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advocacy community education
The information may relate to a pend-
ing loan, employee medical insurance,
child adoption application, or use-tax
certification. The most common type of
request is associated with mortgage
loan applications of tax return prepara-
tion clients who are self-employed.
Examples of information requested by
lenders and loan brokers include:
Confirmation of a client's
self-employment status;
Verification of income from
Profitability or sustainability of a
client's business; and
The impact on a client's business
if money is withdrawn to fund the
down payment on a real estate
The means available to obtain financial
information from a self-employed bor-
rower may be limited. Lenders or bro-
kers are required to assess a borrow-
er'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 con-
firming the accuracy of the information
-- and possibly the risk of non-repay-
ment 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 bet-
ter 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 busi-
ness assets from their sole proprietor-
ship, 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 pay-
ment 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 contin-
ue operations. One method requires
that the lender obtain a letter from an
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 bro-
ker that allow the mortgage to qualify
for sale in the secondary market.
CPAs providing written assurance
Third Party
Verification Letters
ncreasingly, CPAs are receiving requests from clients,
lenders, loan brokers, health insurance providers,
adoption agencies, regulators, and various other
agencies to confirm client information.
Provided by Accountants Professional Liability Risk Control, CNA