Adverse Action Notice Letter
As a business owner, you will find yourself in various situations where you resentfully have to write an adverse action notice letter. It may include circumstances like rejecting your customer’s loan or credit due to their low credibility.
Adverse action letters are a crucial part of the Fair Credit Reporting Act (FCRA). An adverse action letter can be of several types, they are:
- Background checks
- Employment Reports
- Loan or Credit
- Credit Reports
Typically a credit card transaction is denied when there is something wrong with your customer’s credit report. Any irregularities or issues in the credit reports can affect more than just someone’s credit card transactions. Insurance coverages and even jobs could get denied if there is something wrong with a person’s credit report.
In every such case, where anything of value is denied because something is wrong with a person’s credit report, they will receive an adverse action letter. The purpose of this letter is to let the person know why the lender could not complete a transaction because of the person’s credit report.
Whenever a lender denies a transaction or service based on a person’s credit report, they are required by law to send that person an adverse action letter.
The FCRA ensures that customers using credit services are made aware of why the credit service was denied. Similarly, the Equal Credit Opportunity Act ensures that an individual is denied an opportunity because of their credit report.
Although adverse action letters are sent in several situations, it is most commonly seen used by money lenders or credit service providers. It has become a common thing to see someone’s credit card getting declined. And every time a card gets declined the lender has to send an adverse action letter to the cardholder.
Naturally, lenders and financial service providers are often required to send out bulk mails on a regular basis for sending adverse action letters. Furthermore, as serving the adverse action notice is mandated by law, the lenders need to make sure that the mail is securely delivered.
This article will explain what is an adverse action notice and why it is important for lenders and financial institutions. In addition to that, we also discuss the elements you should include in a well-drafted adverse action letter.
Furthermore, the article will also explain why and when an adverse action notice must be served to a customer. Once the customer receives an adverse action notice they may take several steps to scrutinize their credit report.
By discussing these steps, the article explains why and how the accuracy of your adverse action letter is important for your financial business. Apart from sending adverse action letters to their customers, financial institutions may also have to send them to prospective employees who have a bad credit report.
We will also explain the steps you can take to ensure a better credit system for your customers. You even get insights into how your customers can reduce the chance of future credit denials through this article.
What is an Adverse Action Notice?
An adverse action notice is a notification that lets a person know that their credit transaction, insurance, or employment is denied based on their credit report. Typically, the adverse action letter is sent to a person by a lender or a potential employer.
When writing an adverse action letter, make sure you mention all crucial aspects highlighting that your agency decided to deny their application. In addition to this, do not forget to mention the contact information of the credit report agency you employed along with the required resources.
This way, the recipient of the adverse action notice can contact the credit reporting agency directly if they feel there has been a mistake. The following people are entitled to get a free credit report.
- People whose credit card payments get denied.
- People whose job opportunities are denied based on their credit report.
- People whose government license or other benefits get denied due to their credit reports.
People who are denied renting an apartment or house can also get a free credit report. Furthermore, people can get a credit report if asked to pay a marginally higher deposit for the property. Finally, the adverse action letter can also be used to attest that a person is currently either unemployed or a recipient of public welfare assistance.
What Should You Include in an Adverse Action Letter?
As per federal law, you can choose multiple channels to serve the adverse action notice to your customers or prospective employees. This means that the adverse action notice can be served in writing or electronically (via mail), or even orally.
Most lenders or companies decide to use a written medium for adverse action notice. This is because direct mails are more secure and also ensures FCRA compliance. The adverse action letter is sent to the person within seven to ten business days from denying credit, employment, etc.
However, you can always choose the medium through which you want to serve the adverse action notice. But, regardless of the medium you choose for the adverse action notice, the content pretty much remains the same.
Let’s now take a look at the must-haves of your adverse action letter. Dive in with us to know more.
The credit score is the first and most important thing you need to include in your adverse action letter. It is because the credit score helps determine your eligibility for credit, mortgage, employment, and so on.
The notice must clearly state the decision to deny credit or employment or something else was based on their credit score. You must also mention the date corresponding to the credit score. Furthermore, try to include the range of possible credit scores. This range must be based on the specific model used for generating the score.
