Adverse Action Notice

Full definition

An adverse action notice is a federally mandated disclosure triggered whenever a lender takes a negative action on a credit application - including outright denial, approval for less than requested, or counter-offer at less favorable terms than applied for. Legal basis: Two federal laws require adverse action notices. ECOA (Equal Credit Opportunity Act) requires notice within 30 days of a completed credit application. FCRA (Fair Credit Reporting Act) adds additional requirements when the decision was based on a consumer report, including identifying the reporting agency used and informing the applicant of the right to a free copy of the report. What the notice must include: Statement that adverse action was taken. Specific reasons for the action (or the right to request reasons within 60 days). Name and contact information of any credit reporting agency used. Statement that the credit reporting agency did not make the decision and cannot provide reasons. Notice of right to a free credit report within 60 days from the bureau identified. Why it matters for borrowers: The specific denial reasons are valuable diagnostic information. If you are denied for 'too many late payments,' you know to focus on payment history improvement. If denied for 'insufficient income,' you know the lender has a higher income requirement. The free credit report triggered by an adverse action notice lets you verify that the bureau's information is accurate. Common adverse action reason codes: 'Too many late payments' - 30+ day delinquencies in your history. 'High proportion of revolving balances to limits' - high credit utilization. 'Too many recent applications for credit' - multiple hard pulls. 'Insufficient income' - lender's DTI threshold not met. 'Length of credit history too short' - thin credit file.

• Hard credit inquiry