Any time a lender or creditor denies your application for a loan or line of credit, they are legally required to explain why they rejected your application. They do this through a formal communication known as an adverse action notice.
When you apply for a private student loan, for example, any lender that turns you down must supply you with an adverse action notice that includes the specific reason you were denied.
In addition to a detailed explanation for the denial, federal law requires an adverse action notice to include the name of the credit reporting agency (CRA) the lender used to obtain your credit history.
The notice must also specifically address your right to a free credit report from the same CRA [this is in addition to the annual free credit report you’re already entitled to per the Fair Credit Reporting Act (FCRA)].
Lenders that fail to provide an adverse action notice may also be in violation of the FCRA and the Equal Credit Opportunity Act (ECOA), as well as other federal, state, and/or local legislation.
The ECOA prohibits lenders from discriminating against applicants on the basis of race, color, religion, national origin, sex, marital status, age, or participation in any public assistance program; retaliatory action is also prohibited.
|Reason(s) for adverse action||Description of the circumstances of the application denial, including what type of loan (ex. private student or refinance loan) was denied and why|
|Your credit score||If your credit was a factor in the decision-making process, your score will appear with a “reason code” that explains why it isn’t higher|
|Right to free credit report||Explanation of your consumer rights to obtain a free copy of the same credit report from the same agency the lender used to evaluate your credit history|
|CRA information||The name, address, and telephone number of the credit reporting agency the lender used to obtain your credit history|
|Right to dispute||Explanation of your right to dispute the contents of the credit report with the credit reporting agency, including any information that may be incorrect or incomplete.|
|CRA exemption||Statement absolving the credit reporting agency of any responsibility for the credit denial and/or the adverse action notice|
Reasons for an Adverse Action Notice
You will only receive an adverse action notice if you have both applied for a loan or other line of credit and had that application subsequently denied.
These notices reduce incidents of discrimination because they require lenders to demonstrate that an applicant is a reasonable credit risk. In other words, if a lender denies your application for a loan, that lender must clearly disclose their specific reason for doing so; if they do not, you could argue in a court of law that the lender illegally discriminated against you in their decision-making process.
There is a clear set of acceptable reasons to deny an application for a loan or line of credit. Certain financial factors may disqualify you from loan eligibility, or the state of the application itself may be unacceptable.
|Application Requirement||Specific Reasons for Adverse Action|
|Your income…||– does not meet the required minimum.
– is not enough to repay the loan or line of credit.
– cannot be verified.
|Your employment…||– is not steady or stable.
– is not established (you haven’t had your job very long).
– cannot be verified.
|Your credit history…||– includes too much outstanding debt already.
– shows ew on-time payments- is not established.
– cannot be verified.
|Your application…||– does not include enough references.
– does not include acceptable references.- includes unclear, untrue, conflicting, or disqualifying information.
*These are examples from the Federal Housing Finance Agency; the language is not universal.
Your debt-to-income (DTI) ratio must be sufficient to repay your debts. A DTI of 10% means 10% of your monthly income goes toward paying bills. A DTI of 20% or lower is generally acceptable. Many lenders will not approve an applicant with a DTI higher than 43%.
Note that any loans you co-sign are included in your DTI even if you are not the person making payments; your DTI includes your potential debt as well as your current bills.
Income & Job Stability
Most loan applications require evidence of a steady income. This means an established work history with predictable monthly earnings. If your income changes month-to-month, or if you’ve recently switched jobs, lenders may label you a credit risk.
Lenders may still accept your application with a shifting income; expect them to use your lowest recorded earnings to gauge your eligibility as opposed to your average earnings.
What to Do with an Adverse Action Notice
An adverse action notice can help you navigate your personal finances by giving you a list of attributes to work on. If your DTI is too high, for example, you know you’ll improve your chances to qualify if you can reduce your debt or increase your income.
You may also discover mistakes on your credit report thanks to an adverse action notice. An error in your report can significantly decrease your credit score, which has the potential to impact your finances, career, and even your health and personal life.
|Agency||Contact||How to Dispute|
|Equifax||Equifax Information Services LLC
Atlanta, GA 30348
|– mail letter of dispute
– file dispute online
|Experian||Experian Information Solutions, Inc.
