What action must a lender take following a denial of credit?

A lender is required to send an adverse action notice explaining the decision when credit is denied. This requirement is established under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA). The adverse action notice serves to inform the borrower about the denial of credit and provides specific reasons for the adverse action, ensuring transparency in the lending process.

This notice helps the borrower understand why their application was denied, which is crucial for addressing any potential issues that may affect their creditworthiness in future applications. It also plays a vital role in promoting fairness and accountability among lenders. By receiving this information, borrowers can take steps to improve their credit situation or correct any inaccuracies in their credit history.

In contrast, while informing the borrower of their credit score or providing just a reason for the denial might seem helpful, these actions alone do not fulfill the regulatory requirements set forth. Moreover, offering an alternative loan solution is not necessary or mandated following a denial; lenders are generally not obligated to provide alternate options. Thus, sending an adverse action notice is the appropriate and required action following the denial of credit.