What is required from lenders to avoid adverse action based on credit score discrepancies?

To avoid adverse action based on credit score discrepancies, lenders are required to provide an Adverse Action Notice. This notice is a crucial component of the Fair Credit Reporting Act and the Equal Credit Opportunity Act. It serves to inform applicants about the reasons their application for credit was denied or unfavorable terms were offered, particularly when such decisions were influenced by information from a credit report.

When a lender decides to take adverse action, which could include denying a loan application or offering less favorable terms based on the applicant’s credit score or credit report, they must notify the applicant. This notification must include specific information, such as the nature of the adverse action taken, the credit score(s) used in the decision-making process, and the source of the credit report. This transparency helps protect consumers and ensures that they are aware of the factors that influenced the lender’s decision, allowing them the opportunity to correct any inaccuracies in their credit reports or understand how they might improve their credit standing.

Providing this notice is not just a best practice; it is a legal requirement that fosters fairness and accountability in lending. Therefore, it is clear why the Adverse Action Notice is essential for lenders whenever there are discrepancies in credit scores.