Before lending money to an interested borrower, you need to do a thorough background check on them. Their history makes it possible to gauge their paying ability and whether they’ve given the correct personal information. If they don’t qualify for a loan, you can issue an adverse action notice.
What Is An Adverse Action Notice?
An adverse action notice is a written letter addressed to a borrower to inform them that their application didn’t get through. Adverse action notices mostly use credit reports to support the cancellation of loan applications.
You can send either a printed letter, email, or orally communicate to the lender. You have to issue the notice to your client within 30 – 90 days, according to the Fair Credit Reporting Act (FCRA).
Given the usually large number of loan applicants, you’re probably pondering over how hectic it is to draft and send all those letters. Fortunately, there are adverse action tools you can use to make your work easier. These tools provide you with ready-made templates for whatever type of notice you want to issue. All you need to input is the name and email address of the client, and they’ll then get the notification in good time. For more details check MicroBilt.
Types Of Adverse Action Notices
Before getting into the advantages of using these automated tools, it’s good to know the various types of adverse action notices and their typical contents. The following are the main types of adverse action notices:
You can cancel a loan if the client’s criminal history disqualifies them from getting a loan. In assessing their criminal record, you should consider:
- The nature of the crime
- The number of convictions
- The time since they were last convicted
By having this information, you can make a solid decision on whether to give the loan or not. Ideally, you shouldn’t lend cash to a hardcore criminal as you’re never sure of their intent. Also, you don’t know if they’ll keep their promise to pay back the money.
Generally, scores above 700 are excellent. You can give such clients loans without doubting their ability and willingness to pay. On the other hand, any figure lower than 640 is considered a bad credit score.
The lower the credit score, the riskier it is to give a loan to the client in question. If they failed to pay previous debts, you can’t guarantee that they’ll repay their current loan in good time. The credibility of the applicant goes even lower if they still have several loans to pay. So, you may want to tell them that their credit history isn’t satisfactory enough to secure them another loan.
As a business owner, you may want to know the history of your current employees or recent job applicants. You can use consumer reports to confirm what kind of a person they are. If the employee in question has several ill opinions, perhaps due to crimes they’ve committed, you can decide to dismiss them from employment. Or, if it’s a job applicant, you can deny them employment. In these cases, the law requires you to issue an adverse action notice.
Similar to the employee-employer scenario elaborated above, you may want to vet tenants before allowing them to reside or carry out business in buildings you own. If they have a significant criminal record, you have all the right to issue an adverse action notice and stop them from renting your premises.
You must provide a valid reason for canceling the mortgage request. You can cancel mortgage requests if you find any relevant issues, such as pending payments, in the consumer report. Communicate this to the applicant by issuing an adverse action notice.
How To Write An Adverse Action Letter
When relaying the rejection message, you should follow the rules laid out by FCRA. Here are some of the main requirements:
- Include information that helps the client understand why they can’t get the loan.
- Provide the address, name, and telephone number of the reporting agency that provided the credit report you used in making your decision.
- State that the agency wasn’t involved in your decision.
- Inform your client that they have a right to dispute with the credit reporting agency.
Your adverse action letter should follow this format:
- Heading: This part includes your letterhead, the name and contact details of the client, and the date of writing.
- Body: This part details the reason for rejecting the loan request and the name, address, and telephone number of the consumer reporting agency.
- Personal message and signature: To add a personal touch before appending your signature, you can write a short text to the client.
Reasons Lenders Need To Use Adverse Action Notification Tools
As hinted earlier, there are sophisticated adverse action notification tools in the market that you can use to make your work easier.
As a lender, these are some of the reasons why you need to use such tools:
1. Saves Time
Adverse action tools automate the process of sending notices. This means that you don’t have to type and send letters to every rejected applicant, one at a time. You only feed their contact details into the software and send out as many notifications as you want at the touch of a button. This approach saves you time and allows you to focus on other urgent business needs.
2. Multiple Templates
As discussed above, there are different kinds of adverse action letters. Each one of these letters requires different wording and formatting. Conveniently, such notification tools come with a database of several templates so you can choose one that suits your company.
3. Letter Mailing Services
Apart from sending emails, these tools allow you to print letters and mail them to your clients via the United States Postal Services. This feature is suitable for clients who prefer the good old mails to the newly introduced electronic mails.
4. Ensures Compliance
Failure to follow the adverse action process is considered a violation of the FCRA guidelines. If found guilty, you may pay up to USD$1,000 for each violation. Using an adverse action tool ensures you comply with FCRA regulations, even if you process thousands of applications every month.
Technology has made it easy to issue adverse action notifications. You don’t have to skip this critical process because of the many applications you receive daily. If you fail to issue these notices, you risk paying hefty fines if the applicant sues you. So, shop for a reliable tool and stay on the right side of the law.