P.O. Box 4500
Allen, TX 75013
|– mail dispute form
– file dispute online
|Transunion||TransUnion LLC Consumer Dispute Center
P.O. Box 2000
Chester, PA 19016
|– mail letter with dispute form
– file dispute online
Confirm Credit History
Contact the CRA as soon as possible and request your free credit report. Carefully review this report and note any potential errors. Report these errors directly to the CRA as well as the business that supplied you with the adverse action notice. Each
Once you receive an adverse action notice, you have sixty (60) days to request your free credit report. Once that deadline has passed, you will no longer be entitled to that free credit report regardless of the circumstances or contents of the adverse action notice.
If you suspect fraud or exploitative business practice, file a report with the Federal Trade Commission (FTC). Visit ReportFraud.ftc.gov for comprehensive instructions.
Explore Debt Relief Options
Most lenders offer some sort of debt relief; it’s in their best interests to get their money back, and they can’t do that if their borrowers are bankrupt. Ask any creditors or loan servicers you’re working with about debt relief plans they may offer, such as payment plans or deferment.
Unfortunately, some of these debt relief plans increase your final total payments. Temporarily reduced payments, such as interest-only payments, mean it takes longer to repay your loan as it continues to collect interest, ultimately costing you more than it would have had you repaid the loan quicker. For example, reducing a monthly payment from $100 to $50 on a modest student loan debt can ultimately quadruple the total amount of interest you pay.
|Monthly Payment||Time to Repay||Total Interest|
|$50||27 years, 10 months, 28 days||$11,545.88|
|$100||10 years, 9 months, 20 days||$2,962.85|
|$150||6 years, 6 months, 8 days||$1,739.60|
|$200||4 years, 8 months, 6 days||$1,236.86|
Depending on your lender, repayment plans may be available as a debt relief option. Federal student loans, for example, include the option for multiple income-based and graduated repayment plans. With these plans, borrowers’ monthly payments are based on their earnings. With some payment plans, it is possible for the monthly payment to be $0. After an extended period on one of these payment plans, you may even apply for federal student loan forgiveness.
While private lenders don’t generally offer repayment plans, nonprofit lenders are more likely to offer income-sensitive repayment options. These repayment plans are not as flexible as similar federal plans, nor is there an option for eventual student loan forgiveness. In fact, the promise of private loan forgiveness is common among scammers.
Under certain circumstances, refinancing may help reduce monthly debt payments by either decreasing the length of your loan term or reducing your loan’s APR.
Note that refinancing essentially involves taking out a new loan, so refinance lenders will require a hard credit check along with your final application. If you have recently applied for a loan and been rejected, this will temporarily affect your credit score. Use this time to consider refinancing carefully. Experts recommend using a loan calculator and make estimates for every possible eventuality, such as sudden loss of income.
For more about refinancing, see our article Should I Refinance My Student Loans?
Though it may seem unfair, the payments for any loan or line of credit you’ve co-signed count toward your own debt when lenders calculate your DTI ratio even if you’re not the one making payments.
If you are a co-signer, the principal borrower may be able to apply with their financial servicer to release you from your portion of the contract. In cases where co-signer release is not an option, the principal borrower may also look into refinancing the co-signed loan in their own name.
Deferment of Payments
Deferment periods can be helpful in temporarily reducing debt payments. The debt still appears in your credit report, and some lenders will not take a deferment period into account when they evaluate your loan application.
For many types of loans, however, certain deferment periods are usually acceptable. Student loans, for example, usually come with in-school deferment or forbearance options, and it is typical for current students to make use of these options. Consequently, private lenders expect student loan applicants to already have some amount of debt in deferment.
Deferment or forbearance of payments is not ideal, as interest typically continues to accrue during these periods. Few (if any) lenders offer any opportunity for interest-free deferment.
Adjust Credit Goals
After you reevaluate your options to ensure you haven’t missed any alternative financing opportunities, adjust your credit goals. While you may not qualify for the loan you wanted, you may be able to get a smaller loan or one with a slightly higher interest rate. You may qualify for a different type of loan or line of credit, such as a credit card or a loan that uses collateral.
You may also adjust your timeline. A return to school, for example, may have to wait another year while you work to improve your credit history.
For more information about how to improve your credit and loan qualifications, see our article about How to Lower Your Interest Rate.
- U.S. Consumer Financial Protection Bureau, Title XII of the U.S. Code of Federal Regulations Part 1002 – Equal Credit Opportunity Act (Regulation B) Subsection 9
- U.S. Federal Trade Commission (FTC), Using Consumer Reports for Credit Decisions: What to Know About Adverse Action and Risk-Based Pricing Notices
- FTC, Disputing Errors on Your Credit Reports
- Federal Housing Finance Agency, Adverse Action Form: Sample Notice of Action Taken and Statement of Reasons