Chapter 1: Credit Reporting Industry
IN THIS LESSON
What is adverse action?
In finance, the term "adverse action" refers to a type of notice given by a lender when a borrower's credit application has been denied. They are typically delivered within seven to 10 business days following the decision to deny the loan application, usually in writing, although they may be communicated verbally as well. Banks and other lenders must provide adverse action notices to comply with consumer protection legislation.
Besides its meaning in finance, the term "adverse action" can have a second connotation regarding employment and the workplace. Thus, in the hiring process, adverse action means a company may stop the applicant's hiring process or withdraw their offer. This decision is based on the findings uncovered on a consumer report or background check.
Understanding Adverse Action in Finance
The purpose of an adverse action notice is to inform would-be borrowers that their loan application has been denied, while also providing information about what factors influenced that decision. At the same time, adverse actions are included on a borrower's credit report and might, therefore, negatively impact the borrower in subsequent loan applications.
Typically, the factors cited in an adverse action note relate to poor credit history as revealed on the borrower's credit report, such as failing to make debt payments in a full or timely manner. In rare cases, however, an application might be denied due to identity theft.
No matter the reason for the denial, adverse action notices can help loan applicants better understand what they need to do in order to enhance or repair their creditworthiness. If the borrower believes that the denial was due to inaccurate information drawn from their credit report, then they have the option of initiating a dispute resolution process. This process can be especially useful in cases of fraud, where the borrower may have been unaware of the fraudulent transactions affecting their credit score.
Those receiving an adverse action notice will have a 60-day period in which to request a copy of their credit report. This report is given free of charge, to better enable the borrower to understand and correct the problems identified in the notice. In order to protect against discrimination, the report will also include language from the Equal Credit Opportunity Act (ECOA) stating that factors such as the borrower's race, religion, nationality, or sexual orientation were not taken into consideration for the purposes of assessing the loan application.