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What is an Adverse Action Notice?
An adverse action notice is a legal document required under the Equal Credit Opportunity Act that requires creditors to advise applicants of a denied loan and which items on their credit report resulted in the denial. It works in conjunction with Fair Credit Reporting so that consumers know what negative things on their credit history contributed to their rejection.
Purpose of an Adverse Action Notice
The purpose of an adverse action notice is to notify consumers why they were denied credit when applying for a credit card or any other type of loan. They are necessary because consumers have fair credit reporting rights that the federal government protects.
They also allow consumers to access negative information on their credit reports without requesting a copy of it. When a negative item is cited on an adverse action notice, applicants can contact the consumer reporting agency (CRA) that reported the negative item if they believe the information on their report was placed there in error.
Adverse action notices can also give consumers vital information about why they were offered risk-based pricing. Risk-based pricing entails that if an applicant has less-than-perfect credit, they can be offered more expensive terms on their loan documents or loan agreements .
These terms might include one of the following:
- Higher interest rates
- Shorter loan terms
According to the Federal Trade Commission (FTC), risk-based pricing should be based at least in part on a customer's creditworthiness. Applicants have the opportunity to deny loan terms in favor of improving their credit to secure more favorable terms to their financial situation.
Adverse action notices allow consumers to easily access the information they need to make sound financial decisions. This contributes to improved financial health, stability, and wellness across the board.
If an item on an adverse action notice is suspected to be incorrect and consumers cannot resolve the problem with the CRA, finance lawyers can help. Their extensive knowledge of fair credit practices and workflows that can be used to remove inaccurate information from credit reports is valuable to consumers looking to get better terms on their loans.
Check out this article to learn more about the purpose of adverse action notices.
What's Included in an Adverse Action Notice?
Adverse action notices are vital documents that give consumers important information about how their creditworthiness contributed to a loan denial or unfavorable risk-based pricing.
Here is a rundown of the different parts of an adverse action notice:
If your credit score was a contributing factor to the lender's decision, it must be listed on the adverse action notice. Items such as payment history, debt-to-income ratio , and amount of credit used are all examples of factors that impact credit scores. Reporting agencies also calculate the score based on your oldest account and how many accounts you have in good standing.
Name, Address, and Phone Number of Credit Reporting Agency
Credit reporting agencies play an essential role in determining whether a loan can be approved. Lenders may use results from one or more agencies to decide whether to approve your request.
There are three major credit reporting agencies that most lenders use to make their decision:
Lenders must include contact details for any CRA they use to make their decision.
Reasons for Denial
Specific reasons that your loan was denied must be included in your adverse action notice. These notices can contain up to five different reasons for the denial.
Here are some examples of denial reasons on adverse action notices:
- Too many accounts in poor standing
- Insufficient credit history
- Late payments
- A credit score below acceptable threshold
- Excessive debt-to-income ratio
- Charge-off or collection accounts
Notice of Your Right to Obtain a Credit Report
Generally, each American has a legal right to obtain a copy of their credit report up to once a year from each credit reporting agency free of charge. When you receive an adverse action notice, you can get an additional copy of your credit report for 60 days from the date on the notice.
There is no limit on the number of credit reports you can request in response to an adverse action notice. These rights must be clearly stated on every adverse action report.
Notice of Your Right to Challenge the Accuracy of Negative Items
If you believe an item on your credit report is inaccurately reported or incomplete, you can dispute it with the credit reporting agency. You can do so in writing at any time. The major credit reporting agencies also have dispute portals on their websites.
Here is an article about what should be included in every adverse action notice.
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Why People Receive Adverse Action Notices
People receive adverse action notices to formally notify them of negative items on their credit report that contributed to a denial from a lender. Adverse action notices must include a minimum of four negative items that caused the rejection. If any of these factors are related to your credit report's number of hard inquiries, that information must be listed.
Hard vs. Soft Inquiries
Hard inquiries occur when a lender runs your credit report to apply for credit or a loan and negatively impacts your credit score. To run a hard inquiry, lenders must have your written consent to do so.
On the other hand, soft inquiries are typically used to obtain preapproval of a loan. They do not have any impact on your credit score, and they can be legally obtained without your written consent.
Situations that Don't Warrant an Adverse Action Notice
In some cases, your loan may be denied for other reasons, but the scenario does not warrant an adverse action notice.
