CPA Letter for Self Employed re Mortgage Company

[ed_accountant]

Hi,

Mortgage companies are requiring letters from CPAs confirming self-employment status.. How is everyone handling this?

I have been trying to avoid but I have been preparing letters for my clients only.

Thanks

[kcjenkins]

You should be very, very careful about the wording if you do these. Only thing I will say in a letter is "I have prepared tax returns for X for the last [number of years] and he has filed Sch C's for all those years. Copies of those Sch C's may be obtained from the client." That is IT. Nothing about how profitable he may or may not be, nothing about his solvency, etc. DEFINATELY nothing about how any loan may affect him or his ability to pay the loan, etc. Often that is enough, but if it is not, tough. No way am I going to be the backup security on a client's loan, by giving the lender the ability to sue me, claiming he relied on my assurances in making the loan.

[jainen]

>>Nothing about how profitable he may or may not be, nothing about his solvency, etc. DEFINATELY nothing about how any loan may affect him or his ability to pay the loan, etc<<

Nothing even to say he is self-employed. You are not in a position to know whether he is self-employed or not. All you know is that you prepared returns containing Schedule C for his signature, for whatever number of years. That's it.

Include a disclaimer that your work is not intended for anything other than tax preparation and is based solely on the client's own unverified representations. Address the letter to your client and let HIM give it to the mortgage company. I charge nothing for such a letter, and I make sure it's worth it.

[joelgilb]

You should be very, very careful about the wording if you do these. Only thing I will say in a letter is "I have prepared tax returns for X for the last [number of years] and he has filed Sch C's for all those years. Copies of those Sch C's may be obtained from the client." That is IT. Nothing about how profitable he may or may not be, nothing about his solvency, etc. DEFINATELY nothing about how any loan may affect him or his ability to pay the loan, etc. Often that is enough, but if it is not, tough. No way am I going to be the backup security on a client's loan, by giving the lender the ability to sue me, claiming he relied on my assurances in making the loan.

100% AGREE. As lawyer that does a lot of real estate work, the mortgage brokers are trying to get out of the line of fire and put that on the CPA's. You need to be very careful that you don't become liable should your client one day not be able to pay this loan. And never say you have prepared the returns if you have not. State absolute facts only.

Of course the downside is that your client will not be very happy if you don't write the letter.

[joelgilb]

>>Nothing about how profitable he may or may not be, nothing about his solvency, etc. DEFINATELY nothing about how any loan may affect him or his ability to pay the loan, etc<<

Nothing even to say he is self-employed. You are not in a position to know whether he is self-employed or not. All you know is that you prepared returns containing Schedule C for his signature, for whatever number of years. That's it.

Include a disclaimer that your work is not intended for anything other than tax preparation and is based solely on the client's own unverified representations. Address the letter to your client and let HIM give it to the mortgage company. I charge nothing for such a letter, and I make sure it's worth it.

Excellent points here as well.

The disclaimer is a a tough one though. From the CPA's perspective it seems necessary, however, it probably will not fly very well with the Underwriter. You must assess how comfortable you are with a particular client's situation. If you are the least bit wary, the disclaimer may be necessary, or a better answer might be to say that you do not write these types letters.

Be very careful of writing these letters!

[jainen]

>>it probably will not fly very well with the Underwriter<<

Yep, that's the goal. Accountants have been successfully sued for making assertions that banks supposedly relied on in extending credit.

Think about it. The reason the client needs the letter is that he can't prove his income. Because there's nothing to prove. And if he's lying to the bank, there's a good chance he lied to you and the IRS too. It's not unreasonable to identify the source of the information you are reporting.

Of course, you want your customer to come back and lie to you again next tax season, so you have to soften the tone. But two rules are not negotiable. Only identify the actual forms used, without suggesting why they were used. And only address it to the client, never send anything directly to a mortgage company.

[joanmcq]

I won't even write these for my own clients. As a CPA, rendering an opinion on ANYTHING is heavily regulated. From what I understand, EAs are not permitted to render opinions, ie stating someone is self-employed. And NO client is worth getting sued, stressing over getting sued, or losing my license.

[ed_accountant]

Thank you for all the responses.

I also found through an internet search that the Aicpa addressed this issue with an article.

Here is the link:

http://pcps.aicpa.org/Resources/CPA+Comfor...ter+to+Lenders/

Thanks

[ed_accountant]

I just found that my insurance company has a sample letter, as follows:

Example Response To Lender’s Request

For Verification Of Client’s Self-Employed Status

Dear Lender,

You have requested that we provide you with certain information regarding [Client] (hereinafter referred to as “our client”). Our client has consented to our provision of the requested information.

We have prepared the income tax returns for our client during the period from __________through__________. Those income tax returns have each included a Schedule C and Schedule SE, Self-Employment Tax computation.

We prepared the income tax returns noted above based on the documentation and other information provided to us by our client. We did not audit, review, or otherwise verify the accuracy of such documentation or information at any time, and we have not and do not express an opinion or give any other form of assurances regarding the same.

By providing you with this letter, we have not established with you any direct or indirect client, contractual or quasi-contractual relationship. We do not understand or anticipate that you or any third party will rely on the information contained in this letter as a basis for entering into or continuing any contractual or other relationship with our client. We fully expect that before you or any third party decides to enter into any such relationship with our client, that you and/or that third party will exercise an appropriate level of independent due diligence. Accordingly, and use of this information is solely your responsibility and judgment.

By accepting this letter, you acknowledge all of the above, and also that we are under no obligation to provide you or any third party with any additional information at any time, including but not limited to any changes or corrections to any of the information we have provided in this letter concerning our client.

Thank you.

