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Discussion:I swore I wouldn't - mortgage letters...

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Discussion Forum Index --> Business Growth Community --> I swore I wouldn't - mortgage letters...


LJACPA (talk|edits) said:

18 December 2006
It keeps happening. I got three more phone calls last week about doing these 'simple' letters. One client I know I have lost. One, astoundingly, by chance ran into their former CPA (whom they had 'fired') who did the letter for them when I told them I couldn't. Have I lost that client??? Although I know that the prior discussions on this matter range from total acceptance with no problem at all in doing the letters to absolutely don't do them, I just don't know what to do. I've used the language that someone provided from CAMICO and it is totally unacceptable to these lenders. The lenders have become very aggressive, very rude and make me look like I'm the one who is causing their borrower, my client, to lose the loan. The more requests I get, the more concerned I get. One client, the one who got the letter from their fired CPA, told me that the lender was basing the loan approval on his credit score, which was very high, even though his income would not justify the loan being made. Now tell me there's nothing for me to worry about in this case. Since it seems this CAMICO letter/website questionnaire, etc. is the only source of being able to say no, does anyone else have anything substantial upon which to base denying the client these letters? I would appreciate anything at all.

Tfortaxes@msn.com (talk|edits) said:

18 December 2006
Ditto. Verbage that I used last year is not acceptable. I am tempted to tell the client to show the lender their Schedule C. I refuse to state things I know are false. I am bound by my license to do so. What I say now is: I have prepared jon doe's tax return for the last XX years. While I can verify my client is self employed I can not discuss the content of the return with out written permission from my client. This seems to be working, at least for now

Jdugancpa (talk|edits) said:

18 December 2006
LJA, see my comments and article that were posted on Saturday on the previous thread on this topic.

http://www.taxalmanac.org/index.php/Discussion:Requests_from_lendors_for_proof_of_self_employment

Also, see the article Larry Hess linked to following the article I linked to.

CrowJD (talk|edits) said:

18 December 2006
Stick to your guns LJACPA; this too shall pass. It IS possible, after all, that this so-called "soft landing" for the outrageous real estate speculation that's been going on might not be so soft after all. And, if we have a "hard landing" in real estate, the foreclosures will explode, and the lawsuits will start flying. These "No-Doc" loans, and "Interest-Only" loans will come a cropper one day. People need to remember that the main reason you buy a house is to have a place to live..... not to speculate.

Deback (talk|edits) said:

December 18, 2006
LJA - Here is an exellent article at ASCPA that all CPAs and tax preparers should read:


Lenders Still Pushing for “The CPA Letter”

CrowJD (talk|edits) said:

18 December 2006
Good article Deback! In my opinion, those who get the rewards should bear the risks. In the loan situation, the broker gets the commission, the bank get's interest and outrageous up-front fees,the client gets the loan: and the CPA/preparer ends up holding the bag. No way. Again, good article.

Deback (talk|edits) said:

December 18, 2006
Yea, I was happy to find it when searching for "Camico letter" at Google. I just formatted their sample letter in Microsoft Word and will be using it in the future, instead of the short, basic letter I used to use when requested to fax these annoying letters to lenders. I never thought about possibly being sued for providing a short letter stating how many years I've prepared Sch Cs for so-and-so. But after reading this thread and the thread provided by jdugan (thanks, jdugan), I decided I'd better check it out.

Bottom Line (talk|edits) said:

19 December 2006
Fortunately I haven't had to deal with some of this pushy language. All mine have been "TP has been self-employed for X years. I have prepared tax returns for X years." Notice that there is no confirmation of any dollars or statement that the return was filed. Unfortunately I think these requests will continue until we all say "NO - We won't do them!"

Guya (talk|edits) said:

19 December 2006
Over here in the UK we all use the standard letter drafted by whichever professional body (eg Chartered Accountants etc) we belong too. I wouldn't do more because of the insurance risk.

HLCPA (talk|edits) said:

19 December 2006
I have been involved in discussion on this matter a great deal, and am on the line for millions of $$ in mortgages. I now write a letter, if I cant wiggle my way out of it, similar to the letter on pg 8 of the Lousiana CPA (see JDUGANCPA post above) Here it is...

This letter is not intended to confirm nor deny the creditworthiness of the above referenced individual.

You have asked me to provide your lender with certain information on the above referenced client for your use in deciding whether to extend credit. My services to my client were and remain limited to the preparation of 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 my client.

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 him. Again, as the tax returns are based on information given to me by my client, I have not reviewed, audited, or otherwise attempted to verify any of this information. Consequently, I cannot affirm its accuracy or completeness.

[Here I would put in that they are self-employed, or that they get many W-2's and are effectively self employed as an X in the Y business]

If you intend to use this information, you should perform your own independent procedures and tests as you deem necessary for approval of credit. If you use this letter for any purpose, then by your use of this letter you agree that no liability for any reason will be imposed by you, your organization or any organization that you provide this letter to upon [me, CPA]

Gosix (talk|edits) said:

19 December 2006
Maybe we should all start offering a service to the lenders for a fee? Say for a $1000 fee, I'll be glad to do the work necessary to offer a credit opinion. We can verify assets for them, attest to some sort of income, confirm bank accounts, the whole nine yards.

DZCPA (talk|edits) said:

20 December 2006
I have malpractice insurance. Some things I do not worry about. Thats why I bought insurance. If I want to keep the clent, I do the letter. If I want to lose the client, I do not do the letter. Your choice. If you do not want to do the letter, I might consider doing it for you and you will probably lose your client.

CrowJD (talk|edits) said:

20 December 2006
This is obviously up to everyone in their professional judgment. However, every malpractice policy has limitations and exclusions from coverage that should be reviewed carefully. In addition, your application is usually a part of the policy, it is very wise to review what you put on that application regarding the scope of your practice; and keep in mind that insurers will change that app. page that you fill out from time to time. LJACPA said his client's income would not justify the loan, let this sink in. This is not uncommon today, it is, however, insanity for a banker to make loans like this. How does the banker mitigate the negative results of his insanity?: he tries to pawn off the risks to CPAs/preparers. Assuming I was going to respond to these lender requests at all, I would use the most accountant/preparer protective letter possible.

