What Is an Adverse Action Notice & What Are Your Rights?
Decipher adverse action notices. Understand these official communications about negative business decisions and learn your legal rights to respond effectively.
An adverse action notice serves as a formal communication to inform an individual about a negative decision made against them by a business or lender. Its purpose is to provide transparency regarding specific actions, such as the denial of credit, employment, insurance, or housing. This notice is a legal requirement designed to protect consumer rights and ensure that individuals understand the basis for such decisions.
When a Notice is Required
An adverse action notice is required in various situations that impact consumers. When a credit application is denied, or the terms of credit are made less favorable, such as a higher interest rate or lower credit limit, a notice must be provided. This obligation falls under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA), ensuring transparency in credit underwriting processes and safeguarding against discrimination. Creditors must issue this notice within 30 days of receiving a completed credit application.
In the employment sector, an adverse action notice is required when an employer makes a negative decision, like not hiring, firing, or not promoting, based on information from a background check or consumer report. The FCRA governs these situations, aiming to alert consumers when negative information from a report influenced an employment decision. Employers must follow a process that allows the individual an opportunity to review and dispute information.
Beyond credit and employment, notices are also required in insurance and rental housing contexts. If an insurance application is denied or coverage is terminated due to information from a consumer report, an adverse action notice must be issued. Similarly, landlords denying housing or offering less favorable terms based on tenant screening reports must provide this notice.
What the Notice Contains
An adverse action notice must include specific information to ensure the recipient understands the decision and their rights. Primarily, the notice must clearly state the principal reasons for the adverse decision. This means providing concrete explanations, such as a low credit score, a high debt-to-income ratio, or negative findings on a background check, rather than a generic statement of denial.
If the adverse action was based on information obtained from a credit report or other consumer report, the notice must provide contact details for the Consumer Reporting Agency (CRA) that supplied the report, including its name, address, and phone number. It also includes a statement clarifying that the CRA did not make the decision and cannot provide the specific reasons for the adverse action. This directs the individual to the appropriate source for further inquiry.
The notice includes information about the consumer’s right to obtain a free copy of the report used by the entity. This right applies if the request is made within 60 days of receiving the notice. The notice further informs the individual of their right to dispute the accuracy or completeness of any information in that report directly with the CRA. Additionally, the notice will include the name and address of the entity that took the adverse action.
Your Rights After Receiving It
Upon receiving an adverse action notice, individuals have specific rights and actionable steps. One immediate step is to obtain a free copy of the consumer report mentioned in the notice. Federal law grants the right to a free report from the specified Consumer Reporting Agency (CRA) if requested within 60 days of receiving the adverse action notice. This allows for a thorough review of the information that influenced the decision.
After obtaining the report, review it for any inaccuracies or errors. Should discrepancies be found, individuals have the right to dispute inaccurate or incomplete information directly with the CRA that compiled the report. This can be done online, by phone, or by mail, and providing supporting documentation can strengthen the dispute. Correcting errors can improve future outcomes for credit, employment, or insurance applications.
Understanding the specific reasons for the adverse action, as detailed in the notice, can also help in addressing underlying issues. For instance, if the denial was due to a high debt-to-income ratio, the individual can focus on reducing debt. By rectifying inaccuracies or improving financial behaviors, individuals are better positioned to reapply for credit, seek alternative employment opportunities, or secure insurance coverage in the future.