What is an adverse action notice?

An adverse action notice is a document an employer gives to a potential employee due to a background check negating the hiring of a candidate. It’s also a response that a creditor gives to a rejected applicant for a loan or credit card, which details the reasons they were denied for the loan so that they have an opportunity to improve their credit or correct invalid information.

Adverse action notice requirements

Institutions that lend money, such as banks, are legally required by the Fair Credit Reporting Act to send out an adverse action notice any time they deny an application for credit, lower account limits or change the account terms due to credit information. The same law obligates employers to send out adverse action notifications to candidates after a background check. There are, however, certain differences between the procedural requirements and potential violation penalties for lenders and employers.

Related:What Is the Fair Credit Reporting Act (FCRA)? A Guide

Reasons for adverse action notices

In the case of loan and credit-related adverse action letters, you can expect to receive an adverse action notice within 30 to 90 days of your application. If you submitted an incomplete application, you’ll receive an adverse action notice so you know what to correct. Other reasons for rejected applications or closed accounts resulting in adverse action include:

• Unknown income or employment
• No credit or bad credit
• Invalid references
• Delinquent credit
• Bankruptcies and foreclosures

What does an adverse action notice for credit include?

If your business received an adverse action notice in response to an application for a credit card, bank loan or line of credit, the adverse action notice disclosure you receive will include information on how the creditor made their decision. In addition to listing the reasons for the adverse action, the FTC requires that the notice include the following information:

• Action taken:The report outlines the lender’s action, whether that involved closing an account, increasing APR, rejecting a credit increase, suspending an account or denying credit overall.
• Sources: All adverse action notices identify the credit agency or third-party organization where the creditor obtained their information. They also provide contact information n third parties.
• Credit score: If your credit score impacted the adverse action decision, the creditor must explain why and also identify the main factors influencing your score.
• Explanation of rights:The report includes information on your legal rights, such as the right to a free credit report from the same agency the creditor used and your right to submit a dispute for corrections.

Adverse action employment notice rules

The FCRA’s rules govern adverse action notices from employers using background checks to decide employment in much the same way as for credit lenders. These procedures relate to both background checks and their follow-up notifications to employees and candidates.

Specifically, the instructions for FCRA disclosure and authorization stipulate the procedures that you should follow and how to secure written permission for conducting background checks on employment candidates.

Adverse action letter rules that employers must follow include:

• Providing disclosure and obtaining consent: If you’re conducting a background check on any employee or candidate, you must first obtain their written consent for your pending check. Obviously, this should be done beforehand, not once the check has been completed.
• Sending a pre-adverse action notice: After completing a background check, you need to give the subject of the check written notice of any findings that might be used as reasons for not hiring them or for their dismissal. This notice is called a pre-adverse action letter. You also need to give the person a copy of their background check and a summary of their FCRA rights. Keep copies of these documents for your own records as well.
• Offering an opportunity for refutation and clarification: Once a pre-adverse action notice has been sent to a candidate or employee, that person should have ample time and opportunity to review their background check results and respond with their own information. Several days should be enough, though the FCRA doesn’t specify a time frame.
• Providing notice of an impending adverse action: If you still decide not to hire a candidate despite their clarifications, you need to send them an adverse action notice that states this and explains why. You can deliver this as a paper document or electronically.
• Disposing of all sensitive documents afterward according to FCRA rules: Once the entire process above has reached completion for employees or job candidates, you should destroy all of your digital or physical employer copies of the documents in question.

How to respond to an adverse action notice as a business seeking credit

When you or your business receives an adverse action notice, it’s important to take action quickly so you can get back on track and meet your company’s financial goals. Follow these steps to address the notice appropriately.

Research your credit report

Start by getting copies of your credit report and other information used to justify the adverse action. Requesting this from multiple agencies can help you develop a complete picture of your credit. Gaining access to the same information your creditor used and comparing it to other reports can help you identify possible errors behind the adverse action.

Look for common mistakes

Review the details of the report and look for any of these common errors that can influence your credit eligibility:

• Expired bankruptcies over 10 years old
• Credit demerits over seven years old
• Outdated account balance information
• Negative entries that occurred more than seven years ago
• Payments you made on time that are reported as late
• Credit limits or incorrect loan amounts
• Accounts that do not belong to you
• Duplicate information
• Typos in contact information or social security number
• Fraudulent information

File a dispute

If you determine that you were given an adverse action notice due to inaccurate information, file a dispute with the credit bureau to correct the information. Rely on receipts, dated court judgments and other evidence to support your corrections.

Contact the lender

Next, reach out to the creditor that sent you the adverse action notice explaining that you filed a dispute and have resolved the issue. They can run the credit report again and adjust their decision based on the updated information.

Verify with different agencies

After correcting your credit information with one agency, reach out to other major credit reporting agencies to verify that they also have the latest updates on your credit.

Build your credit

If your credit information is accurate and you still received an adverse notice, take steps to build your credit by addressing the main items that contributed to your low score. Consider working with anattorneyto work through complex issues such as bankruptcy.

Watch your account usage

Monitor your lender’s policies to see if they favor your needs too, and use your account carefully or switch lenders to avoid further credit problems.

FAQs about adverse action notices

Can adverse action notices be emailed?

Adverse action notices are usually sent through the mail to make documentation easier, but they can also be sent through email or communicated verbally.

Does an adverse action notice affect your credit score?

Adverse action notices themselves do not impact your credit score. When a lender submits a hard inquiry to start processing your application, this can temporarilylower your creditby about five points, but this will happen whether you are approved or rejected.