Adverse Action Notice
A required regulatory communication (under ECOA/Reg B in the US) explaining why a credit application was denied, including the specific reasons from the model.
An Adverse Action Notice (AAN) is a legally required communication sent to applicants when credit is denied, offered on less favourable terms, or reduced. Under the Equal Credit Opportunity Act (ECOA) and Regulation B in the United States, lenders must provide specific, model-derived reasons for adverse decisions — not generic statements.
Regulatory requirements (ECOA/Reg B):
- Notice must be provided within 30 days of the decision
- Must include specific reasons for the adverse action (maximum 4–5 principal reasons)
- Reasons must be "most significant factors" — not boilerplate
- If an AI model was used, the reasons must reflect the model's actual decision logic
Why AI models create AAN compliance challenges: Traditional credit scorecards have lookup tables mapping score ranges to pre-defined reason codes. Neural networks and gradient boosted models do not have such tables — reasons must be derived post-hoc using explainability methods (SHAP). The CFPB has issued guidance confirming that SHAP-based adverse action reasons are acceptable when properly documented.
The CFPB/ECOA compliance test: An adverse action reason is compliant if it: (1) reflects the actual model decision, (2) is expressed in language the applicant can understand, and (3) identifies the specific factor the applicant could address to improve their chance of approval. Counterfactual explanations are particularly useful for meeting criterion (3).