If you have ever been denied credit, you are probably familiar with the concept of a declination letter also known as a “notice of adverse action.”
Lenders rely heavily on your credit reports and credit scores to help them make informed decisions about the risk of doing business with you. Whenever you apply for a mortgage, a credit card, an auto loan, a student loan, or even a credit line increase on an existing account, you have almost certainly consented to allowing your credit reports and credit scores to be pulled by the lender.
Lenders have certain minimum credit standards that they use to determine whether or not to approve your application for credit. If your credit reports and scores do not meet these requirements then you will either be flat-out denied, or offered an extension of credit with less attractive terms. This process of being offered credit at less attractive terms is known as an “adverse approval.”
Adverse Action Requirements Under The Fair Credit Reporting Act
According to the Fair Credit Reporting Act (FCRA) lenders have an obligation to inform you when your application is denied or when you are adversely approved due to information contained within your credit reports, including your credit scores.
The notification, dubbed an adverse action notice or a letter of declination, almost always comes in the form of a letter and must contain specific information to help you understand why your application was denied. The lender must send you this information, and not wait until you request it.
Here are the three things that lenders are bound by law to include in their letter:
1. The Why
Adverse action letters must include a reason explaining why you’ve been denied.
Unfortunately, this explanation doesn’t have to be detailed, and often lenders provide vague information such as “denied due to information on your credit report.” While this may not be very helpful, it does satisfy the FCRA requirement and it also lets you know that negative information is on your report and is preventing you from being approved for new credit.
2. The Credit Score Disclosure
Thanks to the Dodd Frank Wall Street Reform and Consumer Protection Act, which amended the FCRA in 2011, lenders are now required to tell you the actual credit score they looked at when they reviewed your application.
This is referred to as a credit score disclosure notice and it offers you much more useful information to help you better understand why you were turned down. The score disclosure notice must also identify your credit score range, and where your score falls relative to the rest of the U.S population.
3. The Credit Bureau Referral
This is probably the most useful piece of information in the letter. Per the FCRA, when you are denied for credit the lender is required to disclose which credit report they viewed when considering your application. You also have an opportunity to view that report for free if you request a copy within 60 days.
For example, if they pulled your Equifax report then you can have Equifax send you a copy to see exactly what the lender did when they were deciding whether or not to extend you credit. This can be immensely helpful if you didn’t know you had negative items on your credit report or if you have no idea why you may have been denied.
Keep in mind that the lender will not automatically send you a copy of your report – you will have to actually ask the credit bureau for a copy to review.