Providing letter to Client's Mortgage Lender

Case one: If from a client, who was clearly self employed in
2000, but only earned about $200 of SE income in 1999. I
said something to the effect that he was indeed self
employed in 2000 and had "some" SE earnings in 1999. The
mortgage company called me up and asked me to revise the
letter (I didn't). Can't they look at his tax returns as
well as I can? Why do they want me to restate the obvious?

Case two happened yesterday when a mortgage broker called me
up and asked me to provide a letter for someone who isn't
even a client. In addition, he wants me to state in the
letter that the "likelihood of the person remaining
self-employed in the future is good."

My question is what kind of liability am I taking on by
providing these letters? Do other practitioners provide
these letters, do you charge for them? Is there some
standard language? Thanks,

Mark Haymore, CPA

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Personally, I wouldn't do it. Mortgage brokers in this area
usually have the client sign authorization for the broker to
obtain copies of filed returns from the IRS. If the broker
wants copies of past returns from me, I'll send the copies
to the client and let him/her provide them to the broker.

I know of 2 mortgage brokers who went to jail about 10 years
ago for falsifying information on applications and several
others who managed to "dodge the bullet". That was part of
the fallout from the S&L collapse.

Ed

In regards to to case one, mortgage brokers like to see
certain things. I don't know what they are, I once almost
got into a fight with one because they kept demanding I tell
them how much of an NOL a client had was due to depreciation
on that individuals K-1s. Since we did none of those
entities I didn't know nor was there obviously any Sec. 179
on there taken. They couldn't figure out the depreciation
wasn't a separately stated item. Bottom line is that they
ARE a little clueless when it comes to taxes.

In regards to situation two, I would ask for a fee. Clearly
the inidivual referred to is not a client and I assume never
was nor will be.

David M. Woods, EA, MST
(617) 723-2422
Boston, MA
www.rytercpa.com
evild...@aol.com

This advice does not constitute a client relationship.
If you are not a client, you are on your own.

I'm very careful about what I put in such letters. Before I
even write such a letter, I need authorization from my
client to write it (usually not a problem, but I want to
hear/see it from the client directly, since I'm under an
obligation of client confidentiality). It's important not to
imply knowledge that I don't have. Usually that boils down
to stating facts such as " I included Schedule C on the
client's return for the past "x" years." I never opine as
to the likelihood of my client remaining self-employed; I
don't have a crystal ball. I would not even consider using
"going concern" language unless the client asked me to
prepare a report on financial statements with disclosures.

I was just at a risk management seminar where this issue was
addressed. The conclusion there was that the lender is
trying to pass risk on to us. And the more paper they have
in their file, the better. I would prefer not to write such
letters, but I will write a carefully drafted one as an
accommodation to the client, and I will charge the client
for doing it. I would never do one for someone who is not my
client.

Tom

--Solving your tax and business problems with
Professional Service...Personal Attention
Email: THea...@aol.com
Web: http://members.aol.com/thealycpa/Index.html

Well, the mortgage lenders want the letters to cover
themselves when regulators ask questions. And individuals
may want to short-cut any work they might have to do (so
they use your letter rather than do the work on their own).

However, I would be *VERY* leery of making any judgements
beyond a simple statement of the facts outlined on the 1040.
That is, it's hard to see how there would be liability if
you said the taxpayer reported $200 of self-employment
income on his 2000 Form 1040 (note that's different from
saying there *WAS* exactly $200 of self-employment
income--the latter statement is not one I believe anyone,
*ESPECIALLY* a CPA, could make). I might also confirm
specific facts I'm aware of (such as the fact that the
client is still in business and operating)--but I wouldn't
speculate on things that I clearly can't know (like whether
he plans to remain self-employed in the future).

The danger, especially for a CPA, is that the mortgage
company attempts to convert you from a Circular 230
practitioner simply restating facts from the return into a
CPA *ATTESTING* to various financial and other facts in
reliance on your professional nontax training.

Well, it seems to me that you are being asked to provide
some kind of an "attestation" and, therefore, you may fall
subject to any and all laws, rules, regulations, standards,
etc. that might apply (including, conceivably, peer review).

