Have you ever had a bank or mortgage company ask you for a “comfort letter” to verify a client’s income?
Responding to such a request can create unknown risks for the CPA. (The AICPA provides guidance on this issue in TIS Section 9110, Special Reports .19 Lender Comfort Letters.)
CPA Comfort Letters to Mortgage Companies
Today the LinkedIn AICPA group had this post from a CPA in Boston:
Yesterday I received a phone call from a mortgage company looking for a “CPA Letter”. When I asked, “what is that?”, the person thought I was joking.
Maybe I was pretending since I have heard of comfort letter requests. Some of the content requested was how long has my client been “self-employed”.
Is there a place where I can find what the AICPA says is proper to put on a comfort letter?
My response to the LinkedIn member follows.
George – I see this issue about once every two years.
The comfort letter at issue is usually associated with stated-income loans, which are mortgages that do not require borrowers to document their income. Such loans usually are sought by self-employed people.
Such a letter provides third-party verification of details in the loan application and could transfer some of the potential liability to the CPA in the event of default on the loan.
According to Auditing Standards Board Statement on Standards for Attestation Engagements No. 10, Attest Engagements, an attestation engagement is called for if the client wants a written report providing assurance about a specific subject. Of course, performing an attestation engagement is not prohibited in the case of a lender’s comfort letter request, but you (the CPA) must follow the procedures required in an attestation engagement.
The client will likely not want to incur the expense of a formal attestation engagement.
AT Section 9101, Attest Engagements: Attest Engagements Interpretations of Section 101, No. 2, Paragraph 25 states that practitioners should not provide any form of assurance that an entity is not insolvent or would not be rendered insolvent upon a proposed condition, or that an entity has the ability to pay debts as they mature.
As an alternative, you may want to offer to send a copy (with the client’s written authorization) of the client’s tax forms directly to the lender with a simple cover page stating, “Please find attached the tax forms I prepared for Client for the past three years.”
Shifting the Risk
George – The bottom line: the mortgage company is trying to find a way to document the loan cheaply. Such a letter can transfer risks from the mortgage company to you. It’s a bit of a jam for you because your client probably wants you to “simply write a short letter”; the client may not understand the risk it creates for you.
Another Option – AUP
You can perform an attest service (e.g. agreed upon procedures report), but it will take time and you will need to perform certain procedures and issue a report using standard agreed upon procedures language. This could take a few hours, but it will mitigate your risk.
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