 

By looking at a credit report, they can know if you will make payments on time, if you can handle this amount of debt, and how responsible you are overall with your finances. 

The best way to avoid an adverse action is to prevent negative marks on your credit report in the first place. The following are a few examples of negative actions you want to avoid getting on your credit report: 

Late or Missed Payments

Avoid late or missed payments first by living within your means. 

If you are currently living paycheck to paycheck, find a way to increase your monthly income or downgrade your lifestyle to better fit the budget you have. This will make it a lot easier to keep up with all your payments. 

You can also make use of autopay options wherever you can. Autopay is a great way to automate your budget and never miss or be late on a payment again. 

Defaulting on Credit Accounts

What does it mean to default on a credit account? 

Defaulting on credit is when you've missed multiple payments on a debt or fail to make payments on that debt at all. Avoid defaulting on credit accounts by avoiding going into debt you can't afford. 

Each time you take on a debt, it should be carefully planned into your current monthly budget. If it won't fit into your budget, then seek out other options. 

Overall Debt is Too High

Your total debt becomes too high when it goes over a certain debt to income ratio. The ideal debt to income ratio is under 36%. This means that ideally, you would only have 36% of your monthly income going toward debts. 

Typically, 43% is the highest many lenders will accept when processing an application for a loan or line of credit. But you want to keep your debt to income ratio lower than this whenever you can. 

If your overall debt payments are higher than 40% of your income, then make a strict budget and payment game plan to start reducing your debts. 

Stay Updated on Your Credit Report

You can also help prevent these negative marks on your credit history by keeping tabs on your credit report yourself. 

Don't wait for an application to get denied to check out your own credit history. 

Once a year, go through your consumer and credit history for accuracy and to see how you are doing. 

This way you will be aware of any financially unhealthy habits you need to work on and you'll be able to catch and take care of mistakes before submitting applications that will look at your credit history. 

Get Good Credit Where Credit is Due

Not all financial actions get counted in your credit score unless you do something to make them count. 

For instance, make sure your on-time utility or phone payments are going toward boosting your credit score by contacting your credit agency and allowing them to add that information to your credit file. 

If you plan responsibly, you can also use credit cards to make all these payments, then pay off your credit card immediately in order to make this positive payment history impact your credit history for the better. 

In Conclusion, 

Now that you know what an adverse action is, you can be in the know if you ever get one. Review the adverse action letter for information that will help you understand why your application was denied. If you have any more questions or concerns, you can contact the lender that sent your adverse action letter.