My own policy is that I will *not* provide any comment
(especially "written") to third parties with respect to tax
returns. Period. A tax engagement is just that: It is
undertaken to prepare a return for filing with the
applicable taxing authority and not for any other purpose.
If other people, such as mortgage companies, choose to use
that information for a purpose other than for which it was
intended, I will decline to be "associated" with that
endeavor.

I've had several unpleasant run-ins with mortgage bankers
over this, but that's the way it goes. When clients ask me
to send a copy of their return to a mortgage company (or
insurance company, or whatever), I politely "refuse". But,
I'll send copies to the *clients* if they have misplaced
theirs for a $15 - $30 fee (depending on delivery method). I
also advise the clients that I will *not* discuss *anything*
with their mortgage banker - so don't give 'em my phone
number. <g>

Further, if a mortgage company insists on receiving a copy
of the return that bears my signature (or requests a copy
mailed *directly* to them from me in a sealed envelope,
etc.), I advise the client to authorize the mortgage company
to obtain a "certified" copy directly from the IRS. After
all, dear mortgage company, *I* have no way of knowing what
the client actually filed! (I don't efile.)

If someone wants to hire me as a "mortgage negotiator",
that's an engagement that I might consider accepting.
However, if I were to do that, I would *not* prepare any of
the tax or financial information that was incorporated in
the loan package.

Lines have to be drawn somewhere. <g>

MTW

Please reply to newsgroup - unsolicited email ignored.

I would suggest you stay out of this situation unless a
client of yours is involved.

Wayne Brasch, CPA, M. S. Taxation

I have had a few of these over the last two years. I find
them troublesome and they really put me in a quandry
regarding responding to them. Therefore, I require:
1. Written disclosure authorization from my client,
including spouse if applicable,
2. Spell out in a letter that I am only confirming the
particulars contained within a tax return that I
prepared.
3. Make no other assurances or representations, especially
as to the future.

I would refuse to provide any such statement for a non
client.

I charge my clients a fee for the service...it takes my time
and opens me to liability and I feel I am well within my
rights and should charge for this. After all, who knows what
risk I am taking on?

I would be more comfortable if I felt I could refuse to
cooperate entirely. But, I feel that written authorization
from my clients should cover me and I really limit the
amount of "disclosure".

Catherine R. Reneau

I suspect they want you to confirm the tax return is real.
Anybody can gin up any kind of tax return. One for the IRS
and one for the mortgage lender. But if they know it's a
"real" tax return, they can usually discount the possibility
that someone would pad their income to create real tax
liability in order to qualify for a mortgage they can't
afford.

This approaches mortgage origination fraud. The broker is
stuffing the file. Even if it was a client, you have no
basis at all for assessing the likelihood of his continued
self-employment, and you don't want to pretend that you do.
If it's not a client, how could you know that the person is
even really self-employed. Accountants can get in trouble
for conspiring with borrowers and brokers to defraud
lenders. Remember the incentives at work here. The borrower
wants the money, the broker wants the fee he'll get if
someone makes the loan. You are making representations to
the lender and eventually some market-maker like Fannie Mae
who buys the lender's mortgage loans and issues
mortgage-backed securities to investors, all based in part
on your representations that the borrower satisfies their
origination criteria. If the loan tanks, Fannie Mae will
have to pay off the investor, they will force the bank to
buy back the mortgage, and the bank will start trying to
figure out whether they were defrauded. They aren't going to
find any representations from the broker related to loan
qualifications. And when they come to you, you're not going
to be able to say, "I just said what the broker told me to
say."

I think you can safely say what you know, which is "I
prepared the attached returns based on information provided
by the client, including Forms 1099-Misc which indicated the
apparent receipt of income properly classified as
self-employment income, and reported as such on Schedule C
to the attached returns." If you want to be real careful,
you might add that you did not personally file the return
(unless you did), nor confirm that the 1099s were bona fide
(which nobody does). I would expect my accountant to do
that, but no more, for free, but that's because I pay him
too much money already every year. That's a joke -- the
point is that he would do it for free because I'm a good
client and he knows me well enough and for long enough to
know that I'm not setting him up. But I wouldn't expect a
brand new accountant to do it at all. And if you're doing it
for a fee for anybody the broker sends over, it looks all
the more suspicious when it turns out to have contributed to
a fraud even if you didn't have any actual knowledge.