Birdman (talk|edits) said:

21 December 2006
It is hard to keep a client happy without doing these stupid letters. I had an interesting experience. These letters go from the loan broker to loan originators and on up the food chain. Well, somewhere along the line, somebody did some cut and paste to my original letter so that it made some assurances of income. Needless to say, the loan was axed once the forgery was discovered. If I had more time I would go after the fool that did that. I wonder how many CPA letters I have "written" for people I don't know - without my knowledge. It is a tough delima. I once had a dumb loan broker say "there is no risk to you.... pause.... unless the client defaults." No Duh.

I think I'll start charging $100 for the first letter and $50 for each revision.

CrowJD (talk|edits) said:

21 December 2006
When I first started practicing law, civil RICO cases were first starting. You don't ever want to be a defendent in a civil RICO because the testimony of "Conspirators" comes in against you, and hearsay rules don't apply; the accusation was using the wire (Phone) and mail to defraud a lender (it's hard to do any business deal without phone or mail, good or bad, and use of these mediums is what gives jurisdiction). Anyway, lender goes to foreclose and finds out his collateral is not worth a whole lot, and goes to suing every one he had an address for. My client was an appraiser, now any type of an appraisal is basically an art more than a science, you are comparing apples to oranges and trying to determine value. Generally, you prefer the appraisal come in high when you wish to take a loan out against the property, so my guy did a favor, still within professional standards, but pushing the limits to get the appraisal up there. After 2 years of us fighting this lawsuit, worrying about it, all the dipositions, time he had taken off work, he was a changed man, and he finally won the "count" against him. What's been done already to appraisers is probably on the way for preparers and CPAs. Especially if you in anyway try to "pretty up" the client's situation. I am not saying that every accountant that has written one of these letters is going to be sued, but some will if real estate turns south....and even if they win they lose.

Kluskey (talk|edits) said:

21 December 2006
Great discussion. Banks can always get the client to request the IRS send copies of tax returns directly to them under a power of attorney, which would be a very easy (if not quick) way to get verification that the tax returns the client has submitted have not been altered. But then they wouldn't have the CPA to hold responsible . . .

Death&Taxes (talk|edits) said:

21 December 2006
Banks don't even need to do that: I have seen them have borrowers sign 4506 forms with their address on it, but oddly they often still want a letter since the 4506 takes time. Client called me once from outside a bank, asked what the 4506 was and when I told her, she went back inside and told them another bank had a better deal and lost her application fee. I never had the guts to ask her just what tax returns she was submitting.

Bushmaster (talk|edits) said:

21 December 2006
Wow. Speaking of coincidences!! I stumbled on this thread earlier this week and behold yesterday, I got a request for one of these letters. I had already copied the suggested letters and put them in word format.

I called and asked the lender and he told me they don't even want the tax return! They are doing these loans based on "declared income", whatever the hell that is. These tax returns aren't even a part of the loan application!!! This is why I always asked the question to start with "Why can't you take the tax payers income tax return and deduct that they have filed a Schedule C for the last two years?"

Well, the reason is the tax return isn't part of the loan application.

Bottom Line (talk|edits) said:

23 December 2006
We're already starting to see some press about foreclosures and past dues increasing. Regulators are blaming it on lax lending (surprise, surprise). This type of loan is what they're talking about!

LJACPA (talk|edits) said:

30 July 2009
My what a difference two and a half years has made! As I'm once again going through this with a client, though Wells Fargo is only requesting a "verbal confirmation that I have prepared his returns and for how long", which I still really don't want to do - leave me out of it! The client I mentioned in my original post is still a client and within the last year humbly told me that "you tried to warn me" and I never, ever did a letter for them. They ended up acquiring 12 additional rental/investment properties and the overwhelming nightmare of trying to manage these and have only recently "given back" 5 more of them. Their excellent credit record is shot, they're still buried under more than they can handled and will no doubt lose more, if not all, of the remaining properties. They take full blame for allowing themselves to get into this situation and will no doubt pay for this for many, many years to come. My greatest fears of what was to come have more than surpassed what I could have ever imagined. Not really anything important other than how interesting when you look back at what was and know what is.

CrowJD (talk|edits) said:

30 July 2009
The bubble burst, just like the great tulip bulb bubble of lore burst.

Who was the cheerleader: well, one of them was the Fed. Why? Greenspan knew better, but after he was blamed for George I losing in '92, he couldn't be seen as ruining George II's chance at four more years by raising rates, and he thereby missed his last chance to cool the real estate boom before it burst. Uh, so it burst.

Now, some are adovcating that the Fed. be given even more responsiblity. Which, in my opinion, is a huge mistake.

Brush up on your Japanese everyone, because we are in for the same multi-year stangnation that they have been through since 1990.

P.S. if you like history, here's a blurb from Wiki on the Dutch Tulip Bulb Bubble.http://en.wikipedia.org/wiki/Tulip_mania

NMexEA (talk|edits) said:

30 July 2009
Is there a significant difference between a CPA writing one of these comfort letters and some other tax practitioner writing it?

I ask because it is the very soul of the CPA's profession to express opinions as to the financial health of business entities. If my concern is valid, it seems to me that of all people, CPAs should refuse unless paid to do a proper audit.

Kevinh5 (talk|edits) said:

30 July 2009
Are you implying that Arthur Andersen should have written mortgage letters instead of offering opinions about the financial status of Enron?

Chase (talk|edits) said:

30 July 2009
I received a call the other day asking if I could create a P&L for a taxpayer who was applying for a mortage. Taxpayer already provided the Schedule C but the lender wanted a "Profit and Loss" statement. I did not have the time to do the work so I referred it to a bookkeeper who I work with. She did a great job -- entered all bank account transactions and reconciled the bank statements for 2007 through June 2009.

I told the broker that I would take a look at the bookkeeper's work to confirm that the work was done as I had asked. Just now, the broker copied me on an email asking the taxpayer to send me his contact information...letting him know that a condition of getting the morgage was that a CPA signed off on the AUDIT of his profit and loss statements prepared by the bookkeeper !!!

