Lenders Still Pushing for “The CPA Letter”
CAMICO’s advisory hotlines are continuing to receive a steady stream of calls regarding lenders and loan brokers pressing CPAs and their tax clients to provide a letter from the CPA verifying that the client is self-employed, financially sound, profitable, creditworthy, or a combination of such attributes.
The pressure on CPAs to help their client can be considerable. Many CPAs are informed by brokers that their client will not qualify for a loan to buy a house, or for a mortgage refinance, unless the CPA provides a letter to confirm or verify certain types of information about the client.
Some lenders and brokers have asked for a statement from the CPA verifying the accuracy of the client’s tax returns, or verifying that any funds used from the client’s business to make a down-payment for a loan will not affect the business. One message from a broker to a client stated, “Your CPA needs to write a letter stating that any funds used from your bank account will not affect your business negatively.” The forecasts or projections required for such a statement are, of course, far beyond the scope of a tax preparation engagement.
CPAs want to help their clients and are put in a very difficult position by such requests. There is a strong temptation to comply, especially when the CPA is very familiar with the finances of a long-term client who appears to be financially sound.
On the other hand, CPAs should be concerned about providing what is in effect an attest letter based on nonattest work. CPAs complying with the requests may be in violation of SARS and run the risk of losing their licenses—clearly not in the CPA’s best interests. And many times the CPA is not compensated for the relative risk.
The CPA may also be providing a false sense of assurance to the lender by complying with the requests. If the client then defaults on the terms of the loan, the lender could argue that it relied on the CPA’s letter in lieu of other due diligence steps and, as a result, suffered damages. The CPA may then be at risk for a lawsuit.
Even an apparently harmless verification of client information, such as self-employment, carries much more risk than it appears to, especially if the CPA had prepared tax returns from information provided by the client without performing procedures to verify the information.
Sometimes the broker will write a request to the CPA and include an example of what the lender wants. For instance:
Dear CPA,
I am a mortgage consultant with [brokerage’s name], and I am assisting Mr. and Mrs. [client’s name] with the refinance of their home on [address]. In order to process their loan, the lender requires a verification of the accuracy of their tax returns and proof of self-employment in the form of a letter from the borrower’s CPA. I would greatly appreciate you helping us with this letter.
Below is an example of how the letter should be worded on company letterhead:
Re: Mr. and Mrs. [client’s name]:
My name is [CPA’s name]. I am a CPA (License #12345). I have been asked to provide a letter verifying my client [client’s name]’s employment status. Mr. [client’s name] is self-employed and has been filing his tax returns as self-employed for [XX] years. Mr. [client’s name]’s company is [client’s company name]. Thank you for your immediate attention. *
(*This is not recommended letter language.See “Sample Response Letter Language”on page 15.)
Please call me if you have any questions or concerns about the purpose of the content of the letter requested.Thank you very much.
Sincerely,
Mortgage Consultant
Motives
The motives behind the lender requests are important to understand. The client wants to cooperate with the lender in order to get the loan approved, while the broker wants to make the client happy and earn a commission, neither of which will happen unless the loan is approved.
The lender’s motive, however, is not necessarily so simple. Normally, when a lender grants a loan to a borrower, it relies on many factors, including, but not limited to, assessing the creditworthiness of the customer, collateral, and primary sources of repayment, as well as market conditions, to determine the advisability of extending credit.
Many lenders, though, have been attempting to shift onto the CPA the burden of responsibility for assessing the information supplied by the borrower in the event the borrower defaults on the loan and the lender incurs a loss.
“Pushing Back”
In this type of scenario, CAMICO recommends the art of “pushing back.” Your best defense is to communicate to the client and the lender (if the client has authorized you to) that although you would like to comply with the request, the services you rendered in this situation were limited to the preparation of tax returns from the information that the client had given to you.
Since you have not audited, reviewed or otherwise verified the information provided by the client, you are not in a position to make any conclusions or assurances regarding the accuracy or completeness of the information, nor are you able to forecast the future ability of the client to repay a loan.
If the client agrees, however, you may offer to send a copy of the tax returns or client payroll records so that the lender may compare the records in their possession with the returns you prepared.
The bottom line is that your client needs to clearly understand that you have not been engaged to perform any procedures to certify creditworthiness. You would be falling below your professional standards of care by complying with the lender’s request.
Sample Response Letter Language
CAMICO has prepared sample letter language for responding to requests from lenders and loan brokers, as follows.This letter can be modified as appropriate and sent to your client:
Dear [Bank]:
You have asked me to provide your bank with certain information on [Client Name] for your use in deciding whether to extend credit to [Client Name]. My services to [Client Name] were and remain limited to the preparation of [year] federal and state income tax returns from information provided to me by my client. As such, I have not performed any procedures or been given any information that would allow me to assist your institution in its decision on whether to extend credit to [Client Name]. Specifically, the tax returns were prepared for my client’s tax needs, and your request does not fall within the scope of the engagement that I performed for [Client Name]. Again, as the tax returns are based on information given to me by [Client Name], I have not reviewed, audited, or otherwise attempted to verify any of this information.
Consequently, I cannot affirm its accuracy or completeness.
However, if [Client Name] authorizes me to do so, I can send you a copy of [Client Name]‘s [year] federal [and state] [personal, corporate, etc.] income tax returns so that you may compare your records with those in my office. If you wish me to do this, please send my firm the enclosed form signed by [Client Name] authorizing me to release this information to your bank. However, by providing these returns to you, I am not confirming or in any way verifying the accuracy of the information contained in the tax returns.
If you intend to use or rely on the tax returns I send you, you should perform your own independent procedures and tests as you deem necessary for approval of credit.
Please call me at [phone number] if you have any questions.
Sincerely,
CPA
This letter language is located on the CAMICO Members-only Extranet, accessed at www.camico.com. (Click on the “Member Login” or “New Registration” button on the homepage. Once on the Extranet, click on “Risk Management Resource Library,” “Loss Prevention Tools,” “Additional Loss Prevention Tools,” and “Credit Worthiness of a Client.”) Policyholders can call the CAMICO advisory services hotline at 1 (800) 652-1772 for more information. Reprinted with permission from IMPACT 69 (Fall 2005).
