Comfort Letters for Lenders and Mortgages

October 3, 2022

The most common request for verification is associated with mortgage loan applications of self-employed tax return preparation clients.  We are commonly asked to verify information such as:

• Confirmation of self-employment status;
• Verification of income from self-employment;
• Verification of self-employed borrower’s business ownership percentage;
• Profitability or sustainability of a self-employed client’s business; and
• The impact on a self-employed client’s business if money is withdrawn to fund the down payment on a real estate purchase.

A self-employed borrower often uses business assets to fund a down payment and closing costs for a mortgage. Lenders and brokers are required to assess the borrower’s creditworthiness and verify the accuracy of information provided by the borrower.  Nevertheless, the means to obtain available financial information may be limited.  By obtaining a comfort letter from a CPA, lenders or brokers may attempt to shift the responsibility for confirming the accuracy of the information – and possibly the risk of non-repayment of the loan – to the self-employed borrower’s CPA.  IF the self-employed borrower later defaults on the loan, the lender may raise the comfort letter received from the CPA, prior to the funding of the loan.  The lender may then take the position that the representations made in the letter were a substantial factor in its decision to extend credit.

As a result the lender may be in a better position to recover loan losses by suing the CPA, alleging that it detrimentally relied on the negligent misrepresentation(s) made in the comfort letter.  The comfort letter also may be used to establish the lender’s legal standing to sue the CPA where such standing may not otherwise exist.

In 2013, Freddie Mac revised the Single Family Seller/Servicing Guide (the Guide) by  deleting the practice of obtaining a comfort letter from an accountant  as a method of determining the impact of a withdrawal on a self-employed borrower’s business.  Section 37.13(b) of the Guide, which is related to stable monthly income and asset qualification sources, now states that when business assets are used for down payment and closing costs, financing costs, prepaids/escrows and reserves:

  • the assets must be verified in accordance with the documentation requirements in Sections 37.20 through 37.23;
  • the assets must be related to the business that the borrower owns that is documented in the mortgage file;
  • the seller of the mortgage is required to document a cash flow analysis for the borrower’s business using the individual and/or business tax returns, as applicable; and
  • the mortgage file must contain the seller’s written cash flow analysis and conclusions.

While lenders and brokers have always been responsible for conducting their own due diligence before making a credit decision, the revision to the Guide places the burden of determining the impact on the ability of the business to continue operating as a result of the withdrawal solely on the lender or broker.

If a self-employed borrower is informed that he/she will not qualify for a mortgage unless his/her accountant provides a comfort letter,  you should challenge this assertion by referencing the fact that such guidance does not exist in either the Fannie Mae or Freddie Mac seller guides for residential mortgages.

Third parties are responsible for performing their own due diligence rather than relying on a representation or verification of information by a CPA.  This is especially true when the requested representations are outside the scope of the CPA’s engagement, and the requested verification relates to information from the client for which the CPA has no first-hand knowledge.  Additionally, while clients desire the flexibility to obtain credit in the marketplace, the responsibility for underwriting a loan and determining the borrower’s creditworthiness lies with the lender — not the client’s CPA.

We always support helping our clients obtain the most beneficial financing terms. Still, for the above reasons, we are unable to issue any third-party verifications for the purposes of lending or reviewing financial considerations.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.