Details of The Credit Reporting Agency
As mentioned before, the adverse action letter must include all the details of the credit reporting agency. The basic details of the credit reporting agency that you need to furnish in the adverse action letter include its name, address, and phone number.
Some of the major credit reporting agencies that you may be familiar with are Experian and TransUnion. The name and contact details of the credit reporting agency can be quite helpful in case the recipient finds any discrepancies in the record.
Reasons For Denial
The adverse action report will need to explicitly state the reasons for the denial of credit, employment, and other benefits. This is the most important part of adverse action letters.
So, if there are any other reasons for the credit denial apart from a low credit score, you must list them as well. However, you only need not include more than five reasons for the credit denial.
This ensures that the recipient knows exactly why they were denied and takes the necessary steps to rectify the situation.
Notice Stating The Right to a Free Copy of The Report
The adverse action letter you send must also include a notice that states the recipient is entitled to a free copy of the report. However, the free report can be accessed by the recipient only within 60 days after the denial. Therefore, the notice must also mention how the person can get access to their copy of the report.
Notice of Right to Dispute
Like the notice for the right to a free copy of the report, you must also include a notice that lets the receiver know they have a right to dispute. One of the reasons why the credit report is mandated is because it will give the person a chance to check their own credit status.
The recipient has a chance to check for themselves whether the report is accurate and complete. In the event of any discrepancy in the credit report, the recipient has a right to raise the alarm. The credit reporting agencies will then cross-check the authenticity of the information and rectify the discrepancies immediately if required.
When Should You Send an Adverse Action Notice?
There are several instances where lenders (or employers) are forced to send an adverse action letter. Although most of the credit denials are concerned with credit reports, that is not always the case. For example, financial institutions may choose to deny credit based on factors such as not meeting minimum age or minimum income.
But the thing about credit denial is that they don’t require you to send an adverse action letter. Whereas, if any credit denial is made based on the data on the credit report, it is required to send an adverse action letter.
Credit service providers must list at least four factors that are affecting their customer’s credit scores. In the upcoming section, we will discuss some of the most common reasons behind credit denial caused by discrepancies in the credit report.
Lower Than Minimum Credit Score
One of the most common reasons behind credit denial is that the borrower’s credit score is lower than the minimum required one. As a result, the credit payments can not be processed unless and until the borrower meets the lender’s minimum requirement for the credit score.
Relatively Higher Debt as Compared to The Income
Credit payments can also get denied if your customer is under high debt. It’s not likely for credit card transactions to get rejected because of late payments. However, if the customer has a history of spending more money than they earn, then as a lender you must always keep an eye on them.
An alert is raised if or when a customer’s debt becomes much higher relative to their income. In such cases, the lenders often choose to deny their credit services to their customers. After denying the customer’s credit transaction the lenders are required by law to send them an adverse action notice.
Apart from being a legal requirement, the adverse action letter also enables the customers to check what is wrong with their credit report. The credit report should state the reason for the credit denial along with the credit report.
Absence of Credit History
Sometimes even not having a credit history could end up the customer getting an adverse action notice. When a credit card that has remained dormant for months or even years is reactivated, it raises suspicion.
Hence an adverse action notice is sent to the cardholder to ensure the security of the credit transactions and avoid fraudulent activities.
As you can guess, late payments are also a reason for lenders to decline their credit transactions. This is one of the most common reasons behind credit denials. Hence every lender typically sends out numerous adverse action letters to their customers.
The number of adverse action notices served by financial institutions for late payments is so high that they can hardly be done manually. Owing to the high volume nature of these letters, companies often employ automated direct mail systems like PostGrid.
High Credit Utilization Rate
Credit utilization rate or ratio can be defined as the amount a customer currently owes to the lender divided by their credit limit. As the name suggests, this metric signifies how the borrower utilizes their credit cards.
If the credit utilization rate is high, then there is a good chance that they may end up spending more than their income. Therefore, such cases are also flagged and monitored by the lenders, and after a certain limit, the credit transactions get denied.
Too Many Existing Credit With The Lender
Another reason why lenders are forced to deny credit services to their customers is that they have many existing or ongoing credits. So even if the customer has made relatively smaller credit payments, but the number of the credit payments is high, you can deny credit to them.
