What must lenders do when they decline a loan application?

When a lender declines a loan application, it is required to send an adverse action notice to the borrower within a specified timeframe. This notice is mandated by the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA), which together ensure that borrowers are informed about the reasons for the denial. The adverse action notice must include the specific reasons for the decline, which helps borrowers understand the factors affecting their creditworthiness. Additionally, it must inform them of their right to obtain a free credit report and the details of the credit reporting agency that provided the information.

This requirement promotes transparency in the lending process and protects consumers by ensuring they have access to the information needed to potentially rectify any issues affecting their loan application in the future. Sending an adverse action notice fosters trust between lenders and borrowers and mitigates potential discrimination in lending practices.