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When must a Creditor Send a Notice of an Adverse Action?

The Equal Credit Opportunity Act (ECOA) was enacted to protect consumers from discrimination by decision makers during credit-related application and transaction processes. Under the ECOA, creditors are required to provide notice to applicants and borrowers—both consumers and businesses, alike—against whom an adverse action is taken.

Under the ECOA, “adverse actions” are specific to creditor responses to credit applications or actions taken on credit accounts. Actions that do not involve credit-related transactions are not considered “adverse actions” under the ECOA and, therefore, do not trigger the notice requirement under the ECOA.

Under the ECOA, a creditor must provide notice when an adverse action is taken on a credit application, whether the application is complete or not. A creditor is also required to provide notice under the ECOA when it takes any kind of adverse action on an existing credit account, such as when an account is closed or when the maximum available credit on the account is reduced.

Under certain limited circumstances, a creditor may take an adverse action without providing notice, namely when a creditor makes a counteroffer in response to an application for credit and the applicant accepts the counteroffer. If the applicant does not accept the counteroffer, the creditor must provide notice of the adverse action within the original time period (i.e., 30 days from receipt of the original application). If the creditor provides notice of the adverse action at the time the counteroffer is made, no further notice is required even if the applicant declines the countered terms since the explanation for declining the terms of the original application was already given.

In the case of a withdrawn application, no notice of adverse action is required since technically no action is being taken by the creditor or credit-related decision maker. This applies to instances where the applicant expressly withdraws an application for credit or where an application is constructively withdrawn due to delayed followup by the applicant when such followup is expected after an application is approved. This typically occurs in credit pre-approval type situations where additional action is required to be taken by the applicant before the credit account is considered active. In cases where the applicant does not take that additional action and the offer of approved credit expires, no notice of adverse action is required.

Notice of adverse action against consumers is also required in certain circumstances under the Fair Credit Reporting Act (FCRA). The FCRA was enacted to regulate the manners in which consumer credit information is collected, stored, processed, and reported.

Under the FCRA, notice is required when an adverse action is taken, in whole or in part, based on information contained in a consumer credit report (Section 615(a)) or obtained from a corporate affiliate of the creditor taking the adverse action (Section 615(b)(2)).

Where credit is denied or offered on terms different than those for which the consumer applied, notice must also be given if said action was based on information obtained from another source if that information bears upon the applicant's creditworthiness, credit standing, credit capacity, character, reputation, personal characteristics, or mode of living (Section 615(b)(1)).

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