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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
David H. Charlip, the principal of Charlip Law Group, LC, is one of only 101 Board Certified Civil Trial Lawyers in Miami-Dade, with over 38 years of litigation experience. Mr. Charlip is also one of only 136 Florida Civil Law Notaries. He has managed and litigated cases across the country. Mr. Charlip has advised businesses, drafted business formation and purchase and sale documents and litigated business disputes for over 30 years and is very familiar with all aspects of contractual relations.
With over 16 years of experience in the area of estate planning, trademarks, copyrights and contracts, I am currently licensed in Florida and NJ. My expertise includes: counseling clients on intellectual property availability, use and registration; oversee all procedural details of registration and responses with the USPTO/US Copyright Office; negotiate, draft and review corporate contracts and licensing; counsel clients on personal protection, planning and drafting comprehensive estate plans.
Melissa Taylor, the President and founding partner of Maurer Taylor Law, specializes in business contract review and drafting and is a second-generation attorney with private firm, in-house counsel, governmental, entrepreneurial, and solo practitioner experience. Melissa has a strong legal background, a dedication to customer service, is friendly, warm and communicative, and is particularly skilled at explaining complex legal matters in a way that's easy to understand. Melissa personally handles all client matters from start to finish to ensure client satisfaction.
Lawrence A. “Larry” Saichek is an AV rated attorney and a CPA focusing on business and real estate transactions, corporate law and alternative dispute resolution. With a background including five years of public accounting and six years as “in house” counsel to a national real estate investment company, Larry brings a unique perspective to his clients – as attorney, accountant and businessman. Many clients think of Larry as their outside “in house” counsel and a valued member of their team. Larry is also a Florida Supreme Court Certified Mediator and a qualified arbitrator with over 25 years of ADR experience.
Entertainment Attorney with 30+ years of experience, representing all aspects of the TV, Film, Music and Publishing Industries
Aaron focuses his practice on startups and emerging growth companies, providing general counsel services for companies from formation through exit. Aaron frequently advises clients in connection with routine and unique legal, business, and strategic decisions, including corporate, business and technology transactions, angel and venture financings, mergers and acquisitions, protection of intellectual property, and information privacy and data security.
I enjoy helping businesses of all sizes succeed, from start-ups to existing small and medium sized businesses. I regularly advise corporate clients on a variety of legal issues including formation, day to day governance, reviewing and drafting business contracts and other agreements, business acquisitions and sales, as well as commercial and residential real estate issues, including sales, purchases and leases. As an attorney licensed in both Michigan and Florida, I also advise clients on real estate issues affecting businesses and individuals owning real property in either state, whether commercial, residential or vacation/investment property. I also regularly assist nonprofit organizations in obtaining and maintaining tax exempt status, and provide general legal counsel on all matters affecting public charities, private foundations and other nonprofit organizations.