During the loan process, we are sometimes asked to verify employment. Although your lender may try to request this service from your CPA firm, it is out of scope from the preparation of your tax return.
What the lender is really asking for is a mortgage reference or a comfort letter. When these requests are received by us, it is a regulatory requirement to send the information below:
Lenders or brokers are required to assess a borrower's creditworthiness and verify the accuracy of information provided to them by the borrower. By obtaining a comfort letter, lenders or brokers attempt to shift responsibility for confirming the accuracy of the information -- and possibly the risk of non-repayment of the loan -- to the borrower's CPA. If the borrower later defaults on the loan, the lender will be able to establish that the confirmation came from the CPA prior to funding the loan, and can take the position that the letter was at least a substantial factor in its decision to extend credit.
As a result, the lender may be in a better position to sue the firm to recover the loan losses, alleging a negligent misrepresentation by the accountant, which was relied upon by the lender. This could be used in some instances to establish the lender's standing to sue the accountant where it may not otherwise exist.
Self-employed borrowers often use business assets from their sole proprietorship, partnership or corporation to fund down payments and closing costs for a home mortgage. Such mortgages often are resold to Freddie Mac, a secondary market for residential mortgages.
Sec 37.13 of the Single Family Seller/Servicer Guide issued by Freddie Mac lists loan requirements for self-employed borrowers who use business assets to fund a down payment and closing costs. It stipulates that the lender use one of two methods to analyze whether the withdrawal of funds from a business may have a negative impact on its ability to continue operations. One method requires that the lender obtain a letter from an accountant stating that, "[T]he Borrower has access to the funds and the withdrawal of the funds for the down payment and closing costs will not have a detrimental effect on the business." Sec 37.13 also provides that, "[I]f the borrower does not, or is unable to obtain such a letter from an accountant, the seller must document a cash flow analysis for the borrower's business using the individual and/or business tax returns, as applicable." Clients should be advised to provide the necessary information to the lender or mortgage broker for the purpose of preparing a cash-flow analysis.
Lenders and brokers are responsible for conducting their own due diligence using other supporting documents or performing alternative procedures to meet loan requirements. While self-employed borrowers may be informed that they will not qualify for a mortgage unless their accountant provides a comfort letter, alternative procedures can be performed by the lender or broker that allow the mortgage to qualify for sale in the secondary market.
CPAs who provide written assurance must comply with the AICPA Statements on Standards for Attestation Engagements (SSAE). Attesting to client information without performing attestation services in accordance with the SSAE constitutes a violation of professional standards and has licensure implications. We cannot provide any letter that does not provide assurance. Preparing a tax return is not an audit and therefore, does not provide assurance.
Your lending institution should be able to proceed using copies of your tax returns and the above information, in conjunction with their due diligence.
What if my lender insists...
Now that you have the facts, take heart that we do understand that buying a home is really important to you. Getting the right mortgage is a critical part in the process. We want to help make the process as simple as possible for you and make sure you get exactly the right mortgage that will make your dream come true. If your mortgage company still insists we prepare a mortgage reference or comfort letter, we can get the information together and to the lender within two business days. We charge a small fee of $419 to provide this service.