Adverse Action

What is an Adverse Action?

Definition: A situation where someone is denied from accessing a particular service. It usually refers to a negative response from a job, credit or business application or any other request that is refused by institutions, businesses owners, employers, associations or governments based on negative information regarding the subject.

An adverse action is an official personnel action, usually taken for disciplinary reasons, which adversely affects an employee and may include such punishments as a suspension for a defined period, reduction in grade or status, or removal. For most federal employees, statutes provide for an appeal system and the employee may choose to use the statutory procedure or, if coverage under the contract permits, the negotiated procedure, but not both.

Adverse action is used in other contexts, such as in notice of adverse actions against consumer credit reporting required under the federal Fair Credit Reporting Act (FCRA). The FCRA applies to “consumers.” The act requires the creditor to give a notice to “any consumer” with respect to whom adverse action is taken. Every consumer whose report is used has specific FCRA rights. One of those rights is to be notified if information in that report was used to deny the application.

An adverse action occurs when an employer behaves in a way that puts an individual or a group of people at a disadvantage as far as equal employment opportunities go. For example, take an employee who files a lawsuit against his or her employer. If the employer retaliates by refusing to move ahead with a planned promotion for the employee, that behavior is likely an adverse action. In addition, federal courts in recent years have heightened their scrutiny of employer adverse actions under the Fair Credit Reporting Act. Under this act, employers are required to follow specific procedures such as pre-adverse action notices in situations such as using a background check or credit report to deny employment to a person based the findings of the report.

In finance, the term adverse action refers to a type of notice given by a lender when a borrower’s credit application has been denied. They are typically delivered within seven to 10 business days following the decision to deny the loan application, usually in writing, although they may be communicated verbally as well. Banks and other lenders are required to provide adverse action notices in order to comply with consumer protection legislation.

What Does Adverse Action Mean?

The concept of adverse actions is stated in different U.S. laws, providing lawful procedures to overturn them depending on their nature. Banks usually decide to send adverse action notices through formal correspondence or e-mails when loans or credits applications are denied frequently because they have found inadequate information in a client’s credit report or background check such as a collection of inactive accounts, bankruptcy filings, late payments on bank’s products, foreclosure notices and others. In this case, clients must be specifically informed about all the reasons why the adverse action took place because it is illegal to deny any request or application due to religious affiliation, political preferences, race, sex, nation of origin, color or any other attribute.

Also, during employee selection procedures employers consider the applicant’s background and reports to evaluate if they are fit for the position. In this regard, an adverse action notice might be used when the company decides not to hire a given applicant after they have been offered a job, but they haven’t passed a further stage of the process.

The purpose of an adverse action notice is to inform would-be borrowers that their loan application has been denied, while also providing information about what factors influenced that decision. At the same time, adverse actions are included on a borrower’s credit report and might therefore negatively impact the borrower in subsequent loan applications.

Typically, the factors cited in an adverse action note relate to poor credit history as revealed on the borrower’s credit report, such as failing to make debt payments in a full or timely manner. In rare cases, however, an application might be denied due to identity theft.

No matter the reason for the denial, adverse action notices can help loan applicants better understand what they need to do in order to enhance or repair their credit-worthiness. If the borrower believes that the denial was due to inaccurate information drawn from their credit report, then they have the option of initiating a dispute resolution process. This process can be especially useful in cases of fraud, where the borrower may have been unaware of the fraudulent transactions affecting their credit score.

Those receiving an adverse action notice will have a 60-day period in which to request a copy of their credit report. This report is given free of charge, to better enable the borrower to understand and correct the problems identified in the notice. In order to protect against discrimination, the report will also include language from the Equal Credit Opportunity Act (ECOA) stating that factors such as the borrower’s race, religion, nationality, or sexual orientation were not taken into consideration for the purposes of assessing the loan application.

Example

Mr. Jack is planning to make a few renovations on his house. He has sent all of the requirements to ask the bank for a loan to cover for the project expenses. Six days after his application, he received an adverse action as response. The letter notifies him that he was turned down for the loan, but it doesn’t explain why he was turned down.

So, he asked for a review of his credit report to get detailed information about bank’s denial reasons. He found a list of reasons including accumulated late payments on his credit card that lowered his credit rating and disqualified him as a borrower. He will have to wait almost two years to take this information out of his credit report.

Peter recently applied for a loan at XYZ Financial. Within the next few weeks, he received an adverse action notice in the mail stating that his loan application was denied.

In the adverse action notice, XYZ stated that the rejection was based on a number of negative events drawn from his credit report. Specifically, the report listed two examples of recent issues affecting Peter’s credit score.

The first of these issues consisted of a missed credit card payment that occurred several weeks ago. The second issue, however, seemed much more serious. Apparently, someone used Peter’s personal information to lease an expensive vehicle in a state where Peter does not even reside.

Concerned, Peter contacted XYZ to initiate the dispute resolution process and to inform them that he appears to be a victim of identity theft due to the unauthorized vehicle lease. He also contacted the credit reporting agency to request a complimentary copy of his credit report, in order to scrutinize whether any other suspicious transactions may have occurred.

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