An adverse action reason code is a specific code provided by lenders, creditors, or other entities to explain the primary reasons for taking an adverse action against a consumer. Adverse actions can include denying credit, employment, insurance, or rental applications, offering less favorable terms than requested, or reducing credit limits.
These reason codes are required under the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA) to ensure transparency and protect consumers from unfair treatment. When an adverse action is taken based on information from a credit report or any other source, the lender or creditor must provide the consumer with an adverse action notice. This notice should include the adverse action reason codes, which help the consumer understand why they were denied or received less favorable terms.
Reason codes can vary depending on the type of credit, but common examples include:
- Insufficient credit history: The consumer has not established enough credit to meet the lender’s requirements.
- High credit utilization: The consumer’s outstanding debt is too high compared to their credit limits.
- Delinquent past or present credit obligations: The consumer has a history of late or missed payments.
- Employment history: The consumer has an unstable employment history or insufficient income.
By providing adverse action reason codes, lenders and creditors offer consumers an opportunity to understand and address the factors negatively affecting their credit applications, ultimately helping them improve their financial standing and creditworthiness.