Foreclosures & Bankruptcy
Foreclosures are when a lender takes possession of the borrower’s property when they fail to repay the money. As far as a lender is concerned, providing credit services to someone facing imminent foreclosure is not safe. So, any customer who is dealing with a foreclosure is automatically considered for credit denial.
The same logic applies to customers who have recently filed for bankruptcy. The customers who were recently involved in a foreclosure or bankruptcy are not the ideal ones to do business with. There is a risk factor involved in providing credit to such customers, and financial institutions do not take such risks.
Steps The Customer Take After Receiving an Adverse Action Notice
As the lender, you are only required to state the reason or reasons why you have denied credit to a customer. It is up to the customer to check whether the details that you have provided in the adverse action notice are correct or not.
The credit reporting agencies do not get involved in lending decisions. But, you are required to furnish the details of the credit reporting agency in the adverse action letters you send out. Many of your customers are unlikely to go through the report because they are self-aware of their financial standings.
However, that’s not always the case, and some of the borrowers will want to know more about their credit status. In such cases, the customer will find the information regarding the bureau useful.
Access And Assess Credit Report
As mentioned earlier, the adverse action notice also states that the customer is entitled to get a free copy of their credit report. However, the credit reports are accessible for the customers within sixty days of receiving the notice.
Naturally, the first step the customer will take after receiving the adverse action notice is to try and get access to their credit report. The customer may feel that there is no reason for them to receive an adverse action notice. In this case, they will thoroughly assess the credit report for any errors.
Therefore, it is crucial that you employ a reliable and trustworthy credit reporting agency when it comes to adverse action notices.
Double Check The Credit Score
Once the customer gets access to the credit report, they will want to double-check their credit score. Sometimes, it is possible for the credit score in the report to vary slightly from the one that you have provided in the adverse action letter.
But, this difference in credit score is usually because they both used different scoring systems. Similarly, it is also possible that the value can vary between various credit reporting agencies. Several factors can affect the credit score, and the major ones are listed below:
- Payment History: The payment history of your customer significantly influences their credit score. Therefore, if your customers have a low credit score, there is a good chance that they don’t make on-time payments.
- Amounts Owed: If a customer owes a considerably large sum of money it can easily bring down their credit score. In most cases, the credit score of the customer is inversely proportional to the amount owed. So, when drafting the adverse action mail, you can refer to the amounts owed. You can even cite them as a reason for denying credit to the customer.
- Credit History Length: The credit report is not complete without analyzing the customer’s credit history comprehensively. By analyzing the customer’s credit history you can reveal how consistent the customer has been with their credit transactions. A thorough examination of the length of credit history can help you determine how experienced the customer is with credit payments. Additionally, it can even help you identify patterns in them.
- Credit Mix: The credit mix refers to different types of credit accounts held by the customers. Mortgages, loans, credit cards, etc. are all examples of credit accounts that are typically used by the customer. Credit mix can reveal the financial standing of the customer. Therefore, it is an essential part of determining their creditworthiness.
- New Credit: Applying for new credit would mean that your inquiries will remain on your credit report for at least two years. However, the credit scores generally consider the inquiries made in the last 12 months. Today, most customers have higher credits, and shopping for new credit is now more frequent than it used to be.
Check For Inaccuracies And Fraud
The credit payment sector is secure and accurate. Hence, it is less likely to be subject to fraudulent activities. However, credit fraud is not entirely out of scope. A customer who is seriously concerned about the adverse action notice is bound to take a deeper look into it.
If the customer does find some discrepancies, they need to be able to raise a dispute with the credit reporting agency. Therefore, your adverse action letter must provide the contact details of the credit bureau. This way, the customer can contact the credit bureau directly or via phone, mail, or online channels.
Wait For a Reply From The Credit Bureau
Once the dispute is raised with the credit bureau, all the customer has to do is wait for them to respond. The credit reporting agency will then examine the issue raised by the customer. It includes going through the information submitted by the creditor.
The investigation conducted by the credit bureau typically takes about thirty days to complete but it may be cut shorter depending on the nature of the issue. Once the investigation is completed, you can expect one of the three results, which are:
- Wrong or inaccurate information is straightened out.
- Fraudulent information is either updated or removed entirely.
- The information in the report is found as accurate, and it stays on the customer’s credit report.
How to Minimize Chance of Credit Denials?
