What is an adverse action notice?
An adverse action notice is the response a creditor gives to a rejected applicant for a loan or credit card. It details the reasons you were denied for a loan so that you have the opportunity to take action to improve your credit or correct invalid information. 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.
Reasons for adverse action notices
Depending on the type of notice, 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 that 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 include?
If your business received an adverse action notice in response to an application for a credit card, bank account or line of credit, you can learn more about the decision by reading through the report. 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 notice is required by the FTC to include the following information:
- Action taken: The report outlines the action the lender took, 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 credit agency or third-party organization where the creditor obtained their information. They also provide contact information so you can reach out to them about the report.
- Credit score: If your credit score impacted the adverse action decision, the creditor must explain why the score did not qualify and 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 incorrect information.
How to respond to an adverse action notice
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. If you received an adverse action notice because of your credit and not an error like an incomplete application, follow these steps to address the notice appropriately.
1. Research your credit report
Start by getting copies of your credit report and other information used to justify the adverse action. Some credit reporting agencies have slight differences in your credit score, so requesting a free copy 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 that resulted in adverse action.
2. Look for common mistakes:
If you are surprised by an adverse action notice and find that your business credit score is much lower than you thought it was, there may be a simple mistake in your credit report. 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 loan amounts that are incorrect
- Accounts that do not belong to you
- Duplicate information
- Typos in contact information or social security number
- Fraudulent information
3. File a dispute
If you determine that you were given an adverse action notice due to inaccurate or incorrect information, file a dispute with the credit bureau to correct the information. Write up a statement explaining what information is inaccurate and attach documentation that supports your claim. Receipts, dated court judgments and other statements can help you speed up the process of correcting your credit report.
4. Contact the lender
Next, reach out to the creditor that sent you the adverse action notice explaining that you filed a dispute that has since been resolved. They can run the credit report again and adjust their decision based on the updated information.
5. Verify with different agencies
Even after correcting your credit information with one agency, there could still be inaccurate information in some credit reporting systems. Reach out to major credit reporting agencies to verify that they have the latest updates on your credit.
6. 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 an attorney to work through complex issues such as bankruptcy.
7. Watch your account usage
After receiving an adverse action notice that changes your account terms instead of outright denying credit, decide whether or not you want to continue working with that lender under the new terms. Using the account after accepting the notice is often seen as an agreement to the new terms.
Frequently asked questions about adverse action notices
Can adverse action notices be emailed?
Adverse action notices are usually mailed to make documentation easier, but they can also be emailed 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 temporarily lower your credit by about five points, but this will happen whether you are approved or rejected.