What audit ????? I did not do an audit and I told her that I am not going to be signing off on any letter that states that I "audited" the profit and loss !!

CrowJD (talk|edits) said:

30 July 2009
lol. But haven't you heard the news? Now's the time to buy a house!

Heck, I'd rather wait until they've dropped another 20%.

I figure we are in for another wave of foreclosures due to the unemployment going on. And, by the way, they are cooking the books if they say unemployment is improving. The truth is that people have just stopped looking, and the stats. don't pick them up.

Chase (talk|edits) said:

30 July 2009
Just spent some time on the phone explaining the difference between a bookkeeping engagement and an audit attestation engagement to the broker -- she was OK with it but unfortunately now she really does want an audit !! It ain't me, babe...it ain't me she's looking for :)

CrowJD (talk|edits) said:

30 July 2009
Wow, you might want to get her card. I think you've actually run into an extremely rare find: a loan broker who wants to know the truth. She won't last long.

By the way, forget what I said above about the economy. The people on CNBC just said everything is A OK, and it should be straight up from here on out.

Chase (talk|edits) said:

30 July 2009
I heard the same thing --- yay !! the recession is finally over !!! ........right!

Skassel (talk|edits) said:

30 July 2009
Wait a second....I thought Rahm said "we rescued the economy".....


Yep, he said it a week ago...http://bit.ly/LRJSp

NMexEA (talk|edits) said:

31 July 2009
So, it DOES make a difference if a CPA signs it?

If I were to advise a CPA about signing ANY sort of letter or other document attesting to the financial condition of a business or individual, I'd warn against doing it without a proper audit. But I don't know the audit and attest business very well so maybe I'm being too conservative?

Smokeytax (talk|edits) said:

31 July 2009
Wow.

I've been arguing with a client all week about Wells Fargo's request for "verbal confirmation", just like LJCPA is saying has happened. I may lose the client even though I sent a letter including the Comica boilerplate wording, which anyone in his right mind would have to say is ludicrous.

But, going back to the brilliant CrowJD's DECEMBER 2006 post stating that the lawsuits will fly if the hard-landing crash occurs - my question is, where are the lawsuits?

Has anyone heard of a CPA, or even a mortgage broker having the least bit of problem with having been involved in "liar" loans, in terms of lawsuits or lenders trying to place blame on someone for not being able to collect?

CrowJD (talk|edits) said:

31 July 2009
I am sure there are some civil lawsuits against loan brokers-appraisers-tax people, but frankly, I have seen zero about them on TV or anywhere else. So, it's certainly not a landslide at this point.

This may be one of those times where the shady behavior was SO bad and SO widespread, that the bad players will get away with it.

However, I am still not enthusiastic about signing such letters going forward.

Smokeytax (talk|edits) said:

1 August 2009
Check out this website -

http://www.cpaletters.com/

Actionbsns (talk|edits) said:

1 August 2009
So for $300 out of pocket, they'll do what the lender could do and obtain a copy of the tax return, and sign a letter stating that's what they did. Such a deal.

I did have one disturbing phone call about a year and half ago, just as all the mortgage issues were beginning to shake out. A lawyer had found my letter in the files of a mortgage broker in town who was evidently being held to task on some of the loans she had written. Nothing ever came of it though, I think he just wanted to verify that I existed and the letter wasn't made up. I'm not even sure how it all ended up, never saw anything in the papers.

Natalie (talk|edits) said:

August 1, 2009
Smokey, I think it's interesting to note that CPA may not mean what we commonly think: we will issue a letter from a Certified Public Account that the Borrower has been self-employed for the past two years. Of course, it could also just be a typo.

Smokeytax (talk|edits) said:

1 August 2009
Natalie - I did check out the CPA's website and they do look legit.

When you think about it, you could come to respect what they're doing - it is legal, ethical - no lies are being told, and puts bread on the table. I'll bet, however, that the partners have put all of their assets in their spouses names'.

Actionbsns - that phone call must have been quite creepy!

LJACPA (talk|edits) said:

2 August 2009
So, is it actually the CPA firm (nothing on their website that I saw) that's offering this great service or a separate business? I don't know that I've ever seen the word "creative" used in regards to the services offered by a CPA firm. That's interesting. I agree that they're really not doing anything for this and in all the requests I've received over the last several years, I don't remember one single one that dealt with a Schedule C. The self-employment issue was an issue but only in regards to an S corporation. I wish I could remember the story, but a while back I read an article about a CPA being sued for issuing a letter that was relied upon by the lender/borrower and a pretty hefty fine went along with it. Granted, it was only one case, but if there's one, there's no doubt more. Personally, I'd be embarrassed to have my name/firm associated with something like this. How cheesy and unprofessional.

Fstitely (talk|edits) said:

30 October 2009
Thanks to everybody above posting on this. I just got the type of request from a mortgage company I had not gotten in a couple of years. They asked me to guarantee taking money out of a business would not harm the business. I sent them a copy of the Feb 2007 AICPA newletter, "The CPA Letter". It has an excellent article on professional responsibility and what CPA's aren't allowed to do. This was a big mortgage company. They should know better by now.

EasternPA (talk|edits) said:

30 October 2009
Fstitely, Maybe they just wanted you to post a security bond as a favor for your favorite client! LOL

Yt1300inHtown (talk|edits) said:

30 October 2009
SOunds like my client trying to get a loan against some land he owns.

"The banker said they just need SOMETHING for 2008 in my file, even if it's just a "mock up" or "draft" of my return.

Me: So you want me to slap together an incomplete return for you KNOWING your banker is gonna add it to his files for your loan?

Client: Well the banker said he is OK with that.

Me: OHHH...well, if HE is good with it, then what am I waiting for?

Ksnoopytax (talk|edits) said:

8 May 2010
I just wanted to share my experience yesterday with this.

I have a good client for which we do a corporate tax return. She called me up and said they are trying to get a mortgage loan and the banker wants something from our CPA firm that says they own 5% of the company. I told them on their Form 1120 it shows the stock ownership percentages and the banker can use that but i'll look to see what I can do. I reviewed CAMICO's website and found with some digging a standard letter from 2007 I could use to respond to this request. Part of the letter said that they bank could provide a written request along with the client's permission to get a copy of the tax return from us. At least then, the bank would know that the client isn't making up the return.

