When a lender denies a loan application due to poor credit, what is required of them?

When a lender denies a loan application due to poor credit, they are required to provide a written statement of reasons. This is essential to comply with the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA). The written notification must explain the specific reasons for the denial, allowing applicants to understand their situation and, if necessary, take steps to improve their creditworthiness.

This requirement serves multiple purposes. Firstly, it promotes transparency in the lending process, enabling consumers to be informed about the factors influencing the lender's decision. Secondly, it helps borrowers identify areas where they may need to make improvements in their credit profiles. Providing a written statement also protects the lender legally, as it demonstrates adherence to fair lending laws.

While other actions like refunding application fees or offering alternative loans may be considered good customer service, they are not legally mandated following a denial due to poor credit. Calling the applicant with reasons, while potentially beneficial, does not meet the formal requirement that is specifically addressed through written communication.