Here are some examples of these conditions:
- You do not meet the minimum age requirements to obtain a loan per the lender's terms and conditions.
- Your application is incomplete.
Learn more about why people receive adverse action notices by checking out this article .
Responding to an Adverse Action Notice
If you feel any items on your adverse action notice are incorrect or incomplete, the best way to respond is by working directly with the credit reporting agency that provided the information. After all, adverse action notices only exist to alert you about reporting agencies' items that negatively impact your ability to get a loan.
One of the easiest ways to respond to an adverse action notice accurately is to hire finance lawyers. Since the process of disputing accounts can get complicated, it's never a bad idea to have a professional in your corner to support you through the process. You may need to jump through many legal hoops, such as sending written proof of inaccuracies or incomplete information.
Also, if you send a dispute that is worded in a way that doesn't protect you, you could be on the hook to get sued for a debt that was previously past the statute of limitations. Post a project on ContractsCounsel today to connect with finance lawyers who can help you accurately and effectively respond to an adverse action notice today.
Meet some of our Adverse Action Notice Lawyers
As a veteran software engineer from international blue chip corporations, I focus on legal aspects for regulated and technical businesses. My legal experience includes civil litigation, intellectual property guidance, and market competition, at both private practice as well as Federal and State institutions.
Attorney licensed to practice in both California and New York, Josiah is focused on helping people understand what's in their contracts, and do business with confidence.
I am an experienced in house counsel and have worked in the pharmaceutical, consumer goods and restaurant industry. I have experience with a variety of agreements, below is a non-exhaustive list of types of agreements I can help with: Supply Agreements Distribution Agreements Manufacture Agreements Service Agreements Employment Agreements Consulting Agreements Commercial and residential lease agreements Non-compete Agreements Confidentiality and Non-Disclosure Agreements Demand Letters Termination notice Notice of breach of contract My experience as in house counsel has exposed me to a wide variety of commercial matters for which I can provide consulting and assistance on. I have advised US, Canadian and International entities on cross-functional matters and have guided them when they are in different countries and jurisdictions as their counterparties. I can provide assistance early on in a business discussion to help guide you and make sure you ask the right questions even before the commercial agreement needs to be negotiated, but if you are ready to put a contract in place I can most definitely help with that too.
I represent technology and emerging growth companies at all stages of growth, from startups to mature companies. My practice includes corporate and securities law matters, corporate governance, venture capital financings, and commercial transactions, including software and technology licensing agreements, and strategic alliances. I regularly provide guidance on a range of business and legal issues, including business modeling and go-to-market strategies.
Jeff Colerick has been practicing law for over 30 years and has devoted his professional career to providing clients with intelligent representation and personal care. His experience as a lawyer involving complex matters has resulted in a long history of success. Jeff has built a practice based on a deep understanding of real estate assets and corporate activities. He combines his industry knowledge with a practical and collaborative approach to problem solving. Jeff’s client relationships are strong because they are built on mutual respect. Jeff talks the language of real estate and understands that it is a vehicle to deliver your business strategy. Jeff provides practical, responsive, and strategic advice related to real estate acquisition, construction, leasing, and sale of a wide range of real property types, including office, retail, medical, industrial, industrial flex-space, mixed-use condominium, multifamily and hospitality. As leader of the Goodspeed Merrill real estate practice group, Jeff represents clients with commercial and residential transactions, purchases and sales, land acquisition and development, real estate investment and financing, financing liens and security interests, and commercial leasing and lease maintenance, including lease enforcement support and advice. The firm represents clients in matters concerning construction, lending, developers, contractors and subcontractors, cell site leasing, property and boundary disputes, common interest community law, and residential condominiums and planned communities.
Harrison Kordestani is an executive with over twenty-five years experience in entertainment and media, energy, technologies, and start-ups. Mr. Kordestani has also developed a specialized legal and strategic consulting practice representing select entertainment, oil and gas, mortgage lending, and technology start-up clientele. He is also deeply passionate about new technologies and has also actively worked in building companies in the video-on-demand, wearable tech, information of things, demand prediction and app-marketing spaces. As an attorney, Mr. Kordestani's focus has been on transactional drafting and negotiation and providing ongoing legal counsel, corporate compliance, and contract interpretation to numerous private individuals as well as companies in varied fields.
Over 30 years of experience practicing commercial real estate and complex business litigation law.