So a little bit later I receive a call from the banker who was from a major bank. The call started off cordial but this is how the call went:

Banker: There must be some misunderstanding, I don't need all this extra wording, I just need you to state their stock percentage on a letter. Fannie May (I think) needs us to do some additional work if the stock holding is over 20%.

Me: You can find that percentage on their tax return on page 2.

Banker: Can you just write the letter for me?

Me: I'm sorry I can't. I checked with my insurance provider and this is the letter they suggested I give you.

Banker: Why can't you just write the letter? Didn't you do the tax return? Can't you back up the return?

Me: Because I don't want to get sued over someone's home mortgage

Banker: Now why the heck would you get sued....

Me: Why else would you ask for assurance from me then?

Click...he hung up.

Please don't write any letters for the bankers. If they really need to find out more information, they can go do the work themselves. This was a good client and I explained to them that as a CPA, we really don't like writing these letters because the bankers are just looking for someone else to sue of the home loan goes bad. Your loan may be fine but if they keep asking CPA's, some CPA is going to get burned. It's just not worth the risk when they can do the legwork themselves.

Actionbsns (talk|edits) said:

8 May 2010
Ksnoopy - wouldn't the corporate documents also provide the information the banker was looking for? I don't understand why they need or even ask a CPA to state what is obvious in several different sources some of which should probably be better sources than a letter.

CrowJD (talk|edits) said:

8 May 2010
All tax preparers should get together and report to one designated person how many "mortgage letter" requests they get each month. It could be made into an new economic indicator. As the number rises, a crash is sure to follow (based upon the raw number increase, and the percentage increase per month in numbers of requests).

It was an EXCELLENT predictor of the last crash.

Two thumbs up for Ksnoppy standing his ground.

I think we've stumbled upon a new economic indicator ladies and gentlemen. I think we should call it the "Tax Preparers' Speculation Index" the TPSI (TM). lol.

Gosix (talk|edits) said:

8 May 2010
I decided I would do one of these stupid letters this year for a good friend. Only reason I did it. And I put nothing but the tax return for XX was prepared for XX years based on what XX provided. The letter that says nothing about nothing.

Now the bankster clown show just couldn't stop there. I emailed the letter to them. Three weeks later the letter is not good enough. Wasn't signed. So I print it out, sign it, scan it, and send it to them again. Three more weeks pass and its not good enough again. Why? Oh has to be on company letterhead? Well would it make you feel better Mr. Bankster Clown if I typed my company heading and centered it at the top of the letter rather than to the left column? Yes? Oh good.

Ok so now, I have a question for the Bankster. Where do I send my bill? Your time is up to 1:00 now at $100 per hour.

Bankster: What bill? What are you billing for? What service?

Me: Well, the comfort letter as you call it that you have called me about 4 times and I've had to resend you 3 times.

Bankster: What? Thats not customary. We won't pay for that

Me: Why not?

Bankster: We've never heard such a ridiculous request before.

Me: Well I provided a SERVICE on the loan and I expect to get paid. The Lawyer gets paid at settlement. The termite Inspector. The Home inspector. The title searcher. The realtor. Fee to the mortgage company. Etc. All the people who provided a service get paid at settlement. So where do I send my invoice so I can get paid at settlement?

Bankster: Click. Hung up.

I called my client, we laughed about it all, he put the phone down and called the bankster, told the bankster to stuff the loan, he didn't need it that bad.

Lori nj (talk|edits) said:

10 May 2010
It's very interesting how this topic is still going since, 2006. I received a call about a month ago as well about providing a letter for a P&L statement, client was not even mine. She and her husband came to me for a consultation during tax season a year ago, never filed a return, never heard anything from the,. Low and behold she calls me up. Of course I decline, but I want to CAUTION those who do these letters be careful. My husband's step mother works at a major mort co, in the back office. All the loans that have went bad, they are looking things such as CPA letters etc.


Lori_nj

CrowJD (talk|edits) said:

10 May 2010
"Stick to your guns LJACPA; this too shall pass. It IS possible, after all, that this so-called "soft landing" for the outrageous real estate speculation that's been going on might not be so soft after all. And, if we have a "hard landing" in real estate, the foreclosures will explode, and the lawsuits will start flying. These "No-Doc" loans, and "Interest-Only" loans will come a cropper one day. People need to remember that the main reason you buy a house is to have a place to live..... not to speculate."

I made that remark in 2006, above. We had a hard landing in real estate for sure.

My husband's step mother works at a major mort co, in the back office. All the loans that have went bad, they are looking things such as CPA letters etc.

I haven't seen too many actual lawsuits yet. I guess if it is considered to be a four year statute of limitations, the lawsuits may be yet to come.

That fact that there were so many foreclosures may be in the accountants' favor. Just too much paper to handle all these potential lawsuits (of course appraisers and mtg brokers could be sued as well as accountants/tax preparers, all in the same lawsuite, join them all). Everything gets lost in the debt shuffle (which is not over).

There were so many foreclosures, it's hard to wade through the paperwork to be able to sue.

I would, however, be very, very careful in writing these letters from now on out. Make sure to talk to your E&O carrier for sample letters.

Fsteincpa (talk|edits) said:

10 May 2010
My question in regards to these, and I have done a few in the past, is how can you be sued for simply regurgitating facts?

If it helps my client obtain a loan, then why not? It is the bank that is on the hook. Naturally, when presented with this request, there is usually a conversation with the client if based on my knowledge of their situation, I think they may have issues making payments.

Below is the complete wording of a comfort letter I had written for a client. Could someone tell me how I could be on the hook based on the wording in this letter.

Dear Banker:

This letter is in response to our conversation regarding All Client Dynamo Corp. Please take this as notice that Beckley & Quirini have been the accountants for All Client Dynamo Corp for the past few years and in that time have been aware of the filing of taxes as a corporation during that time.

Should you have any questions regarding the foregoing, please feel free to contact me at

Sincerely,

FSteinCPA

CathysTaxes (talk|edits) said:

10 May 2010
A few years back, I used to get calls from lenders asking me to do financial statements for self employed individuals applying for loans. I informed them that I had to actually do the bookkeeping before I could issue a P&L and BS.

