Home Mortgage application.

[SunTaxMan]

I have a client who is anticipating his first residence purchase. He is the sole shareholder in an S-Corp. (Age 32, single, no dependents, no divorce, no child support in the picture.) I have been doing his tax work, recordkeeping, etc, for several years, including years prior to this business. By the way, the business, in the six years since its inception has had no loss years, and is showing substantial, consistent growth. The balance sheet for 12-31-08 shows total liabilities that are 51% of assets - assets that equal just about double the amount of liabilities.

He has made an application to a bank for a home loan. The loan officer has requested, and has received, 3 years of tax returns, business and personal, financial statements, including a part-year profit and loss statement, bank statements for ALL of the taxpayer's accounts (business and personal) and statements from his retirement account.

The loan officer has now requested, "I need a letter from your accountant {that's me}, signed and on letterhead, stating that using your business funds for settlement will not negatively affect your business in any way."

My first reaction is that this requires a "judgment call" that should be made by the loan officer, not by me. I am not an Underwriter and I don't feel qualified to make what appears to me to be an "underwriting" kind of conclusion.

My second reaction is to wonder why they are concerned in the first place. By the way, settlement costs should be about $10,000. In the larger picture this seems to be a rather insignificant figure. Purchase price of the home is $120,000.

As far as my "opinion" is concerned. I don't think using Company funds is even worth considering as a risk at all, but it just seems to me that expressing that as an "official" opinion is not within the scope of my "job description." And I am not thinking of "hiding" the use (distribution) of those funds as a Company expense. I see no problem in making them a W-2 payment - his wages are on the "low side" of reasonable this year anyway.

What would you suggest I do? Or am I worrying about something about which I should not be concerned?

[JohnH]

The loan officer is an idiot and needs to go back to taxicab driving or whatever similar work he did before the bank made the mistake of hiring him. I think the only answer you can give him is "I can't make that assurance about my own business, much less somebody else's." (With the appropriate apologies to your client, of course). Why doesn't he just ask you to co-sign the loan for your client and be done with it? Or at least be honest and require you to provide the name of your E&O provider, since that's what he's trying to use to shore up his lending decision just in case the loan defaults.

I just finished a refinance on my personal residence and I was glad to see the lender was being as careful as they are, but they did ask some pretty stupid questions and make some downright ridiculous demands for info. Oddly enough, the pendulum has swung very far on the side of conservative underwriting for low-risk loans, even though the standards are still pretty loose for high-risk borrowers who are overextended. This is a strange time in the lending business.

[kcjenkins]

Don't do it, TR. If the bank makes the loan or does not make the loan, either way it's not your problem. Copies of the returns,combined with his knowledge of his customer, should give the banker all he needs. But as you said, you can not express an opinion on the business.

[jainen]

>>I don't think using Company funds is even worth considering as a risk at all, but it just seems to me that expressing that as an "official" opinion is not within the scope of my "job description."<<

I don't understand your objection. Presumably such an unequivocal opinion is based on your personal knowledge of the strength of the company. Will a $10000 expense leave him without adequate reserves, or compromise his cash flow? That's all the loan officer is asking, and it is an obvious and reasonable question.

If the scope of your "job description" doesn't cover this, draft a new engagement letter. I mean, this is what you do for a living, isn't it? And your client very much wants you to, right? Are you going to tell your client he can never be a homeowner because YOU don't feel qualified to be doing this job?

Of course, any assertion you make must be limited by your actual knowledge. You only keep the records, so apparently you would have to say your conclusions are based on unverified data provided by your client. But nobody is asking you to underwrite the loan. Just do the stuff you have already been doing for years.

[TAXBILLY]

There is a spirited discussion of the use of the comfort letter on another tax forum:

http://www.taxalmanac.org

Put the words comfort letter in the yellow search box.

There's something I'm confused about. You say the client is applying for a home loan but then you say they are asking you about "business" funds being used for the settlement?

taxbilly

[Gail in Virginia]

We were recently asked for the same thing for one of our clients, and when we questioned the loan officer we were told it was a new requirement for loans. Basically, we weasel-worded the letter to say that withdrawing money from the business would not adversely affect the business in any way not already disclosed in the financial information provided to them. They already had enough information that they should have been able to tell as well as we could what this would do, but their new checklist was requiring a letter.

[JohnH]

That's interesting. Looks like I may as well plan to lose a client or two if this is really a requirement going forward, because I don't intend to sign any such letter for any lender.

[imjulier]

I did this many years ago before the latest lending debacle so its not a new practice. I signed a letter without a second thought since the business had the money and it would not keep them from paying any liabilities. I think the intent is to know where the funds for closing are coming from in the event there will be another liability that could keep the homeowner from paying the mortgage. But what do I Know. I think I stated in my letter that I (or anyone) could not guarantee the on-going success of the business. If I were asked, I'd do it again.

