CPA Letters for Loan Brokers and Lenders

More and more CPAs are receiving requests from clients, lenders, and loan brokers to confirm client information in connection with a pending client loan application.  In some cases, CPAs are furnished with specific language to be included in a confirmation letter. Generally, these requests originate with individual tax return preparation clients. Examples of requested information include:

·         Confirmation of a client’s self-employed status

·         Verification of income from self-employment

·         Profitability of a client’s business

·         The impact on a client’s business if money is withdrawn to fund the down payment on a real estate purchase

When presented with such requests, it is imperative to assess the situation and ask yourself two important questions. Why are lenders and loan brokers seeking this information? And how should you respond?

No-documentation or low-documentation loans remain popular options within the lending community, especially in lending to the self-employed.  The information a prospective borrower is asked to furnish in connection with such loans is limited; however, lenders or brokers are still required to assess a borrower’s creditworthiness and verify the accuracy of information provided to them by the borrower. By obtaining confirmation from you, the CPA, lenders or brokers attempt to shift the responsibility for confirming the accuracy of information to you.  If the borrower later defaults on the loan, the lender will be able to prove that the confirmation came from you prior to funding the loan and was relied upon for its credit-making decision. As a result, the lender may be in a better position to sue your firm directly to recover the loan losses, claiming to be in privity of contract with the firm. This written communication may be intended as a tool to overcome privity defenses available to CPAs in those states where statutes or case law provide protection against unwarranted third-party claims asserted against professionals.

In response to such requests, you should remind clients that tax returns are prepared based on the information that they provided and this information is neither audited nor verified. You should inform clients that you cannot provide assurances to a third party about information in tax returns or any other client matters.  Attesting to client information without performing an audit or attestation services constitutes a violation of professional standards with licensure implications.

Although from a risk management perspective it is preferable to avoid confirming any client information to a lender or broker, refusing to provide any information may alienate your clients. As an alternative, you could offer (after obtaining the client’s approval) to send a copy of the client’s tax return to the lender or broker and confirm that it was prepared by you.  Obtaining client consent before providing any confidential information to a third party is required under professional ethics standards, the Gramm-Leach-Bliley Act, the Internal Revenue Code, and federal and state privacy statutes and regulations. The following is a sample letter that could be used in this situation:

Date

ABC Company

Address

City, State Zip

Dear Mr. _______________:

I am writing to you at the request of Mr. & Mrs. ____________________.

The purpose of this letter is to confirm to you that I prepared the 20XX federal income tax return of Mr. & Mrs. ______________ and delivered this return to them for filing with the Internal Revenue Service (IRS). At their request, I have attached a copy of the tax return and related schedules provided to them for filing.

This return was prepared from information furnished to me by Mr. & Mrs. _______________. This information was neither audited nor verified by me, and I make no representation, nor do I provide any assurance regarding the accuracy of this information or the sufficiency of this tax return for your credit decision-making purposes.

I prepared Mr. & Mrs. ___________________ tax return in accordance with the applicable IRS rules and regulations solely for filing with the IRS.  As a result, the tax return does not represent any assessment on my part as to creditworthiness and does not include any statement of their financial position or income and expense for the year 20XX in accordance with generally accepted accounting principles and should not be construed to do so. 

As you know, a credit decision should be based on a lender’s exercise of due diligence in obtaining and considering multiple factors and information. Any use by you of Mr. & Mrs. __________________ 20XX federal income tax return and this letter is solely a matter of your responsibility and judgment. This letter is not intended to establish a client relationship with you, nor is it intended to establish any obligation on my part to provide any future information to you with regard to Mr. & Mrs. ____________________.

Sincerely,

____________________________________

(Firm Name)

cc: Mr. & Mrs. ______________________ (Client)

Even after offering this practical solution, clients may continue to press you to provide whatever a lender or broker is seeking.  The lender or broker may also assert that the prospective borrower will not be approved for a loan if you do not provide the requested letter.  When this occurs, it is appropriate to educate the client about the limited scope of services provided by you, and to explain why you are limiting your contacts with the lender or broker.  While clients need to have the flexibility to obtain credit in the marketplace, the responsibility for underwriting a loan lies with the lender — not the client's CPA. 

Additional Resources

·        How CPAs Should Handle “Comfort Letter” Requests From Lenders, Mortgage Brokers,  The CPA Letter, February 2007, AICPA

·        AICPA Information Technology Center: Federal, State and Other Professional Regulations

CNA, Accountants Professional Liability, 333 S. Wabash Ave., 39S, Chicago, IL 60604.

Updated January 2008

The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the authors’ knowledge as of the date of the article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes or protocols addressed herein unless they are produced or created by CNA.

Any references to non-CNA Web sites are provided solely for convenience, and CNA disclaims any responsibility with respect to such Web sites.

To the extent this article contains any examples, please note that they are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental.  In addition, any examples are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy.  Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured.  All CNA products and services may not be available in all states and may be subject to change without notice.

Continental Casualty Company, one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program.