I did get a call a couple years ago from a client who has a SCorp. All the letter said was that he was the 100% shareholder and he was responsible for his income taxes. I sure hope that isn't going to bite me in the butt.

AKCCPA (talk|edits) said:

May 10, 2010
Problem you have is one of privity as well as what happens if the client hasn't filed the returns? or filed them after altering them?

Fsteincpa (talk|edits) said:

10 May 2010
Issuing a financial statement is totally different from what I submitted. Financial Statements fall under either compilation or review standards and should only be issued under such.

Making a statement that you prepared a S-Corp return is a simple statement of fact.

CrowJD (talk|edits) said:

10 May 2010
I don't think the vast majority of tax preparers and accountants have anything to worry about (from the past), at least from what I've seen and read so far.

Having said that, people do win at roulette (even though the odds are horrible).

You never know when your number could come up.

Each practitioner has to have a plan for how they are going to handle it, according to the degree of risk they are willing to take.

If I had a practice like most of you do, I'd probably let all my clients know in advance that you will be using a letter suggested by your E&O carrier, so there will be no surprises. Tell them it's for liability reasons so you can keep the door open and not lose it all to a lawsuit (exaggerage if you have to). Blame it on your insurer.

But it's really up to the risk tolerance of the practitioner.

P.S. Fred, it's what's not in the letter that may be a problem. Maybe verbiage like: please note, we did not audit this firm's financials etc. etc. I don't know what I'd put, it's been a while since I've looked at the suggested insurance company letters. I know CPA's have to be very careful in how they use certain words, and I'm not an expert on that.

NOTE: Even if a practitioner did not have E&O, you could take a sample letter to your lawyer, and help him work one up for you, or people could try to fix up their own letter (this would be my last choice as a suggestion).

CrowJD (talk|edits) said:

10 May 2010
One thing I did not make clear. When I said that I thought the vast number of accountants would be ok from the past, I was talking about the past! You can't change what you did then anyway.

Going forward, it makes logical sense that with fewer loans, the lender will be able to scrutinize each loan more carefully if things go bad.

So, careful going forward.

Fsteincpa (talk|edits) said:

10 May 2010
Crow, I know how you legal rat bastages twist things, and, I also know how the insurance companies try to overly protect for everything. There preference is that we don't do these so that they don't have to defend us if we do get sued.

If the only statements I make are pure statements of fact that truly cannot be disputed, then I do not see how I can lose a lawsuit.

I do understand the time and money involved in defending for these things and that it can be a simple lottery situation as the case may be. I do understand that. I truly cannot see how I can be held liable for a defaulted loan where the only statements I made were ones per my previous post or a statement to the fact that I prepared for X years a schedule C as part of the clients tax return indicating that they are self employed.

Are sophisticate bankers going to try and infer that the numbers on a Sch C submitted were audited? Even when all I said was that I prepared a Sch C on their behalf.

If they wanted to come after accountants for defaulted loans, and they used the tax return as a basis, then I think there would be a stronger argument if they wished to argue that due diligence was not used during the preparation of the tax return vs a letter indicating a return was filed.

And Crow, maybe throwing in a statement that no audit procedures were undertaken. Add in compilation verbiage and turn it into a 20 page small print deal would be good too.

I haven't done one of these in a year or two, but if they are only asking for pure statements of fact, I am happy to provide.

Taxalmancer (talk|edits) said:

10 May 2010
I remember reading an article about this subject. It may have been in the Journal of Accountancy or perhaps even the Tax Adviser. Can't remember for sure.

I'll see if I can dig up a link to the article and post it here but, if memory serves me, the gist was it was a huge no-no to issue one of these "comfort" letters.

Taxalmancer (talk|edits) said:

10 May 2010
Here is something for you to take a look at. Hopefully it helps.

http://www.journalofaccountancy.com/Web/20091528.htm

Waynecpa (talk|edits) said:

10 May 2010
And here's another one: [1]

CrowJD (talk|edits) said:

11 May 2010
Good information. Fred, it's every likely nothing will come of it. Ck the letter out Wayne posted.

Wayne, that letter looks like a good one. Taxalmanacers letter is good, it's a little longer.

Fsteincpa (talk|edits) said:

11 May 2010
I think the article in the JOA pretty much states what I said. The point being to not put anything ambiguous in the letter. Only pure statements of fact.

I do like the added legalese which I will include in my letters though. TA has one as well?

Kbairtax (talk|edits) said:

14 May 2010
Not to keep this going, but I just received a request from a clients banker, that they need a letter from me..here is what they wrote...

"Freddie Mac has a requirement that we obtain a letter from his accountant as to the following: "That Tim has access to the funds from his business accounts, and that the withdrawal of the funds will not have a detrimental effect on the business". If this is the case, could you provide this statement on your letterhead and send to me as an attachment. "

So, I researched Freddit Mac guidelines and found they have revised this requirement for loans after April 10th...ths is from the Freddie Mac Responsible Lending Guide

"If the borrower does not, or is unable to obtain a letter from an accountant, the Seller must document a cash flow analysis for the Borrower’s business, to determine that the withdrawal of business assets by the Borrower will not adversely affect the Borrower’s business in lieu of a letter obtained from an accountant"

Since I am not an accountant, I can easily decline.....

Natalie (talk|edits) said:

May 15, 2010
"must document a cash flow analysis for the Borrower’s business" I find that very interesting. Does that mean that the bankers/mortgage brokers are actually going to analyze financial statements that are provided to them? Or are they going to ask the client to ask their accountants for a cash flow analysis?

Kbairtax (talk|edits) said:

15 May 2010
Natalie....I found that interesting as well, which is why I posted it. I am not sure these mortgage folks would understand one if I gave it to them. After all, they did not understand that a schedule C was included in the personal return...kept asking me to send his "business returns"!!

Natalie (talk|edits) said:

May 17, 2010
Either way it sounds like the loan applicant will have to pay more to get a loan -- either fees to an accountant or additional loan fees to the banker/broker. I'm sure it'll take more time to do a cash flow analysis than it does a letter.