Very Truly Yours,

[jainen]

>>my insurance company has a sample letter<<

I'm sure the insurance company had a team of lawyers approve every word, but I think those last two paragraphs are stupid. If I were on a jury and this was in evidence, I wouldn't give any credence to such a disclaimer. One can't evade responsibility for one's words or actions just by saying so. It sounds like, "Here's the information you needed. I'm giving it to you but I don't expect you to use it. Even if I know it's wrong, I'm not going to tell you."

The main thing I like about the letter is that besides saying that I'm not going to say anything important, I don't actually say anything important. Stop after the third paragraph. And send it to the client. Why tell the broker that "we have not established with you any direct or indirect client, contractual or quasi-contractual relationship," when you could simply avoid any relationship at all?

[joelgilb]

I just found that my insurance company has a sample letter, as follows:

Example Response To Lender’s Request

For Verification Of Client’s Self-Employed Status

Dear Lender ...

As an attorney I generally feel this is a good letter. Says nothing and has caveats. Not so sure I like the wording of the last paragraph, but do like the content. And puts the responsibility right back where it belongs, on the lender to due proper Due Diligence.

With all the fraud the lenders have done over the last few years, it is about time we put them back on the hot seat. It is also time the lenders stopped this "Stated Income" loan process as it is full of fraud.

I also like the comments on the article from the AICPA. Don't let the mortgage broker put you at risk. He is generally the one in a Real Estate deal doing the FRAUD, trying to lay this responsibility on others. Just take a look at the current status of our real estate market in this country and some of the loans your clients have on there homes.

Every time I tried to explain to a client why they should not close a particular loan or that they were purchasing outside their means, the lender would suggest he was the one on their side not me. And try to convince them (usually successfully) to go forward. Now they are in trouble and come back crying for help, as one after then next gets foreclosed on.

How soon do you think the lenders are going to try and go after the CPA's for this?

And you might want to let your clients know that stated income loans will cost them higher fees and interest rates as a general rule.

On another note, the same issue occurs when our clients have S-Corps and some of the income flows through the K-1. Underwriters and lenders just do not understand the K-1 flow through. I have often had lenders ask for the SE letter when they see income from my clients S-Corp. Can't ever seem to get them to understand that this is not Income from Self Employment.

[joanmcq]

That's close to the CAMICO letter, but not exact. The CAMICO one doesn't have the bit about the Sch C and SE or the last disclaimer paragraghs. This is the important bit

"We prepared the income tax returns noted above based on the documentation and other information provided to us by our client. We did not audit, review, or otherwise verify the accuracy of such documentation or information at any time, and we have not and do not express an opinion or give any other form of assurances regarding the same."

But I just don't sign one. If they want a stated income loan they can buy a letter from a 'CPA' willing to sign one.

[Hakan]

Hi,

Mortgage companies are requiring letters from CPAs confirming self-employment status.. How is everyone handling this?

I have been trying to avoid but I have been preparing letters for my clients only.

Thanks

Anyway you can share the letter you prepared. I do need a sample letter for the same purposes.

Thanks

[jklcpa]

I won't write these letters. The lender can request the returns from the IRS if they want to see the actual Sch C and SE included with the returns. My state's division of revenue has an easy search function for businesses licensed in the state showing when the initial license was issued, type of license, and the date the current license expires. For a small fee, much more information is available through the Sec of State for those businesses required to file there as well.

[North Idaho Rich]

I don't write them either. I just cite them IRS Code Section 7216 revised Jan 1, 2009 that says I must have a consent form in writting before I prepare the taxes. I've faxed the CCH practice alert many times and I never hear back. Here's a link if you want:

http://tax.cchgroup.com/landingpages/books/sec-7216/7216-CCH-Practice-Alert-Rules.pdf

[jainen]

Dear Lender,

My client says he has applied for a mortgage. In completing his tax return, I am required to use all information I know about. Please send me a letter verifying his self-employment income. Thank you.

[Richcpaman]

Dear Lender,

My client says he has applied for a mortgage. In completing his tax return, I am required to use all information I know about. Please send me a letter verifying his self-employment income. Thank you.

I like it. Puts it back on the lender.

I have ignored these requests, and other times, I have signed one that states "Client has a sch c and I have prepared a return with a sch c for clinet for 2 years.

And that's it.

When I ignore it, the loan goes through. When I write the letter, the loan goes through. I haven't heard anything back from either. However, I know that is no protection.

The banks WANT to make the loan. I do not care if it closes Tuesday, Wednesday, or next month. Not my problem.

It would be nice if the freaking lending folks would actually READ the documentation, instead of checking the boxes... Ok, There is that piece of paper! Approve the loan!

Rich

[Lion EA]

We just applied for a HELOC (I have no more first mortgage). I'm self-employed. The paperwork arrived in today's mail asking for a copy of my pay stub at closing. I hate to write those letters. But, should I as the preparer write a letter for me as a taxpayer?!?!

[Gail in Virginia]

Be sure before you write such a letter for yourself as taxpayer, that you obtain consent from yourself as client to disclose information about yourself. Otherwise yourself as preparer could be in a world of trouble, even if yourself as client should choose to be understanding about it.

[Jack from Ohio]

Be sure before you write such a letter for yourself as taxpayer, that you obtain consent from yourself as client to disclose information about yourself. Otherwise yourself as preparer could be in a world of trouble, even if yourself as client should choose to be understanding about it.

Reading it made me smile and I did too!

[joanmcq]

My refi asked for my last two year's tax returns.

Have fun with the refi. I've been sending paperwork for two and a half months now for an 'expedited' refi with my same mortgage company.

[Lion EA]

This might be a letter I will want to write! If I had more time on my hands, it could be a lot of fun!

[michaelmars]

i add that : I have no idea if the client later on amended his filing and that his income can be verified with the IRS directly.