What is an Adverse Action Notice?

When someone takes out a loan, they need to fill out a loan application. Lenders then overview the application and make a decision about approval or denial based on information from the application. Lenders let borrowers know if their application was denied by sending what’s called an adverse action letter or notice. 

What is an Adverse Action Letter or Notice?

An adverse action letter 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 notice or letter to let you know your application was denied. 

What is on an Adverse Action Letter?

The content of your 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: 

• 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 notice 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 this information, you can now better understand where your credit score stands and how you might be able to improve your credit. You can also contact a consumer reporting agency if you find inaccurate information on a copy of your credit report.

These reporting errors could be part of why your application was denied, and fixing inaccurate information with a consumer reporting agency can help you get approved next time. 

Reasons for Receiving an Adverse Action Notice

An adverse action notification can apply to many instances of denial or termination. You could receive one if you were denied a job, if your loan application was not approved, if you filed for extensions of credit and got denied, or if you are being dropped from any other kind of contract or benefit. 

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

You can receive a notice like this from many places and for many reasons. Here are a few examples: 

• 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 notice will also look different based on who is sending it. 

If it's 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 it's 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. 

What is a Pre-Adverse Action Letter?

A pre-adverse action is a notice that comes before the official decision has been made. They 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 notice, 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. 

FCRA Requirements for Adverse Actions

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 requirements, 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.