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Adverse Action — Definition

Sarah Edwards | May 02, 2023

Sarah Edwards
Legal Expert
Sarah Edwards, BS

Sarah Edwards is a professional researcher and writer specializing in legal content. An Emerson College alumna, she holds a Bachelor of Science in Communication from the prestigious Boston institution.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Experiencing an adverse action hurts.

Summary: When you apply for a loan or any other type of credit, the lender will decide to approve or deny your application. If they reject your application, it’s an adverse action, and the creditor must explain the factors that led to the decision. SoloSuit explains the ins and outs of adverse action.

You’ve probably applied for credit at some point and received a denial. A refused loan application will undoubtedly put a tinge of gray on anyone’s bright and sunny day. You likely needed whatever you were applying for, and now you’ll need to figure out how to move on without it.

Once a creditor denies you credit, they’ve taken what’s known as an “adverse action” against you. An adverse action is either an outright denial of credit or an approval with less favorable terms than the borrower requested.

Under the Fair Credit Reporting Act (FCRA) and the Risk-Based Pricing Rule, which are both federal regulations, creditors must specify the reasons for their decision. They must send you a written explanation of their denial, which lists the factors that led them to the adverse action.

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A creditor can’t arbitrarily deny a request for credit

Creditors can’t decide to deny you credit just because you have purple hair or wear clown shoes. They can’t say sayonara to your loan application simply because you used a red pen to fill it out.

Whenever a creditor takes adverse action against you, they must give you specific reasons that fit legal criteria. Adverse action includes any of the following:

  • Denying or revoking a credit line or consumer account.
  • Refusing to grant you credit according to the terms you requested.
  • Making a negative change to your credit account terms, like increasing your interest rate or lowering your credit line.

It’s important to note that a creditor who denies you additional credit on an existing credit line is not taking adverse action against you, according to the terms of the law. So if you call Bank of America and ask if they can throw another $500 on your credit line, and they say no, it’s not considered an adverse action.

Let’s consider an example.

Example: Dominic applies for a credit card with 0% APR from Orange Bank. He intends to use the money to purchase a $5,000 mechanical bull for his apartment. He wants to become a matador and believes the mechanical bull will help him achieve his dreams. When he explains the purpose of his application to Orange Bank, the bank denies him credit. It sends him a notice of adverse action, citing the reason for refusal of credit as “crazy person who wanted to buy a mechanical bull.” Unfortunately, their reason for denial doesn’t comply with the FCRA, and Dominic could file a complaint with the FTC.

Watch SoloSuit’s video to learn how to write a Debt Validation Letter in two simple steps.

Creditors must include specific information when they take adverse action against you

According to the FCRA, your creditor must notify you of an adverse action orally, electronically, or through written notice. The adverse action notice must include all of the following:

  • The name of the consumer reporting agency that supplied the information they used to make their decision.
  • A statement that says the consumer reporting agency only supplied information and did not make the actual decision.
  • Notification that the consumer can request a copy of their credit report within 60 days of the adverse action.
  • A statement that the consumer can file a dispute if they believe the consumer reporting agency’s information was inaccurate.
  • The consumer’s credit score on the date of the adverse action, if the creditor used the credit score when making their decision.

You should receive a copy of the adverse action notice quickly. If you apply for financing online, you may receive the notification within the same day.

If a creditor takes adverse action against your credit application, find out why

Usually, creditors deny loan applications for specific reasons, like a low credit score or a history of not paying your bills on time.

If you apply for credit and encounter an adverse action, use the opportunity to request a free copy of your credit report from the consumer reporting agency. Your credit report will list any negative information you can use to improve your credit the next time you apply for financing.

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