J. Noble

Good grief, Charlie Brown! I can't comment on any liability
you may be standing under, but I can say that I will not
provide any such a letter to any mortgage lender. I agree
with you, the tax return that I prepare speaks for itself.
I've certainly no crystal ball with which to predict if
client will remain self employed.

Cheer$,
Harlan Lunsford

It sounds like your clients may be doing what is called a
"stated income" loan. With this type of mortgage loan the
lender does not verify the applicant's income. In exchange
for a higher loan rate the lender accepts the clients
statement of his income and cannot in many cases look at the
tax return. A bank statement showing existing cash and a
letter verifying employment is all that the lenders require.
For self employed individuals the lender will seek
employment verification from a tax preparer, attorney, or
any other person who would be in a position to verify the
applicants self employed status.

The "stated income loan" and the similar "no documentation
loans" may seem strange concepts, but they are legitimate
mortgage products that mortgage brokers and lenders see
frequently.

Jim Howard

In all honesty the credit bureau people (like D&B) are
getting really annoying also, how reliable is info they get
if its given over the phone???? Marty

That they may be--but CPAs still have to be very careful
about what they sign because, in the area of attest
services, a CPA's report has a very special significance.

As I said, I have no problem with a letter describing what
is on the return. I do have problems with interpretations
going beyond that point (including the extreme case of
asking the preparer to attest to the fact that the borrower
will *continue* to be self-employed).

Linda Dorfmont EA

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Moderator:
He who responds to threats is a wimp.
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When you think about it, that's almost exactly the tact
someone what wanted to gain *unauthorized* access to the
client's information would attempt to use (you have to act
*now*, you don't have time to contact the client and get
formal permission, etc.). I explain that to the client if
they are at all upset about why I'm asking for specific
permission.

OK - how about a negative type of confirmation for continued
employment? I have had 2 or 3 lenders ask for confirmation
of continued self employment and have responded with
something like "I have been preparing the tax returns for
Mr. X for the last XX years. In that time, he has always
been self employed. I have no information at this time that
indicates that Mr. X has any intention of ceasing his self
employment status."

This seems to have satisfied the lenders while accommodating
the client and my attorney seems to feel that it also
protects me as well.

What do you think?

Gene E. Utterback, EA

Unfortunately for a CPA, that last sentence reads a lot like
a review report and conceivably it could be asked whether a
CPA should have taken steps that would have uncovered such
an intention before making such a statement. You've also
opened yourself up if it is shown at a later time that you
or your staff was aware of *any* fact that the lender later
could make a case was the "indicator" that the client was
not going to continue being self-employed.

In some ways, this is the equivalent of the "going concern"
issue under GAAS. If I've performed an audit, I'm in a
position (or should be) to make a call about the ability to
continue as a going concern (which is essentially what we
are asking about here). But if I've done no attest work for
the client, I'm very uncomfortable making that call.

I would probably drop that last line and send it on to them.
I don't see a problem reporting the facts--I do see a
problem commenting at all on his continued status,
especially as a CPA.

Looks OK to me.

> What do you think?

I wouldn't do it. If pressured to make an accommodation, I
might request a representation letter from the client saying
exactly what you said (and including an authorization to
disclose the information to the lender). Then, I would
forward the client's letter to the lender marked "per your
inquiry".

Here's my drift: If the lender won't accept the word of the
client on this matter, then they are obviously trying to
make *you* responsible in some way. This is clearly a
position that I cannot allow myself to be put in.

MTW

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I'm with Ed on this one. Strike the last sentence. It's too
much like a prediction of something I can't verify.

Tom

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I think the operative phrase here is, "my attorney seems
to feel that is also protects me."