It’s no fun getting turned down for credit, but here’s some silver lining: The company you applied with can’t just ghost you – it is legally required to tell you why you were rejected and even provide information that could set you up for success next time.
This information comes in the form of an adverse action notice, which you should receive soon after rejection. Understanding this notice and what’s in it is vital to moving on.
Why you got an adverse action notice
In short, you applied for something and were rejected – or didn’t get the terms you applied for. The laws requiring adverse action notices encompass a variety of scenarios.
“It could be a card, a mortgage, a car loan, but it could also be for insurance or when an employer checks credit for employment,” says Kim Cole, outreach coordinator for Navicore Solutions, a non-profit financial counseling firm headquartered in Manalapan, New Jersey.
There are two laws that mandate adverse action notices when it comes to denial of credit, or denial of employment or insurance based on your credit.
1. Equal Credit Opportunity Act: The intent of this law, enacted in 1974, was to prevent lenders from discriminating against applicants, says Judson Crump, a consumer protection attorney based in Mobile, Alabama.
“During the Civil Rights Movement, the law started to catch up with the reality that certain groups of people were getting treated very unfairly,” says. “One of the areas where there was a big problem was in the granting of credit.”
The ECOA stipulates that lenders must provide a notice of action (a “yes” or “no”) within 30 days of receiving a complete application for credit. This prevents them from simply sitting on an application they don’t want to approve, Crump says. If the answer is “no” (for the application itself or the exact terms you requested), they must send a statement of reasons. This compels lenders to provide a non-discriminatory reason for rejection (your credit’s not good enough, you don’t have enough money, or you lack proper collateral, for example). No statement of reasons is required by the ECOA, however, if you accept a counter-offer from that same lender.
2. Fair Credit Reporting Act (enacted 1970): If an entity pulls your credit report and then, based on that credit check, turns you down, won’t offer the terms you applied for, or worsens your terms (upping your interest rate, for example), it must inform you. This adverse action notice must contain:
- The reason the adverse action was taken: This reason can vary, depending on what you applied for (insurance, a job or credit). When it comes to credit, “the most common reasons we see are that there are accounts in delinquent status or that someone is new to credit and got denied because their credit history was too new,” Cole says.
- Which report was pulled and instructions for getting a free credit report: There are three consumer credit bureaus, and the adverse action notice must name the one that was used. In addition, the FCRA entitles you to free copy of the credit report that got you denied – and requires that the adverse action notice provide information on how to get it.
“Those things together make the adverse action notice important to a lot of people because, for a lot of folks who aren’t very Internet savvy, it’s the only way they know how to get a credit report,” Crump says.
Note that you have only 60 days to access your credit report for free.
- Other housekeeping information: The adverse action notice required by the FCRA will generally advise you not to contact the credit bureaus about your denial – all they did was provide information to whatever entity checked your credit. However, the notice will encourage you to dispute inaccurate information with the bureau that provided it.
As you might have noticed, the ECOA and FCRA overlap, and the company that rejected you may provide a single notice that encompasses the requirements of both.
Why adverse action notices can be empowering
Don’t regard adverse action notices as salt in an open wound. They offer powerful information for consumers, including:
- Credit intel: Remember that free credit report? Assuming you’ve already used up your annual free report for that particular bureau from AnnualCreditReport.com, you’d otherwise have to pay for it.
“A credit report is worth about $20,” Crump says. “And it’s worth a lot more if it has information you can correct so you can get approved for a loan to make an important purchase you need to make.”
In fact, correcting incorrect information should be your first priority once you receive the adverse action notice. If, for example, your reason for denial is “delinquent accounts” and you know for a fact you have just one card that you’ve always paid on time, something ominous is probably lurking within your credit report.
“We’ve found that many of our clients who are victims of identity theft have found out about it by being denied for credit,” Cole says. “So it’s very important that that information be verified.”
Fraud aside, credit bureaus sometimes make mistakes and report incorrect information. The free credit report guaranteed by the FCRA may alert you to the need to begin the dispute process.
If the negative information on your report is indeed accurate, acknowledging it is the first step to fixing it.
“If there has been a history of delinquent accounts and large outstanding balances, maybe the consumer makes sure they’re paying bills on time for six months and then reapplies,” Cole says. “They really do need that credit report in order to know what the next steps should be.”
- A heads-up on sketchy auto-lending practices: Some dealerships that serve customers with poor credit engage in a practice called spot delivery agreements — and adverse action notices can clue you in.
Here’s how it works: You find a car you want at the dealership. The dealer tells you you’re “preliminarily approved,” or something similar and allows you to drive the car off the lot. In reality, the dealer is shopping your loan application to a variety of lenders – and the paperwork you signed says something about the deal being “conditional on approval.” In other words, if no lenders want to give you a loan, the dealer will want the car back.
Dealers may not be in a rush to let you know that your financing isn’t working out and may brush off your calls asking about your title papers and financing details. After all, by allowing you to drive off the lot, they’ve taken you off the market for their competitors, Crump says.
Worse yet, the dealer might be charging you fees for each additional day you keep the car (or each additional mile driven).
“So they’ve stolen the down payment,” Crump says. “Now, not only has the person lost the opportunity to shop around, they’ve also lost the money they had to shop around with.”
If you get an adverse notice in the mail saying you’ve been denied financing, you know something fishy is happening. That lets you at least minimize your costs, save most of your down payment by returning the car earlier and avoid spending another cent on insurance for a car you don’t own.
Whatever the situation, the adverse action notice tells you it’s time to take, well, action – action to protect yourself from dishonest lenders, action to correct credit report errors, or action to repair your credit so you’re eligible for the very best terms in the future.
“The adverse action notice tells you why you were denied, you follow up on it, you fix the problem, and get approved the second time around,” Crump says. “That’s how it’s supposed to work. That’s the core purpose of the FCRA.”