When a credit application is denied, the applicant receives an Adverse Action Notice either electronically or as a hard copy.
This is a document which clearly states the reasons for which the applicant was denied.
Adverse Action Notices are an important consumer protection under both the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA).
What is an Adverse Action?
An adverse action is when a creditor responds negatively to an applicant’s request for credit or other types of needed approval such as employment and insurance.
According to the Equal Credit Opportunity Act (ECOA) as implemented by federal Regulation B, an adverse action is categorized as any of the following:
- Application refusal for credit: This is a denial of application either:
- for new credit
- to refinance
- to stretch the life of a loan
- Account termination: This includes account closures due to:
- the customer moving outside of the creditor’s servicing region
- the creditor closing accounts only beyond or below a specific credit threshold.
- Application refusal to increase available credit limit: Whereby a customer with an existing credit is denied a limit increase through the creditor’s application process.
The Fair Credit Reporting Act (FCRA) expands the definition of an adverse action to include:
- Unfavorable insurance decisions:
- Refusal to grant insurance
- Cancelation of an existing policy
- Increase of premium
- Decrease in policy coverage
- Unfavorable employment decisions:
- Refusal to grant employment
- Disadvantageous affects to employment as a result of employer’s deciding factors
- Unfavorable government benefits:
- Refusal to grant government licenses/benefits
- Cancelation of an existing licence/policy
- Any adverse changes to existing license/policy
- Actions detrimental to customer interests:
- Negative account reviews
- Adverse response to a customer application or transaction
Adverse Action Notice reasons
Applicant denials fall under one of the 6 categories below. When an adverse action notice is issued, it will typically have between 1 and 4 reasons marked as to why the loan was denied.
Here is an infographic summarizing the reasons that fall into each category.
Let’s go through each reason in detail.
Incomplete application
There is not enough information provided to make a credit decision. These types of adverse action notices will generally request that the applicant provide the necessary information and reapply.
- Credit application incomplete: Necessary information needed to process the application was missing. This includes personal information where the identity of the applicant could not be verified as well as credit related.
- Insufficient number of credit references provided: It is likely there is no credit history, or existing history is insufficient to approve the request.
- Unable to verify credit references: The applicant may have payment history with individuals or businesses which don’t report to a credit bureau.
- Unacceptable type of credit references provided: The creditor does not accept credit references which do not report to a credit bureau.
Credit issues
This category allows for common credit concerns, some general and some specific.
- No credit file: The applicant has no recorded credit history with the credit bureau.
- Limited credit experience: in regard to type of application, the existing payment history is too recent or the applicant does not have enough open accounts.
- Delinquent credit issues:
- Poor credit performance
- Derogatory payment history
- Debt in collections
- Wage garnishment
- Lien placed on a property
- Foreclosure or repossession
- Bankruptcy
Employment issues
Very recent employment or lack of steady employment is notably high risk in regard to making payments.
- Temporary or irregular employment: The applicant’s employment is not permanent, possibly a short-term contract or seasonal work. There may be frequent or unexplained gaps in the applicant’s employment history.
- Unable to verify employment: The employer may have no record of the applicant. The applicant is unable to present income verification (paystubs, direct deposit printout, tax returns, etc)
- Length of employment: The applicant may have only recently started a job. Many employers have a 90-180 day initial employment period. Applicants will not necessarily be denied solely for this reason, but in combination with other reasons.
Insufficient income
This category addresses situations wherein applicants cannot reasonably provide verification of income.
- Income insufficient for the amount of credit requested: The applicant’s income is not adequate to reasonably accommodate the amount of debt requested.
- Excessive obligations in relation to income: The applicant has inadequate income after paying existing obligations. This results in little or no capacity to pay an additional debt.
- Unable to verify income: As in regard to employment verification, the applicant can provide no verification of stated income (paystubs, direct deposit, contract, tax return, etc)
Residence
Insufficient information regarding residence may be considered negatively during the application process.
- Length of residence: The applicant has only recently changed residence. This is typically not a single reason for denial, but will be in connection with another reason.
- Temporary residence: This may be reason enough for denial if there is cause for concern that the applicant may have no permanent ties or obligations, or if there is no way to reliably link the borrower to the address.