Credit denials are by no means beneficial for neither a lender nor a borrower. As a lender, you need to understand that your customers do not intentionally hit their credit limit or have their credit denied. And every time their credit transaction gets denied, they may end up blaming you.
Your company’s reputation could get damaged if more and more of your customers keep getting credit denials. Furthermore, it could also lead to unsatisfied customers. Hence, you have to ensure that the credit denials are kept to a minimum.
Moneylenders should consider educating their customers on how they can avoid credit denials. Furthermore, you can even employ different methods that encourage the customers to keep a clear credit report for themselves.
The key is to focus your attention on the credit score or ensure that the customer’s attention is on their credit score. You can minimize the chance of credit denial by helping your customers keep up their credit scores. Consider the following steps to accomplish this task:
Encourage Timely Payment of Bills Via Reminders
One of the crucial aspects of maintaining a good credit score is to ensure the timely payment of bills. It is tricky to do this when it is entirely up to the customer to make these payments. However, most of the time, they just need a nudge in the right direction.
You can push the customers to make bill payments every month on time by setting up payment reminders. By combining these reminders with marketing efforts you can even provide extra content that introduces your latest service or product to the customers.
Even though this can hardly do anything for your past-due payments, this can indeed be very helpful for your new customers.
Encourage to Pay Down Credit Cards
As far as the credit score is concerned, how much money your customer owes is perhaps the most important factor to consider. This significance is even more prominent when it comes to credit cards. But, again, this is also totally dependent on the customer or borrower and not the lender.
But, there is one thing you can do: educate your customers to understand the importance of their credit scores. Experts claim that keeping your credit card balance low can help avoid getting red marks on your customer’s credit report.
Most credit cardholders are not aware of this, and you can educate them on the subject. You can even use text messages or emails to get the point across to your existing customers.
Help Them Avoid Unnecessary Credit Applications
Indeed, credit inquiries do not really have a big role to play when it comes to credit scores. But, if a customer ends up applying for credit numerous times over a short period, you may run into some trouble.
The best practice is to not apply for credit unless and until you have to do it. However, many credit cardholders may not know this, and the lender should educate them on this. Furthermore, if the customer uses your credit card, send them reminders when the transactions exceed a limit.
Utility And Phone Payments Credit
Companies like Experian Boost reward on-time payment of utility and phone bills. It enables the customers to add this information to their credit files. Once done, the customer can drag in the benefits through their credit scores.
To accomplish this, all they have to do is to connect their bank accounts to their credit accounts. Once the bank account is connected, you can identify the relevant payments the customer would want to add to your credit file.
Streamline Your Adverse Action Notice With Automated Direct Mail
Lenders often have to send large numbers of address action letters to their customers in the event of credit denial. However, manually carrying out such a task is highly impractical and could cost the company a lot of time and money.
Most lenders and financial institutions go for a more streamlined approach for sending their adverse action notices. Well, they prefer using automated direct mail solutions like PostGrid, as it is ideal for lenders and they can easily bulk verify addresses. They can also mail the notices seamlessly.
Tools like PostGrid make personalizing, printing, and mailing adverse action letters easy for lenders and financial service providers. The fully automated direct mail systems like PostGrid with features like address verification ensure that the adverse action letters are delivered to your customers without fail.
Every lender that provides credit services to its customers will inevitably have to send out numerous adverse action letters. So it doesn’t matter how cautious you are or how many reminders you send your customers. You will have to deny at least some of your credit transactions.
Lenders must do everything in their power to minimize credit denials for their customers. In the meantime, they also need to be well-equipped when it comes to sending adverse action letters in bulk. This can only be carried out effectively if you use an advanced automated system like PostGrid.
Tools like PostGrid can fully automate your direct mail process enabling you to serve adverse action notices in a streamlined manner. With such an advanced system, you can personalize, print, and mail your adverse action letter.
The address verification capability of PostGrid enables you to check whether an address is real and deliverable by USPS. In addition, you are bound to send adverse action notices to your customers in the event of credit denial. Hence, PostGrid ensures that the notice is delivered to the customer.
It is high time that lenders and other banking institutions that provide credit services adopt a smart solution for sending adverse action letters. With advanced capabilities and a 99% deliverability rate, PostGrid is the perfect tool for sending your adverse action letters.