If you’ve ever had the unfortunate experience of applying for and being denied credit, then you likely received a letter from the lender with the bad news shortly thereafter. It was no coincidence. Lenders are required to send these “declination” letters if they used your credit report and/or your credit score as a basis for their rejection. Those letters are more formally referred to as adverse action notices.
The requirement for lenders to send adverse action notices has long been a part of the Fair Credit Reporting Act (FCRA), a federal law that promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies.
The letters look almost identical regardless of which lender is sending it, and the reason they look so similar is because the FCRA requires that lenders share very specific information about their declination processes.
What Information Must Be Included in an Adverse Action Notice?
The notice advises that you’ve been denied credit and that you have certain rights; it names the credit reporting company that provided the credit report used by the lender; it names the actual credit score used by the lender; and it contains other attributes used in the decision-making process. Here’s a bit more information about each of these items:
Notice of Denial – Almost all adverse action letters start with a short sentence generally thanking you for your application but also advising you that regretfully your application has been denied. The letter also informs you that the decision to deny your application was not made by the credit reporting company, a not-so-uncommon assumption by consumers.
Notice of Your Rights – Because a credit report was used as a basis for the adverse decision, you have the right to see a copy of your credit report from the same credit reporting company, at no cost. The letter will include the name of one or more of the credit reporting companies — Equifax, Experian and TransUnion – as well as their address, phone number and website address. You will have 60 days to leverage this free credit report right and you must proactively request the report. It will not be sent to you otherwise.
Your Credit Score – The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the FCRA to require that adverse action notices include your credit score. As such, all adverse action notices sent since 2011 also include the actual credit score the lender used as the basis for their adverse decision.
Along with your credit score, the letter is required to provide the key factors that affected your score. These key factors are formally referred to as adverse action codes, but nobody seems to use that phrase. The factors are more commonly referred to as reason codes, but they’re all the same thing.
In the past, the language associated with the reason codes wasn’t terribly consumer-friendly, but that has changed. For example, VantageScore 3.0 and VantageScore 4.0 (which is scheduled to launch in the fall of 2017) have specifically designed reason codes that are more informative and easier to understand. Also, by using the free online resource ReasonCode.org, consumers can gain a better grasp on the deeper explanations of each reason code as well as tips for improvement.
Finally, the credit score section of the adverse action notice must also include additional information about your credit score, including the date the score was calculated and the range of the scoring model (generally 300-850). And most importantly, the score that you receive will be THE ACTUAL SCORE the lender used.