Julie

[jainen]

>>years ago before the latest lending debacle<<

Although my earlier post encouraged the letter, subject to substantial disclaimers, I must respond that times have changed. First of all, there have already been court cases in which a lender has recovered damages after relying on an accountant's representation of credit-worthiness. Recently the IRS has suggested that it may be unethical for a tax preparer to contact the lender directly, even with the client's written permission.

So nowadays the best we can do is provide a statement only to the client, who can forward it as desired. Although reasonable projections should not be a problem, they should be narrowly based on what the accountant has actual knowledge of. If all you have is whatever the client himself has told you, include that key fact. Ask your E&O insurance agent for sample letters.

[ed_accountant]

Over the years, I have done similiar letters. Stick to the facts and do not state an opinion.

Please be advised that OWNER is the president and 100% shareholder of the Company Inc. OWNER has total access to the bank accounts of COMPANY Inc. OWNER can draw and deposit money from the COMPANY Inc without affecting the ongoing flow of the business.....

Here are two standard example letters:

CPA Letterhead Level 2 Sample Letter

Date

To Whom It May Concern:

The purpose of this letter is to attest that _____________________________ Social Security Number _______________________has been self-employed for the past two years.

His/Her business name is _______________________________. His\Her business is located at _________________________________ and has been for at least two years.

This attesting has been done by the review of his/her past two tax returns (2004 and 2005 years). These tax returns were prepared by ____________________________________.

I have verified that the tax returns I have in my possession, have been filed, accepted and processed by the Internal Revenue Service. This letter is only intended for use by the above person. It has a specific ID number and it is _________________. I have permission from the taxpayer to provide you with copies of the tax returns that are in my possession, if you desire.

If you intend to extend credit to the taxpayer based on the amount of self employment, you should do your own independent procedure, as I am only attesting that He/She has reported self employment to IRS, but not to the amount. If you need to reach me for any reason, please call at the number above during the day from 9:00 am to 5:00 pm.

Sincerely,

Sample 1

Example Response To Lender’s Request

For Verification Of Client’s Self-Employed Status

Date:

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,

Certified Public Accountant

The above example would be a perfectly appropriate limited response to a lender or broker’s request for credit-worthiness information. However, the most protective thing for the accountant to do, especially in a state like California (with very restrictive law on the ability of third parties to sue accountants), would be to decline to respond to the lender’s request. In California, unless the third party can demonstrate that there is close and direct contact between itself and the accountant, it will be difficult to establish the requisite standing to bring a lawsuit alleging detrimental reliance on the accountant’s work product or representations. By responding to the lender or broker’s request for a credit worthiness letter, the accountant would be helping the lender build its case for close and direct contact. So, unless this is a client that the accountant does not want to lose, and would lose if the accountant didn’t provide the requested response, we advise against responding to the request, and advise the accountant to direct the lender or broker to the client for the needed information.

[Catherine]

My opinion (which is worth every penny you've paid for it) is to NOT do the letter.

I've seen some very lively discussions on other boards, and pretty much all I can see as "do-able" is some version of "we prepared returns for X years for this client based on information provided by client. we did not audit or otherwise verify, blah blah".

Basically, the lender wants your malpractice insurance to co-guarantee their loan. Doesn't sound like a good deal when put that way, does it?

[Catherine]

http://www.aicpa.org/download/cpaltr/2007_02/feb07.pdf

Page 10 has the "official" AICPA take on the matter.

If you're an EA, as I am, there's no question of "attest" functions anyway. So make sure you stay within your professional boundaries.

[JohnH]

Very interesting discussion. I may have to eat these words some day because it would be too financially painful to "Just Say No", but I haven't yet seen anything on this thread (or on any forums I have read) that I would sign.

[SunTaxMan]

I am puzzled.

Malwarebytes blocked access to taxalmanac.org as a malicious site!

And this happened in MS IE, Firefox and Google Chrome - the browser change didn't affect it.

[taxxcpa]

Very interesting discussion. I may have to eat these words some day because it would be too financially painful to "Just Say No", but I haven't yet seen anything on this thread (or on any forums I have read) that I would sign.

In my opinion you should explain that you are unable to predict the future and also point out that you have not audited the client and accordingly cannot express an opinion. If you are not a CPA you are not allowed to audit or review financial statements and if you are a CPA and HAVE audited the client, you still cannot predict the effect without making assumptions that may or may not be correct.

[10SorTAX]

SunTaxMan, the link TaxBilly provided to taxalmanac.org is misspelled. Try it without the extra "a" and it will take you to the correct, safe site.

[JohnH]

In my opinion you should explain that you are unable to predict the future and also point out that you have not audited the client and accordingly cannot express an opinion. If you are not a CPA you are not allowed to audit or review financial statements and if you are a CPA and HAVE audited the client, you still cannot predict the effect without making assumptions that may or may not be correct.

You're right, which I believe can be simplified to "NO".

(And THAT is something I will sign if asked.)

[TAXBILLY]

I fixed the link. Bad typist :~)

taxbilly