Kevinh5 (talk|edits) said:

17 May 2010
we can all collectively say "NO we won't do those letters."

Just because Freddie Mac requires them doesn't mean we have to provide them. If enough of us refuse to provide them, then Freddie Mac will change their policy.

CathysTaxes (talk|edits) said:

17 May 2010
I'm with Kevin on this. I'm not going to put myself at risk so someone can get a loan. There are tax returns and income statements and balance sheets that could be used.

Kevinh5 (talk|edits) said:

17 May 2010
I don't see how a CPA could provide any assurance "...that the withdrawal of the funds will not have a detrimental effect on the business". I'll bet the E&O carriers won't allow this type of language.

JR1 (talk|edits) said:

May 17, 2010
You're going to alienate clients, SOMETIMES, unnecessarily. IF they have to jump through more hoops now because you won't state facts, as Fred describes above, that's just dumb. If they have to produce a cash flow statement because we won't let them rob the bank account, that's something else entirely. Use your head is all. Rules are for when you can't or don't want to, think.

Fsteincpa (talk|edits) said:

17 May 2010
The fact that bankers wish more information is not a bad thing. The fact that people need to think prior to obtaining more credit is not a bad thing. The fact that they will need to pay us to provide additional services is not a bad thing. If they are unorganized and this makes them think about being more organized during the year is not a bad thing.

What is a bad thing is providing assurances in regards to these types of loans carte blanche.

There are procedures to be done when creating a cash flow analysis. There are procedures to be done if they are looking for a cash flow projection. It is not wrong of the banks to request this type of information. That kind of information is a lot more useful than a statement indicating that the individual is self employed.

I actually view this as progress. Not the first statement requesting a blanket ambiguous comment that funds withdrawn won't hurt the business, but the request for other information. Rather than saying no to Freddie Mac and other lenders, education is a better route. Our clients are going to want us to sign the simple letter. I will never ever do that. I will explain the liability issue associated with the letter. I am also sure that a response letter is probably already being created, or is out there that will state something without really stating something and will have the proper disclosures necessary for us to issue some of these, providing that we do a few simple tasks/analysees.

CathysTaxes (talk|edits) said:

23 August 2010
Thanks to this thread, when I was asked by a client who wanted to refinance to provide financial statements for her husband's scorp (his 2009 return is not yet completed because I think I finally got the remaining info I needed), I informed her that I was not a CPA and I couldn't prepare the statements they requested. I suggested she just give them the tax returns. I also mentioned that even though I do their bookkeeping (all at once several months after the year has ended), I do not pay the bills, nor do I see what he bills his customers (he's a carpenter), nor do I know which customer paid what and when, so I really could not provide something with 100% certainty.

I did explain to her that they probably wanted somebody they could sue (being me) should they (the clients) default on the loan.

Thanks to this thread, I probably saved by butt!

OCNumberz (talk|edits) said:

23 August 2010
Cathy, I, too, am not a CPA, but was asked just last week by a client doing a refi to do a letter for her lender. She told them she was no longer using her CPA from the last 3 years, and she was happy with a letter where I validated the fact I'd seen her business license and records and could tell she was legitimately in business.

Natalie (talk|edits) said:

August 23, 2010
legitimately in business With all the fraud going around these days, even that simple request seems difficult to validate.

Kevinh5 (talk|edits) said:

23 August 2010
yeah, I wonder how one who is not a Certified Fraud Examiner would be able to tell if someone was laundering money through such a business. That would preclude 'legitimately in business' wouldn't it? Heck, even someone thinking of selling his business might be tempted to run his garage sale/personal e-bay receipts through the company checking account, in order to 'prove' higher sales than actual.

OCNumberz (talk|edits) said:

23 August 2010
I certainly wouldn't do a letter for someone trying to defraud a mortgage company. But, if a receiver of info is going to possibly misinterpret the facts, I'm always game to paint a picture to the benefit of the party I know and trust. But, I won't ever make a statement that's flat out false. I like the outside of a prison cell, thank you! ;)

Natalie.... "Validate" from my perspective. They can take it for what it's worth. My client was happy for my efforts, so that was the part that was important to me. : )

Mindtrick (talk|edits) said:

23 August 2010
I was once asked by a client to write such a letter indicating that her self-employment income was over $100,000 a year. Um, I looked at her current tax information and prior year returns, and she reported approximately $25,000. I told her that I could not write such a letter, and on top of that, since I was now suspicious and had no idea which figure was actually false, I fired her as a client.

I have done them in the past though, stating only that I prepared the return and it included a Schedule C. I did not quantify. I am not a CPA, but the discussion has been interesting, even for an older thread.

OCNumberz (talk|edits) said:

24 August 2010
"Everything old is new again."  ; )

How were the EA exams, Mindtrick? You do them out of order for a reason?

Mindtrick (talk|edits) said:

24 August 2010
Thanks for asking OCnumberz. I took them out of order because I thought part 2 would be the hardest so I wanted to get the other two out of the way. I will take part 2 in September. Part 3 was a lot harder than I thought it would be and I didn't feel at all confident when I hit the "end" button. It wasn't so much that I didn't know the material, but rather the questions were worded very strangely. Maybe they do that on purpose.

EatonCPA (talk|edits) said:

24 August 2010
Our firm had a request from a lender a little less than a month ago wanting, among other things, a letter stating the client had access to sufficient capital from his business and that the withdrawal of said funds would not harm that business. My response was "not a chance" (worded more politely and professionally of course). I didn't fall off a turnip truck yesterday and I know exactly what lenders are asking for without coming out and saying it. It's their job to assume risk, not mine, and I am not about to attempt to hedge their risks that a client who may be in a favorable financial position now will remain that way. I prepare tax returns, I do not manage my client's business. I have zero idea what his potential cash flow needs could be in the future. I cannot guarantee the client's cash flows in and out will not take a turn for the worse (especially given the current economic climate). I also cannot guarantee my client will not do something stupid. That $100K sitting in the bank at this moment could disappear down a roulette table in Vegas next month for all I know. I record historical facts; I do not predict the future. Bottom line is that's my client's money, not my money. I do not control what happens to it and the ONLY person capable of giving any assurance in this matter is the client themselves. If their word isn't good enough for the lender, then don't make the loan.

