Adverse Action Notice

An adverse action notice is the message a lender must send when it turns down a credit application or takes certain other negative actions. In the US, the Equal Credit Opportunity Act (ECOA) and its Regulation B require it for business credit as well as consumer credit. The Fair Credit Reporting Act adds its own notice when a credit report shaped a consumer decision.

Adverse action includes:

• Denying an application.
• Offering different terms than requested, if the applicant does not accept or use them.
• Closing an account or cutting a credit limit, in most cases.
• An unfavorable change to an existing account that does not apply to most other accounts.

For consumers and for businesses with $1 million or less in gross revenue in the prior year, the lender must notify the applicant within 30 days of receiving a completed loan application. The notice must state the action taken, the lender's name and address, an ECOA anti-discrimination statement, the federal agency that oversees the lender, and either the specific reasons or how to request them. For these small businesses, the notice can be oral or written.

For businesses with more than $1 million in revenue, the lender must notify the applicant within a reasonable time and give written reasons if the applicant asks in writing within 60 days.

Why it matters for lenders

The reasons must be specific. Regulation B says that saying the applicant failed to reach a qualifying score, or did not meet the lender's internal standards, is not enough. A reason should say what actually drove the decision.

Models and AI tools do not change that. If no one can explain why a credit decisioning model declined a file, the lender cannot meet the rule. That is one reason explainable AI matters in lending.

Missing or vague notices are a common exam finding and can support fair lending claims.

How it works in practice

A community development financial institution (CDFI) declines a $40,000 loan for a bakery because projected cash flow covers only 80% of the payment. The underwriter picks reasons from a set list tied to the policy checks: "insufficient cash flow to cover the requested payment" and "limited time in business." The system generates the notice with the required ECOA language and agency address and emails it the same day, well inside 30 days.

The reasons, the send date and a copy are stored on the application.

When notices are typed by hand, reasons drift from the real decision and deadlines slip on busy weeks. Tying reasons to the checks that produced them keeps notices accurate and on time.