What must a financial institution do if they deny a loan application?

When a financial institution denies a loan application, it is required to provide a notice of adverse action. This notice is a critical component of compliance with various federal regulations, specifically the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA).

The notice of adverse action must inform the applicant of the decision to deny their application and include the specific reasons for the denial, or alternatively, disclose that they can request the reasons if they are not provided in the notice. This requirement aims to promote transparency in lending practices, allowing applicants to understand why they were denied, which can help them address any issues or improve their creditworthiness in the future.

This process also helps protect applicants' rights, ensuring that financial institutions do not discriminate against borrowers based on prohibited characteristics like race, gender, or age. Overall, providing this notice is not just regulatory compliance; it also fosters trust and accountability in the lending process.

The other options do not align with legal requirements. Ignoring the application denies the applicant the necessary information and rights; automatically approving the next request does not address the context of the denial; and merely filing the application does not offer any feedback or reasons for the decision, which is essential under the current laws.