Which of the following describes an adverse action?

An adverse action refers to a negative outcome regarding a credit application or specific credit terms offered to a borrower. In this context, the denial of credit is a clear example of an adverse action because it indicates that the lender has determined that they cannot extend credit to the applicant based on their financial circumstances, creditworthiness, or other related factors.

This is significant under the Equal Credit Opportunity Act (ECOA), which mandates that lenders provide notice to applicants when they take adverse action, such as denying credit. The notification must include the reasons for the denial or, at the very least, a statement that the applicant can request the reasons.

In contrast, the other options represent positive actions taken by a lender: loan approval and increased loan limits suggest that the borrower meets the lender's criteria for lending, while a reduction in interest rates denotes a more favorable credit term being offered to the borrower. Therefore, these do not reflect adverse actions; instead, they indicate beneficial changes in the applicant's financial circumstances concerning their creditworthiness.