What Is an Adverse Action Letter and What to Do Next?

An adverse action letter is a formal notification from a business or entity, such as a lender, employer, or landlord, indicating that a negative decision has been made regarding an individual’s application or account. This letter serves as a legally mandated communication, informing the recipient about the unfavorable outcome and outlining the reasons behind it. It is a fundamental component of consumer protection laws, ensuring individuals understand why a particular action was taken against them and promoting fairness in various financial and transactional interactions.

When an Adverse Action Letter is Required

Adverse action letters are legally mandated in various situations where a negative decision is made, particularly when influenced by information from a consumer report. The Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA) are two federal laws that govern these requirements. ECOA prevents discrimination in credit decisions, while FCRA addresses the use of consumer report information.

For credit decisions, a letter is required if credit is denied, offered on less favorable terms than applied for, or if existing credit terms are unfavorably changed. This includes applications for loans, credit cards, or mortgages. Lenders must provide this notice within 30 days of receiving a complete application, or within 90 days if a counteroffer was made but not accepted.

In employment contexts, an adverse action letter is necessary when a decision not to hire, promote, or retain an individual is based on information from a consumer report, such as a background check. Employers must follow a two-step process: first, sending a pre-adverse action notice with a copy of the report and a summary of FCRA rights, allowing time for review and dispute (typically at least five business days), and then, if the decision remains, sending the final adverse action notice.

Adverse action notices also apply to insurance decisions, such as denying coverage, increasing rates, or cancelling a policy, if information from a consumer report contributes to the decision. Landlords are required to send these letters if they deny a rental application or offer less favorable terms based on information from a credit report or background check.

Key Information in an Adverse Action Letter

A legally compliant adverse action letter must contain specific details to ensure transparency and enable the recipient to understand the basis of the decision. The letter must clearly state the principal reason or reasons for the adverse action. These reasons might include a low credit score, excessive existing debt, insufficient income, or negative information identified in a background check.

The letter must also provide the name and address of the entity that made the adverse decision. If the decision was based, in whole or in part, on information from a consumer report, the letter must include the name, address, and toll-free telephone number of the consumer reporting agency (CRA) that supplied the report.

If a consumer report was used in a credit-related adverse action, the letter must inform the recipient of their right to obtain a free copy of that specific report from the CRA within 60 days. It must also notify the recipient of their right to dispute the accuracy or completeness of any information provided by the CRA.

Your Rights Upon Receiving a Letter

Upon receiving an adverse action letter, individuals are granted specific legal rights. A significant right is the ability to obtain a free copy of the consumer report that was used in the decision-making process. This right is distinct from the annual free credit reports and must be exercised within 60 days of receiving the adverse action notice.

If the adverse action was based on information from a consumer report, such as a credit report or background check, you have the right to dispute any information you believe is inaccurate or incomplete. This right allows you to challenge errors directly with the consumer reporting agency that provided the information. In some cases, you can also dispute the information directly with the entity that furnished it to the CRA.

If the adverse action letter provided a general reason for the decision, or if you seek more specific detail, you generally have the right to request additional information regarding the decision. For credit-related adverse actions under the ECOA, you typically have 60 days from the date of the notice to make a written request for specific reasons, and the creditor must provide these within 30 days of your request.

Taking Action After Receiving a Letter

Receiving an adverse action letter provides an opportunity to understand the underlying reasons for a decision and to take steps to address them. The first step involves requesting your consumer report from the specific consumer reporting agency identified in the letter. You can typically do this by visiting the agency’s website, calling their toll-free number, or sending a written request.

Once you receive your report, carefully review it for any inaccuracies, outdated information, or accounts you do not recognize. Look for discrepancies in personal details, account statuses, payment histories, or public records. Identifying these errors may have contributed to the adverse action.

If you find inaccuracies, initiate a dispute with the consumer reporting agency (CRA). Most CRAs offer online dispute portals, or you can mail a dispute letter. Your dispute should clearly identify the incorrect item, explain why you believe it is erroneous, and include copies of any supporting documentation. While the CRA investigates (typically around 30 days), you may also consider contacting the data furnisher directly to dispute the information.

You can also contact the entity that sent the adverse action letter. This outreach can be for clarification on the reasons provided or to offer additional information if you believe a mistake was made or if you can resolve the stated reason for the adverse action.