BerkshireCPA (talk|edits) said:

24 August 2010
Has anybody seen how things play out? We have a local CPA (one man show)who wrote a similar letter saying he prepared the return. He just got a notice from a service with a copy of his letter asking him to verify that he indeed wrote the letter.

I told him to call his carrier and he told me he does not have coverage. I did not want to scare him too much, but I assumed they are starting their case to go after him. The loan was foreclosed on by FNMA. Has anybody seen how these things have played out. My guess is he can probably settle for 50 cents on the dollar at worst.

Kevinh5 (talk|edits) said:

24 August 2010
the other 50 cents going to the attorney who represents him. More likely 85 cents to the attorney and 50 cents for the settlement on each dollar.

BerkshireCPA (talk|edits) said:

24 August 2010
Kevin,

Have you heard of actual results where this is true? Or are you just speculating? On a $200k loan I can not imagine paying a lawyer $170k to come up with a $100k settlement.

I know we always hear about the potential lawsuits of these comfort letters but I have never heard first hand from somebody that was actually involved in one or has direct knowledge.

Kevinh5 (talk|edits) said:

24 August 2010
My point was that it is absolutely idiotic to NOT purchase E&O insurance. Especially if you are a one man show. (No other set of eyes look over your work.)

I have seen attorney fees in the $20,000 - $40,000 range for 'simple' mistakes made by others. Add to that number whatever the potential settlement is offered to the plaintiff, or judgement of damages.

Having E&O would have allowed the professional to pay their $5,000 deductible and be relatively done with the matter.

Writing a mortgage comfort letter would not be a 'simple mistake'. Writing a letter that you have indeed prepared a tax return from the client's information but have not audited or verified the numbers should not be a problem if that is indeed the truth.

Kevinh5 (talk|edits) said:

24 August 2010
I am currently a witness to (but not personally named in) a 'professional liability' lawsuit. The defendants (3, 2 of which are professionals with E&O coverage) have each spent upwards of $15,000 on attorney fees, and the matter is just now coming to mediation (one full year since the suit was served). It will probably be another $15,000 each for legal fees if the matter goes to trial, plus another $5,000 in legal fees each to settle the cross-claims. That's over $100,000 in legal fees (and the plaintiff is seeking damages of only $82,000). Add to that the amount of a possible settlement or judgement. The answer is YES, it could cost $180,000 to settle an $80,000 claim.

The two with E & O have paid their $5,000 deductible and the insurance companies are footing the rest of the bill for legal fees, settlement, or judgement. The one without E & O is losing a lot of sleep, a lot of billable time, and a lot of real money.

Kevinh5 (talk|edits) said:

24 August 2010
The lesson I've gotten out of watching the proceedings and depositions is: DOCUMENT YOUR WORK, PUT PLENTY OF NOTES IN THE CLIENT FILE.

BerkshireCPA (talk|edits) said:

24 August 2010
I agree with you 100%. One thing I am not so sure about is the way the insurance company reacts. I could see them saying you are not covered because they have given guidance on how to handle comfort letters and you failed to comply. Or they might question if your engagement letter only called for a tax return, you were not covered because you turned this into an attestation enegagement.

Knock on wood, we have never had a formal claim. But I hear the horror stories at the seminars about claims being denied for all sorts of reasons like not contacting them immediately, etc.

Actionbsns (talk|edits) said:

24 August 2010
Just as the mortgage bubble was bursting I had a call from someone checking to see if I was a real business because I had written a letter for a client. It was really upsetting at first because I was visiting my dad who didn't have internet access and it was fairly late at night when I listened to the cryptic phone message. I called my husband and had him go on line to my office computer and e-mail me the letter. I didn't want to return the call until I knew what I had written. It was fairly non-committal and innocuous. In the end, my letter had surfaced during an investigation into a local mortgage broker who was be held to task for some shady loans. She had apparently written some of these letters herself using various company names. I never heard from them again. I don't write these letters at all any more.

As for horror stories at seminars, they annoy me more than anything else. Sometimes I think they are urban myths designed to scare us and they generally do a good job. But after the last seminar I went to where they were doing this, I started turning a deaf ear. The speaker was talking about criminal investigations and was making me feel like he'd really like to just have a paddy wagon outside the door so he could take the whole room off to jail because, well, we prepare taxes so we must be criminally responsible for something. I have better things to do with my time than to be sort of threatened in that way. I don't go to that particular seminar anymore.

Kevinh5 (talk|edits) said:

24 August 2010
Stories work to illustrate the point. Read Mark 4:34 "He did not say anything to them without using a parable. But when he was alone with his own disciples, he explained everything."

OCNumberz (talk|edits) said:

24 August 2010
Mindtrick, what study materials did you use? My CPA friend loaned me Gleim and FasTax. I did 25 questions on the latter last night, and got a whopping 31%. I feel I've learned a lot of 'concepts' this season, but these study questions required you to have memorized exemptions and standard deductions for all taxpayers...something I let my tax program do. So, it was more of an exercise in math computations, something I wasn't ready for. I'll refresh myself and try again! I have learned a lot coming here. Many Google searches landed me on Tax Almanac pages, and I've enjoyed getting info from the pros.


It's their job to assume risk, not mine, [.....] I prepare tax returns, I do not manage my client's business.

Eaton, AMEN!  : )


Kevin, thanks for the E&O warning. I felt an overkill for a 'newbie' with low volume like me, but I'll look into it.

Kevinh5 (talk|edits) said:

24 August 2010
Low volume translates into 'little experience' in the courtroom, OC. You lose your E & O case before you even start. "Do you do many returns like the plaintiff's, Ms. Tax Professional? NO? Then why did you accept an engagement for which you are not proficient?" Those lawyers will twist your own words into whatever they want the jury to hear.