- Unable to verify residence: This reason will be given if the applicant provides an address that is nonexistent, partly correct or unspecific and cannot be verified as the current residence of applicant.
Overall credit report
There are occasional situations that do not necessarily fit into any of the above scenarios, but are also considered negative.
- Number of recent inquiries on credit report: This is considered negative because it signals the applicant may be ‘credit shopping,’ possibly resulting in simultaneous credit approvals. In this case, the applicant’s financial obligations may be more than what is visible on the credit report and application. It may also indicate the borrower is desperate to obtain credit, which is an indication of higher risk.
- Value or type of collateral not sufficient: The collateral offered to secure a loan does not hold enough value to offset the amount of debt requested.
- Other, specify: Extenuating circumstances may require additional explanation or reason for denial which will be indicated here.
When is adverse action notice required?
If a consumer is denied credit, employment, insurance, housing, or any other applications based on a credit report, they are required to receive an explanation of why they were denied.
In particular, under the ECOA, the creditor must provide an adverse action notice when:
- an existing consumer credit account has an adverse action
- a completed/incompleted credit account has an adverse action during application
On the other hand, under the FCRA, the creditor must provide an adverse notice when their decision is based on information from:
- the applicant’s credit report
- other credible sources besides credit bureaus
It’s important to note that the (Equal Credit Opportunity Act) ECOA will only provide an adverse action notice when the denial involves credit.
The law was first enacted in 1974, making it illegal to discriminate against any applicant based on race, color, religion, national origin, sex, marital status, use of public assistance, or age (excluding minors) with respect to credit decisions.
Otherwise, any adverse actions to do with employment, insurance, residential issues as well as credit fall under the governance of the Fair Credit Reporting Act (FCRA).
That is, notice must be provided that adverse action was taken based on information in the applicant’s credit report.
It also provides information for obtaining a free copy of consumer credit report within 60 days of adverse action, and also how to dispute the information if found to be inaccurate or incomplete.
Why did I get an adverse action notice?
An Adverse Action Notice is typically given to an applicant who is considered a high risk based on a mostly negative credit history.
A derogatory credit report does not reflect well on the applicant and therefore resulting in a denial.
The decision is essentially an evaluation of credit worthiness and intent to repay and include a review of past behavior.
This will determine the likelihood of future behavior in regard to credit or other financial commitments.
While it is not always an accurate forecast of future behavior, it does provide a generally accurate illustration of past behavior.
If the applicant deems the information does not adequately reflect their commitment to act responsibly, it is incumbent upon them to provide clarification for any extenuating circumstances that contributed to the derogatory credit.
Providing this additional information will not necessarily result in approval. Often the applicant must first address any past derogatory credit situations before moving forward.
Why did I get an adverse action notice after buying a car?
Sometimes there is a crossover during the application process when a borrower has applied for different amounts or with different creditors.
If one application is denied and one application is approved, the applicant will still receive an adverse action notice regarding the denied application.
When is adverse action notice not required?
- When an applicant agrees to amending the terms and conditions of an existing account.
- When an action is taken on an account that has been delinquent, has indications of inactivity, or is in default.
- When a transaction on a consumer’s account has been refused or failed to authorize.
- When an application for a particular type of credit plan is refused because it isn’t offered by the creditor.
Can you dispute a loan denial?
Yes. The Fair Credit Reporting Act (FCRA) provides 60 days during which a borrower may request for details behind the derogatory credit report.
They may then appeal the decision and provide documentation their claim that the negative statements and the reason for denial is inaccurate.
Why do I keep getting denied for loans?
If the negative stain on your credit report is neither resolved if inaccurate nor has it been given any effort to improve, the creditor will most likely continue to refuse under the same application approval process.
A consumer can challenge a loan decision within 60 days of denial, but it is not a guarantee of approval.
The credit application will be re-evaluated based on the documentation provided, and if accepted will be included in the re-application process.
The request will again be either approved or denied according to creditor policy.
Does the adverse action notice affect credit score?
It does not negatively impact credit score. However, multiple inquiries from several lenders in a short period of time will negatively impact credit score.
