Adverse Action Notices are utilized to inform consumers they’ve been denied credit, employment, insurance, or other benefits based on credit reports or background check information. These notices are required to be sent out within 30 days of receiving a complete credit application.
In terms of employment, when screening an employee, a background check can affect someone’s employment. This not only applies to new hires but also for denying promotions or transfers to existing employees.
If you screen a job candidate and uncover that you need to execute an Adverse Action, you must complete three steps to follow the Fair Credit Reporting Act (FCRA) Adverse Action process.
1. Pre-Adverse Action Notice
Provide the candidate a notice that you are not able to move forward with the employment process based on information found in their background report. Be sure to list the reason behind the Adverse Action Notice. This pre-notice allows the candidate an opportunity to respond to the information given. It is important to include a standard document called “A Summary of Your Rights Under the FCRA,” in your Pre-Adverse Action Notice.
2. Waiting Period
The FCRA requires a waiting period designed to allow candidates to come forward and dispute any incorrect or outdated information or provide additional information to consider. There is no set number of days required to wait – but generally, seven days is a standard timeframe. Multiple cities have their own required waiting period so ensure you research before moving on to another candidate. If the applicant ends up not providing supplemental information, you can then send the Post-Adverse Action Notice.
3. Post Adverse Action Notice
Once the waiting period is complete, you must provide a final notice if you’ve decided not to move forward with the candidate.
- Include the name and contact information for the consumer reporting agency that triggered the Adverse Action process.
- A statement advising the candidate that the consumer reporting agency did not make the decision and cannot provide reasons why the Adverse Action was made.
- Notification that the candidate or employee is allowed a free copy of their background check within 60-days.
In terms of credit, an Adverse Action Notice is sent to inform consumers who have credit-related requests information regarding a variety of decisions. These include credit denial, interest rate increase, credit limit reduction, denial of increase, or account suspension or closure. Any time a lender needs to alert a customer of a negative decision related to credit, the consumer is required by law to receive an oral, written, or electronic notice of the determination.
Included in the action letter you can find your credit score along with the date pulled. Also included is the name, address, and contact information of the reporting agency that supplied the utilized credit report. Additionally, you’ll see up to five reasons for the denial along with the notice of the right to a free copy of your credit report within 60 days from the credit bureau and how to receive that copy.
There are multiple reasons an application can be denied by a lender including,
- Credit score not meeting minimum lender requirement
- Debt to income ratio is too high
- Not enough credit history
- Multiple late payments
- Too many recent credit inquiries
- High credit utilization ratio
- Too much existing credit with lender
- Collection or charge-off accounts
It is important to note that adverse action notices do not harm the applicant’s credit score or appear on their credit report unless the creditor pulls a hard inquiry.
Sending an Adverse Action notice anytime an applicant has been denied credit, employment, insurance, or other benefits based on credit reports or background check information is required by law. Stay on top of notifying candidates by having a template in place to streamline the Adverse Action process.