How Adverse Action Works

Lenders send written, electronic, or verbal notices—adverse action—to borrowers within seven to ten business days of the denial of their application. The main reason for sending adverse action is to let the borrower know why the lender rejected them. Lenders and financial institutions like banks need to provide adverse action to be in compliance with consumer protection legislation.

Adverse actions are included in the borrower's credit report and can negatively impact other loan application processes. Usually, there are citations of factors related to the borrower's poor credit history in the adverse action note, i.e., continual missed and late existing loan payments. Other reasons why a borrower can receive an adverse action include:

  • Bankruptcies
  • Unverifiable employment
  • Insufficient income
  • Possessing present or past delinquent accounts
  • Repossessions or foreclosures

Example of Adverse Action

Brian recently applied for a loan at his local credit union. However, the credit union denies Brian's loan application. He receives an adverse action notice through the mail.

According to the adverse action notice, Brian was denied because of a couple of adverse events that reflected on his credit report. To be specific, the adverse action notice showed two issues that affected his credit score. Over the past few months, Brian had missed several credit payments. However, the second issue was the most serious as it stated that someone had used Brian's personal information to lease an expensive luxury vehicle in another state.

Due to the reasons stated in the adverse action letter, Brian becomes more concerned and starts a dispute resolution process. It was clear that he was an identity theft victim and needed to straighten things out before he could apply for the loan again. Fortunately, even though the adverse action letter was disappointing, he's happy that he was denied. Now he knows his sensitive information is at risk.

Significance of Adverse Action

Financial institutions must provide the borrower with adverse action to inform and help them understand the reasons why their loan application was denied. Informing them about their failure to access the loan might help them work on their creditworthiness. If, in any case, the borrower thinks that the information from the credit report is inaccurate, they have the option to start a process of dispute resolution. During cases of fraud, where the borrower was unaware of the fraudulent transactions, the dispute resolution process might prove to be of great help.

The borrower has to request the resolution process within 60 days of receiving the adverse action notice to receive the credit copy. To correct and understand the stated problems in the adverse action notice, the credit reporting agency gives the credit report to the loan borrowers free of charge.

Also, the credit report includes a statement from the Equal Credit Opportunity Act (ECOA), which assures the borrower that factors like religion, race, sexual orientation, or nationality were not among the factors considered during the consideration of loan application.