So, it is always important to be very specific when applying for credit, and allow credit inquiries only when absolutely ready to be evaluated.
Who receives the adverse action notice?
Under ECOA (Regulation B), any applicant applying for credit must receive this notice. This includes individuals, businesses of all sizes, and any person liable or who will be liable for the debt, including co-applicants.
Under FCRA, any consumer defined as an individual, including co-applicants must receive this notice.
When should an adverse action notice be provided?
Under ECOA (Regulation B), a creditor has an obligation to notify an applicant within 30 days after receiving an adverse action on:
- either a complete or incomplete credit application
- an existing credit account.
If the creditor has made a counteroffer, and the applicant does not accept it within 90 days, an adverse action notice should still be issued.
Under FCRA, the creditor does not have any obligations at all to provide notice within any time period.
Therefore, timing is always designated by the ECOA (Regulation B).
How can I make sure I get approved for a loan?
It takes time, sometimes years depending on the issues, to clean up derogatory credit. Meanwhile, some efforts that may help are the following:
Establish a relationship with a credit union or bank
While it is always best to address difficult situations as early as possible by communicating with creditors, sometimes that can’t or won’t happen.
Even if a debtor does make the effort, sometimes they have no means to prevent a bad credit situation from getting worse.
Treat your savings and checking accounts as a trial run for loan approval. Don’t overdraw.
Have your pay direct deposited into your account and pay bills electronically from your account.
The better customer you are without loans, the more likely they will lean in your favor when you do apply for credit.
Build a strong employment history
Lenders often understand that what’s on paper is not the whole picture.
While past credit is one measure of character, it isn’t the only one. Emphasize how long you have worked at the same job or in the same industry.
Make sure they know about monthly volunteer hours at the dog rescue or a food bank (that are verifiable) because these things also speak to your integrity as an applicant.
Live frugally
Credit can easily become a crutch in this world of consumerism. There are creative ways to both cut living expenses and increase income without taking on the burden of additional debt.
Repair your credit report
Collections should be paid as soon as possible. If they are settled for less than what is owed, it is still positive. A zero balance collection demonstrates accountability.
Debtors are often left dealing with the aftermath of difficult financial situations.
However, collections, delinquency, default, charge-offs must eventually be revisited in order to truly move forward and regain financial control.
Borrowers are often considered higher risk when no effort has been made to clean up derogatory credit.
They will be less likely to receive a loan approval than someone who came through a similar situation but made an effort to settle old debts and repair derogatory credit.
This effort expresses accountability to creditors and a commitment to the responsibility of debt repayment, regardless of experiencing financial difficulties.
It may also prove useful to know the credit bureau from which a particular creditor will most likely pull your credit report.
Financial institutions will typically have a preference and it will depend on the state in which you live and the loan for which you are applying.
The information below was compiled from creditboards.com, where consumers share the results of their loan applications regardless of whether they are successful or not.
| Creditor | Preferred credit bureau |
|---|---|
| Chase | Experian |
| Capital One | Experian |
| Discover | Equifax |
| American Express (AMEX) | Experian |
| Navy Federal (NFCU) | Equifax |
This is based on all the results compiled in the United States from an overall perspective. The link for each creditor will provide more information on the variations in preferences at the state level.
Knowing which credit bureau a particular creditor will likely pull from, will help guide you in determining which credit report to begin addressing first.
Take it slow when reestablishing credit
If there has been a bankruptcy or serious delinquency or default, a lender will not look favorably at an applicant immediately seeking credit.
The applicant may have to begin with a very small loan, secured credit line, or high interest credit card to establish a good payment history over 6 to 18 months.
During this time, the credit score should noticeably rise. Distance from derogatory credit, reestablished payment history, and increased credit score should eventually culminate in a loan approval.
Approvals are based more on just excellent credit
Approvals are based on an overall assessment of the applicant.
This assessment includes credit history but also credit recovery and other behaviors that speak to responsibility of weathering credit difficulties as well as life in general.
Employment history, residence history, ability to repay, and intent to repay are all considered when making decisions to approve or deny.
It’s not only about credit score. It is often the overall picture that is the difference between being approved and receiving an adverse action notice.