What is an FCRA Adverse Action Letter?

Not all loan or credit applications end happily. Sometimes, you might apply for a loan or line of credit that you believe you qualify for, only to be denied. When this happens, your denial should be accompanied by an FCRA adverse action letter.

Today, let’s break down what an FCRA adverse action letter is, what’s included, and how you can avoid getting an FCRA adverse action letter in the future. 

Adverse Action Letters Explained

In a nutshell, an adverse action letter is an explanatory document breaking down why you were denied for credit, a loan, a job, or something else on the grounds of credit information.

Say that you apply for a mortgage so you can purchase a new home. If you are denied that mortgage because your credit score wasn't high enough or for some other related reason, you'll receive an adverse action letter explaining the problem.

However, adverse action letters are not required if the reason for the denial did not have to do with your credit. Imagine that you apply for a mortgage once again. However, in your mortgage application, you explain that you don’t have enough money for the requested down payment. Then, the mortgagor could deny your application on the grounds that you don’t have enough money on-hand rather than on credit-related grounds.

Why Are Adverse Action Letters Mandated by the FCRA?

The Fair Credit Reporting Act requires credit furnishers – that is, any organization that supplies credit information to the credit bureaus, including lenders, mortgagors, banks, businesses, utility companies, etc. – to provide adverse action letters whenever they deny consumers something on the grounds of credit.

This is to ensure that consumers understand how their credit affects their financial opportunities and so they know how to improve their financial options later on. For instance, if a lender denies a borrower an application because their credit score isn’t high enough, they are obligated to tell the borrower that information specifically. The lender can’t just say, “you don’t qualify,” and not go into any detail. The lender has to say, “your credit did not meet our internal minimum requirements.”

Information in an Adverse Action Letter

Any given adverse action letter will include a variety of helpful information that consumers can use to improve their credit scores and their financial creditworthiness. Adverse action letters are legally required to include the below information at a minimum:

• The specific reasons for denial of credit, a loan, etc. Creditors can include up to five reasons for denial if they desire
• The applicant’s credit score if it was used to make the decision. This should also include the date on which the score was created and the credit score models used to generate the consumer’s credit score
• The contact information of the credit reporting agency that gave the credit report used in the decision, including Equifax, Experian, and/or TransUnion
• A complete notice of the applicant’s right to a free copy of their credit report within 60 days of receiving the adverse action letter, including information about how to get the free copy of the credit report
• A complete notice of the applicant’s right to dispute the accuracy or completeness of the information given by the credit reporting agency

The last note is particularly important. It outlines consumer rights so they can contest or dispute inaccurate credit information.

Say that you are denied a loan because your credit score is too low. But when you receive your adverse action letter, you notice that your credit score is too low, according to what you believe your credit score to be.

When you investigate your credit report, you find inaccurate line items negatively affecting your credit report. Then you file dispute letters and reapply to get the loan you deserve (once your credit score is back up to its rightful place). 

Why Do Consumers Receive Adverse Action Letters?

Consumers receive adverse action letters primarily so they receive comprehensive information about their credit score, credit report, and the reasons for application denial. This is important for public knowledge and for legal protection for companies.

Say that a company denies a borrower a loan. The company benefits from adverse action letters because it's an opportunity to explain why it decided on a denial – that way, consumers can't accuse companies of discrimination or other unfair practices (an especially salient concern for certain organizations, like lenders).

Remember, as a consumer, you will only receive an adverse action letter if you are denied for something because of your credit information. If you are denied for any other reason, you will not receive an adverse action letter explaining the matter. Some reasons you might be denied a loan or other decision include:

• You have a history of late payments for other debts
• You have too much debt relative to your income (or too high a "DTI" or debt-to-income ratio)
• Your credit score doesn’t meet a minimum requirement
• You have made too many recent applications for credit
• You have a high credit utilization ratio
• You have too much existing credit with the lender in question
• You recently had a bankruptcy, foreclosure, or short sale
• Your credit report has too many charge-offs or collection accounts

In addition, companies are legally required to list up to four of the key or primary factors that adversely affect your credit score (if applicable). This can also include there being a record of too many hard inquiries on your credit report in recent history (i.e., you applied for too many lines of credit or loans over the last few months).

What to Do After Receiving an Adverse Action Letter

After receiving an adverse action notice, you can and should take a look at your credit report to double-check the information from the lender/letter sender. For instance, if you apply for a mortgage and the lender says that your credit score is too low, follow the information on your adverse action letter to obtain a free copy of your credit report.

Not only is this wise so you better understand your overall financial health, but it also lets you make sure that the lender has their information right. If you check your credit report and see that your credit score should be good enough for the loan, you can write a response letter to the lender explaining your point of view.

If you’re correct, the lender may be more than happy to re-run your credit and reconsider your application. 

Best Ways to Reduce the Chances of Receiving an Adverse Action Letter

If you receive an adverse action letter, don’t give up. You can improve your credit score and make your credit profile more attractive to lenders by practicing some smart financial steps. Here are some examples:

• Pay down as many debts as you can completely, starting with the smallest debts
• Be sure to make all of your utility payments or debt payments on time, such as by using auto-pay tools online or on mobile apps
• Don’t take out unnecessary loans or lines of credit
• Close any unused lines of credit that you don’t think you’ll need in the future
• Reduce your debt-to-income ratio by paying down your debts and retaining more of your income

Wrap Up

An FCRA adverse action letter is an explanation for why you were denied a loan, line of credit, insurance coverage, job, or anything else if you were denied because of your credit report. FCRA adverse action letters are required by the Fair Credit Reporting Act, and they can be used to strengthen future financial applications from consumers like you.