If you own your own business and you’ve had a mortgage lender ask for a mortgage comfort letter from your CPA? You need to proceed cautiously.
The reason? Often, these letters ask your CPA or CPA firm to either break state accountancy law. Or require your CPA to violate professional standards.
What Lender Wants from Small Business Owners
Let’s start with what a prospective mortgage lender wants. The mortgage company wants assurances from not just you, the borrower, but from your accountant.
Specifically, lenders ask your accountant to confirm or sometimes to “certify” that the down payment used to buy a property won’t threaten your solvency of your business. Or its health.
The lender may also want your accountant to confirm that information you’ve given the lender is accurate. Up to date. Or complete.
If you supplied last year’s tax return, the lender may want the CPA to confirm you haven’t amended the tax return. Or that your financial situation hasn’t changed for the worse.
We also see lenders asking CPAs and CPA firms to confirm that a borrower owns a business at the time of the loan application, for example.
But the really important point here: Almost always, lenders ask CPAs to confirm or to “certify” historical information that CPAs simply obtained from the borrower. Not information which the CPA independently confirmed or verified or developed. And not current information the CPA would possess.
What CPA or CPA Firm Can Supply
Here’s the problem with mortgage comfort letters. Often, what the lender wants is assurance. And the rub there? Federal and state laws and then professional standards strictly define assurance and related services and how they get delivered.
Essentially, CPAs may provide the following accounting and assurance services if they follow the law and professional standards:
Financial Statement Compilations, a service whereby the CPA organizes and presents financial statements and sometimes related footnote disclosures. A CPA provides no assurance when it performs a compilation. And the standard compilation report a CPA firm delivers as part of performing a compilation explicitly says that. (See CPA Charles Hall’s discussion of what a compilation requires and what the standard report looks like here: Definitive Guide to Compilations.) But that lack of assurance saves the small business owner money. Figure a last-minute, full compilation costs between $2,000 to $3,000.
Financial Statement Reviews, a service whereby a CPA provides limited review and testing of some of the information and some of the disclosures in a business’s financial statements. A review maybe costs $5,000 to $10,000. (Charles Hall provides another useful discussion here and shows what a review report looks like: Definitive Guide to Reviews.)
Financial Statement Audit Opinions, a service whereby a CPA firm does extensive testing and analysis of accounting information and then usually issues a boilerplate audit opinion that says the business’s financial statements follow generally accepted accounting principles and are materially accurate. You can get an idea of what an audit involves by looking at this resource from the Association of International Certified Professional Accountants (AICPA) resource, Forming an Opinion and Reporting on Financial Statements. (The actual audit opinion appears on page 37 of the document.) But the main takeaway for a prospective mortgage borrower: Though an audit represents a significant expenditure–figure $10,000 to $20,000 even for a small organization–it does not provide any of the assurances a mortgage lender seeks via the typical mortgage comfort letter.
Agreed Upon Procedures, essentially a forensic accounting service whereby a CPA firm performs specifically defined test procedures and then reports on the test results. The AICPA also provides a good resource describing what agreed upon procedures entail, Agreed-Upon Procedures Engagements. But to summarize, a CPA firm might examine all the disbursements in excess of some dollar limit and then verify that appropriate documentation exists and that accounting policies were followed and documented. The cost of an agreed upon procedures engagement, predictably, depends on the time required to devise procedures, follow them and then report on the test results. But the cost would possibly run anywhere from a few thousand dollars to tens of thousands of dollars depending on the number and type of procedures.
A key thing to note again about the above list. Nothing on the list looks anything like the CPA firm providing assurances to lender via a last-minute mortgage comfort letter.
A Possible Workaround to the Mortgage Comfort Letter Requirement
Lenders should not therefore ask borrowers to ask their CPA firms for typical mortgage comfort letters. (More information on this topic from the AICPA appears here: CPA Comfort Letters to Lenders.)
Thus, a first borrower tactic should be to push back on the lender request. A prospective borrower might even want to complain to an appropriate regulatory agency. (A state of Washington borrower asked to pressure their CPA firm to break the law or violate professional standards might want to submit a formal complaint with the Washington State Department of Financial Institutions here.)
A borrower might also help other consumers avoid this predicament by posting an online review of a bank or mortgage lender.
A third possible option exists too, however. A prospective borrower may be able to get a CPA firm to write a letter that provides no assurance to the lender but which, appearing on the CPA firm’s letterhead, provides some comfort. Such a letter appears below. Note that the part of the letter in boldface does not provide assurance. Rather the boldfaced text describes what appears in the tax return.
Example Mortgage Comfort Letter Language
Dear Mortgage Company
I am writing to you at the request of my clients, John and Jane Doe
The purpose of this letter is to confirm to you that I prepared the 2022 federal corporation income tax return of Doe Corporation and the 2022 federal individual income tax return of John and Jane Doe and e-filed these returns on their behalf and with their approval with the IRS. If Mr. and Ms. Doe authorize me to do so, I can send you a copy of these tax forms so that you can perform your due diligence.
I have been asked by Mr. Doe to document that the tax returns we file show Mr. and Ms. Doe owning 100% of Doe Corporation.
I have also been asked to report that the Doe Corporation tax return reflects $100,000 of W-2 wages paid to Ms. Doe and shows $200,000 of distributive share income on the K-1s that the Does receive to show the business income they earn.
As you may know, CPAs must meet various standards of quality and professional ethics before attesting to the accuracy of a client’s information. More specifically, as a CPA certified to practice in Washington State, I must comply with both the Washington State Board of Accountancy’s regulations and the AICPA’s professional standards and ethics rules regarding CPA assurance services.
This letter is intended to be the best representation of the facts I can offer you on behalf of my clients within the aforementioned legal, professional, and ethical constraints.
This return was prepared from information furnished to me by my clients. This information was neither audited nor verified by me, and I make no representation nor do I provide any assurance regarding the accuracy of this information or the sufficiency of this tax return for your credit decision-making purposes.
I prepared my clients’ tax returns in accordance with the applicable IRS rules and regulations solely for filing with the IRS. The tax return does not represent any assessment on my part regarding creditworthiness and does not include any statement of their financial position or income and expense for the year 2022 in accordance with accounting principles generally accepted in the United States of America (commonly referred to as “GAAP”), and should not be construed to do so.
Any use by you of my clients’ 2022 federal income tax returns and this letter is solely a matter of your responsibility and judgment. This letter is not intended to establish a client relationship with you nor is it intended to establish any obligation on my part to provide any future information to you with regard to my clients.
Two Final Comments
Two comments to close. First, your CPA firm will probably provide a comfort letter similar to the one shown above as long as you give them adequate time to prepare the letter and wordsmith the language. Do remember that your CPA firm gets extremely busy during the tax seasons and at year end, and neither you nor your mortgage lender should expect immediate turnaround. Your mortgage lender especially should know this. And plan ahead for it.
Second, you’ll probably pay at least several hundred dollars to get a last minute custom letter that works for the mortgage company. (Our CPA firm charges $500 an hour with a $1,000 minimum charge to do a mortgage comfort letter.) Thus verify ahead of time that your lender will accept a letter like that shown above. A letter in other words that confirms or explains or describes information in the tax return. But not a letter that assesses solvency or confirms (or “certifies”) facts.