The Risks of Mortgage “Comfort Letters”

If you have applied for a mortgage recently (and especially if you are self-employed), your banker may have asked for a letter certifying items from your tax return. In the tax industry, we call these supplemental requests “comfort letters.” And these comfort letters pose a significant risk to our CPA firm license. So what are comfort letters? And why do they make CPA firms uncomfortable?

Comfort Letter Defined

A comfort letter is a document provided by a tax professional to a banker or other third party at the request of a client. Its purpose is to provide additional information or assurance regarding the financial condition of a company or individual. 

Bankers often request letters to obtain additional information regarding a borrower’s financial condition. Investors or other third parties who are considering entering into a financial transaction with an individual may also request letters. 

We’ve seen all types of requests from bank underwriters over the years. Some ask us to verify the numbers filed with the tax return. Some ask us whether the taxpayer’s business is solvent and can fund withdrawals needed to service the loan. What?!?

So Why Are Comfort Letters Dangerous to CPA Firms?

One of the biggest risks in providing a comfort letter is the potential for legal liability. If a banker or other third party relies on a comfort letter provided by a CPA and suffers a financial loss as a result, they may sue us for damages. Any information provided as support for the loan can leave CPA firms liable.

In addition, comfort letters pose a risk to our state CPA firm license. Comfort letters are considered an “attest” service. Attest services are defined as any engagement that requires the CPA firm to provide a conclusion about a fact or statement. There is a rigorous framework that CPA firms must follow to provide an attest service. This includes making the firm’s work papers subject to a peer review process. This can cost several thousand dollars per year. CPAs providing comfort letters without the correct licensing and procedures could have their license revoked.

As for comfort letters that request solvency verification, there’s no ethical way for CPA firms to respond to these requests. The American Institute of CPAs (AICPA), of which we are a member, has confirmed that CPAs are prohibited from responding to these types of requests.

How Does Our Firm Respond to These Requests?

We provide a standard letter similar to the one below. It confirms that we have prepared the tax returns in accordance with applicable laws and regulations using information supplied by the client. We also provide a reminder that credit worthiness is a due diligence activity of the banks and not us as the CPA firm. 🙂

I am writing to you at the request of Client Joe. The information reported on the calendar year 2021 return was prepared from information furnished to us by Joe. This information was neither audited nor verified by us. We make no representation nor provide any assurance regarding the accuracy and completeness of this information or the sufficiency of this tax return as it relates to your decision to extend credit to or make any other determination regarding Joe or any other persons or entities.

We prepared Client Joe’s tax returns in accordance with applicable tax law and regulations and guidance by the IRS and the state tax authority solely for filing with the tax authorities. As a result, the tax return does not represent any assessment on my part as to their creditworthiness and does not include any statement of their financial position or income and expense for the year in accordance with generally accepted accounting principles and should not be construed to do so. 

As you know, a credit decision, or any other determination for which this information might be used, should be based upon your exercise of due diligence in obtaining and considering multiple factors and information. Any information used by you from the federal individual income tax return and business tax returns is solely your responsibility and judgment.

By providing you with this letter, I have not established with you any direct or indirect client, contractual or quasi‐contractual relationship, nor is it intended to establish any obligation on my part to provide any future information to you regarding Client Joe.

Often, we find the banker never reads the letter and is simply asking to check the box off their list.

The AICPA has been working with banking industry groups to eliminate these requests. Federal backed loans (Fannie Mae and Freddie Mac) no longer request comfort letters. However, we still see these requested with many regional and local banks.

We will continue to do our part to push back on these types of requests to protect our CPA firm as well as others.