OCNumberz (talk|edits) said:

24 August 2010
Wow, I'm on the stand already and I didn't even do anything wrong! ; )

I hear you, though...you never know what can happen. I used to sell health policies 25 years ago for an agency. They carried E&O and I got commissions monthly from different carriers. One of my clients (a family run construction company) lied to me to get a pregnant daughter-in-law covered. Once they paid late premiums and had incurred a lot of claims, the insurance company dropped them. So, in filling out new paperwork years later (she did not contact me first), she forgot her initial 'lie' on her application, and was refused coverage. Her husband had heart issues and was uninsurable without guaranteed issue. She tried to say that I had told her to fill out the initial application stating she was the office manager when she was really the wife of the owner..leaving them short 1 employee for guaranteed issue. As soon as she found out I didn't personally have E&O coverage, she stopped calling. It was an eye-opening experience on how a seemingly nice clients can turn on you when the chips are down.

The letter I wrote was for an insurance agent who's been successful in the business for many years and is refi-ing a home she's owned for 25 years. But, I'll certainly think twice about doing a letter for clients in the future.

Larry0434 (talk|edits) said:

25 August 2010
Just an additional thought to consider. Issuing a mortgage letter would be making an attestation to the lender. For a CPA licensed to attest to financial information in a state, they must ensure that they meet the expected standards and requirements for issuing an opinion. In some states, this may include mandatory peer review of all engagements for which an attestation is performed. For a non-licensed individual, they may be viewed as issuing an attestation on a financial document similar to a financial statement and as a result, in violation of state regulations related to financial statements designed to protect the public receiving those attestations.

This is the reason why I would include in any letter that the tax information is based on client representations, that no procedures were performed to verify those representations, and as a result, the information should not be relied on to make a loan decision. Further, I would state you only have a responsibility to prepare the tax returns for your client and that this letter does not establish a client relationship with the lender.

OCNumberz (talk|edits) said:

26 August 2010
Unfortunately, it seems you can't just do a letter stating the facts as you see them. You have to worry more about what you "haven't" said and what you "have said" that can be misinterpreted. :(

CathysTaxes (talk|edits) said:

26 August 2010
I'd like to know why a letter is even needed? If you have the tax returns and show them the reports from your accounting software, that should be sufficient. They (those wanting the letters) are looking for scapegoats to blame if the borrowers default.

OCNumberz (talk|edits) said:

26 August 2010
I was wondering about suggested wording if one chooses to do a letter for a client, and this link that Taxalmancer provided a few months ago is quite helpful:

http://www.journalofaccountancy.com/Web/20091528.htm

Cathy, the "Blame Game" is played far too often..most don't want to take responsibility for their own actions. Whatever happened to the old 20% down on a home to cover themselves if the borrower defaulted?? Creative financing has been the downfall of our system.  : (

Dap19 (talk|edits) said:

22 November 2010
Our office received a request from a lender that stated "Quality control was performing a post closing audit for the above mentioned applicant. Please review the attached document and confirm if the information provided is valid and accurate." It then provides a section to be signed which states "Please re-verify that the information is true and correct." The attached was the first two pages of the 1040 that our firm prepared for the client. Has anyone had a similar experience?

I have a couple of concerns regarding that request. 1) The representative from the company said the form just means that the attached is what we gave to the client to be filed. By signing that document are we attesting to the fact that the income numbers are correct? We did not perform an audit of the client's information, we prepared the return from information given to us.

2) Are we even allowed to answer the request without getting the proper written authorization from the client in accordance with IRS guidelines about releasing tax information to a third party (font size, specific wording, etc)? All the mortgage company sent was a boiler plate authorization signed by the client. Thanks for your input.

Fsteincpa (talk|edits) said:

23 November 2010
I would be happy to tell them that the information agrees with I had filed with the IRS.

Larry0434 (talk|edits) said:

24 November 2010
Dap19:

The lender can obtain verifying information from the IRS.

Any response by you may be considered an "Attestation Engagement" in most states. You should verify if you are allowed to attest. In addition, I would use careful "attestation language" in responding. Finally, I recommend that you have the client sign an "attestation engagement letter".

As you mentioned, I would obtain a Consent to Release Tax Information before responding. My experience in requesting the client's consent is that they do not always provide it.

Smokeytax (talk|edits) said:

24 November 2010
I think the client really deserves to be informed of the letter you received & given the choice of whether he wants you to respond. If he does, I would first request a Consent to Release Tax Information in standard IRS dictated format from the client.

I would then send the lender another copy of the tax return with a cover letter containing the usual wording suggested by insurance companies, as we've discussed in other posts ("The returns were prepared based on information . . . I have not audited, etc etc").

Then if the lender wants to verify that the figures on the tax form they were given with the mortgage application is the same as on the copy I sent them, they are free to do so.

Thanks for the headsup on what we might expect to receive from lenders.

The lender really has a lot of nerve - asking you to "re-verify" the information! Just their asking shows such a cavalier lack of understanding. But I guess "cavalier" pretty much defines the actions of lenders over the last few years.

Dap19 (talk|edits) said:

24 November 2010
Thanks all for your replies. I felt very uncomfortable with the request. We'll contact the client, who I think doesn't know anything about this request.

EatonCPA (talk|edits) said:

24 November 2010
Actually I'm a bit impressed the mortgage industry has decided to perform a little due diligence - 'bout time. Quality control is probably making sure whatever was submitted to doc the income for the loan is legit - no doctored financials or some such.

Not that I would relax any CYA verbiage in your communications mind you ... but this may just be the new routine.

Harry Boscoe (talk|edits) said:

24 November 2010
Valid and accurate and true and correct. Dap19, I don't think you're in a position to *attest* to all that.

This request is totally unrealistic. But it's been a coupla years since anybody asked me for this kind of pie-in-the-sky overall blessing for *anything*. Maybe the rules have changed. Not likely!

And also, the first person you should call is your client, not the guy at the loan store who's asking for you to attest to the composition of the moon.

Is it time for the PBRs yet? Condolences to the turkey family...

OCNumberz (talk|edits) said:

26 November 2010
Condolences to the turkey family...


Condolences to the family of the one you ate yesterday, Harry??  ; )

After I did a letter requested by a client earlier this year, her mortgage company requested verification from the IRS, for which she sent me a copy of the return in the IRS format. So, of what purpose is there to check in with the tax preparer for a written verification? And....what about all those people(I hear 60%) who do their own tax returns? Don't they get loans approved?

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