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·         The impact on a client’s business if money is withdrawn to fund the down payment on a real estate purchase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

Recently, no-documentation or low-documentation loans have increased in popularity within the lending community. 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 the borrower’s creditworthiness. By obtaining confirmation from you, the CPA, lenders or brokers attempt to shift the responsibility for confirming the accuracy of information provided to them by the borrower. If the borrower later defaults on the loan, the lender will be able to prove that this information came from you prior to funding the loan. 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 case law or statutory 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 provided and that 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 outside of the scope of an audit or attestation services engagement may be construed as a violation of professional standards and have 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, and 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 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.

March 2006

By John McFadden, CPA, CFE, Risk Control Consulting Director, CNA, Accountants Professional Liability, CNA Center, Chicago, IL 60685.

The information, examples and suggestions presented in this material have been developed from sources believed to be reliable, but they should not be construed as legal or other professional advice. CNA accepts no responsibility for the accuracy or completeness of this material and recommends the consultation with competent legal counsel and/or other professional advisors before applying this material in any particular factual situations. This material is for illustrative purposes and is not intended to constitute a contract. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All products and services may not be available in all states.