What is an Adverse Action by a Creditor?

An “adverse action” occurs when a creditor makes a decision adverse to the interests of an applicant or borrower. The manners in which adverse actions may be and must be handled are regulated by the two main Federal consumer credit protection laws: the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA).

Under Regulation B of the ECOA, an adverse action most commonly occurs when a creditor refuses to approve an application for credit in substantially the same amount or with substantially the same terms as requested by the applicant. An adverse action under the ECOA also includes the termination of an existing credit account, a change in terms of a credit account that are not also made to the others in a class of account holders, and the refusal to grant a request for increased credit on an existing account.

The ECOA also provides guidelines for what specifically does NOT count as an adverse action by a creditor or other qualifying credit decision maker under the ECOA. In general, an adverse action does not occur in situations where the applicant or borrower is obviously or demonstrably aware of the action, such as when an applicant expressly accepts a counteroffer in response to an application for credit or when a change to account terms is made with the account holder’s express agreement. A non-adverse action might also occur at point-of-sale transactions where an account transaction is denied in real time.

Notably, the ECOA does not consider an adverse action to have occurred where an action or forbearance on an account is taken in connection with inactivity, default, or delinquency as to that account. It is not considered an adverse action when a refusal to extend credit is based on a law prohibiting the creditor from making the requested extension or where the creditor does not offer the type of credit or credit plan requested.

Under Section 701(d)(6) of the FCRA, “adverse action” is defined more broadly than by the ECOA. An adverse action under the FCRA generally includes a denial or revocation of credit, a change to the terms of an existing credit account (formal or otherwise), or a denial of credit under substantially the same terms or in substantially the same amount as requested.

The FCRA also specifically broadens the scope of “adverse actions” from that defined under the ECOA by including the denial, cancellation, increase in any charge, reduction of coverage, adverse change in terms, or other adverse action in connection with the underwriting of insurance, existing or prospective.

The FCRA further considers an adverse action to encompass a denial of employment or other decision adverse to the interests of a current or prospective employee, a denial, cancellation, or adverse change in terms of a government license or benefit, and an action adverse to an application or transaction initiated by a consumer or related to the review of a consumer’s account.

While the ECOA and FCRA define “adverse action” under substantially similar terms, it is notable that while the ECOA terms apply to both individual consumers and businesses, the terms under the FCRA only apply to actions taken against individual consumers.