Adverse Action Notices and Disclosures

The FCRA requires any person who takes “adverse action” against the consumer to give a consumer a disclosure. [15 USC 1681m(a)] The nature of the disclosure depends on whether the adverse action is based on information in a consumer report or not.

Adverse Action Defined

Before we look at the notice requirements, you should know what the FCRA means by “adverse action.” The term includes any action within the ECOA definition of adverse action. [15 USC 1681a(k)] The Equal Credit Opportunity Act (ECOA) definition reads as follows:

: …a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested. Such term does not include a refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default, or where such additional credit would exceed a previously established credit limit. [15 USC 1691(d)(6)]

Under the FCRA, adverse action also includes “an action taken or determination that is (I) made in connection with an application that was made by, or a transaction that was initiated by, any consumer, or in connection with a review of an account…, and (II) adverse to the interests of the consumer.” [15 USC 1681a(k)]

Notice When Adverse Action is Based on a Consumer Report

If the adverse action is based in whole or in part on information in a consumer report, the person who took the adverse action must: (1) give notice of the adverse action; (2) give the name, address, and telephone number of the consumer reporting agency which provided the consumer report (the telephone number must be toll free if the agency compiles and maintains consumer files on a nationwide basis); (3) include a statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken; (4) give notice of the consumer’s right to obtain a copy of the consumer report from the consumer reporting agency; and (5) give notice of the consumer’s right to dispute with the consumer reporting agency the accuracy or completeness of any information in the consumer report. [15 USC 1681m(a)]

The notice may be oral, in writing, or in electronic form. [15 USC 1681m(a)(1) and (2)] Oddly, the statute does not specify a time frame in which the notice must be given. Other provisions of the FCRA, however, suggest that the creditor should give the notice within a reasonable time of taking the adverse action.

If there is more than one applicant, you must provide the FCRA adverse action notice to all of them, though you need not provide the notice to a guarantor, even if you are taking the adverse action based in whole or in part on a consumer report relating to the guarantor. [Federal Trade Commission, Advisory Opinion to Ryan S. Stinneford, July 14, 2000] Note that this rule is different from the rule under Regulation B, which is the implementing regulation for the ECOA. Regulation B requires that you provide the ECOA adverse action notice to only one of the applicants, though it must be the primary applicant if one is readily apparent. [12 CFR 202.9(f)]

Item (3) above requires a statement on the notice that “the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken.” In February of 2000, the FTC issued an Advisory Opinion saying that this statement should not be included if it is factually incorrect. The opinion was in response to questions from a consumer reporting agency supplying reports for employment purposes. The employers had asked the agency to supply, along with the reports, its own opinion on whether the applicants should be hired. Since the agency would be participating in the hire/not hire decision, the employer should not include item (3) in its adverse action notice. See the FTC Advisory Opinion, February 14, 2000.

Notice When Adverse Action is Based on Third-party Information

If (1) the adverse action is not based on a consumer report and is, instead, based on information from a third party other than a consumer reporting agency, and (2) the credit is for personal, family, or household purposes, then the creditor must disclose the consumer’s right to a description of the nature of the third-party information. [15 USC 1681m(b)(1)] Note that this rule only applies to adverse action with respect to consumer credit. It does not impose any requirements on adverse action with respect to a deposit account.

What is “the nature of the information”? The Commentary to the FCRA says:

: [T]he creditor need disclose only the nature of the information that led to the adverse action (e.g., history of late rent payments or bad checks); it need not identify the source that provided the information or the criteria that led to the adverse action…. A statement of principal, specific reasons for adverse action based on third-party information that is sufficient to comply with the requirements of the Equal Credit Opportunity Act (e.g., “unable to verify employment”) is sufficient to constitute disclosure of the “nature of the information” under subsection (b).

The “third-party information” disclosures must be made at the time the adverse action is communicated to the consumer. The creditor must also disclose the nature of the third-party information if the consumer requests it within 60 days after learning of the adverse action. The on-request disclosure must be made within a reasonable time after the consumer’s request. [15 USC 1681m(b)(1)]

Adverse Action is Based on Certain Affiliate Information

Finally, different notice requirements apply if the person bases its adverse action decision on information received from someone related by common ownership or affiliated by common corporate control where the information is (1) not a consumer report, and (2) not information relating solely to transactions between the third party and the consumer. In this circumstance, the person must notify the consumer of the action, including a statement that the consumer may obtain the information, and must disclose the nature of the information if the consumer requests it within 60 days after transmittal of the adverse action notice. The creditor must disclose the nature of the information within 30 days of the consumer’s request. [15 USC 1681m(b)(2)]