Federal Dodd-Frank legislation is continuing to send shock waves throughout the banking world and CPAs are feeling some of the effects.
CPAs on our federal and state tax listservs are reporting an uptick in requests for “comfort letters” from CPAs for client’s mortgage and loan applications. Some are saying “the new regulations are requiring this.
AON/CNA, our insurance preferred provider has some guidance for us.
Danger! This is an attempt to get the CPA (and your liability insurance) as a backstop to the client in the event the loan goes south.
The issue is that the CPA’s work with individuals in tax returns and personal financial statements rarely incudes an actual audit or review. The CPA is relying in the individual taxpayer for disclosure and documentation and therefore should not take the additional repsonsibility some lenders are trying to establish.
And it is not a “new requirement” (although it was an option) and Freddie Mac has revised it guidelines to reflect this as follows,
Note that effective February 15, 2012, Freddie Mac revised its Single Family Seller/Servicer Guide to remove the option of obtaining a letter from a self-employed borrower’s accountant which states the 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. Section 37.13(b) of the guide, detailing, “stable monthly income and asset qualification sources,” now indicates 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 and must be related to the business that the borrower owns that is documented in the mortgage file. Because the borrower’s withdrawal of assets from a sole proprietorship, a partnership or a corporation may have a negative impact on the business’ ability to continue operating, the impact of withdrawal must be considered in the seller’s analysis of the borrower’s self-employed income. As part of the analysis, the seller must document a cash flow analysis for the borrower’s business using the individual and/or business tax returns, as applicable. The seller may perform the required analysis using any format that enables the seller to determine that the withdrawal of the funds for the down payment and closing costs, financing costs, prepaids/escrows and reserves will not have a detrimental effect on the business The mortgage file must contain the seller’s written cash flow analysis and conclusions.
Here is the AICPA AON/CNA resource center with guidance on comfort letters and samples you can use that keep you safe from unnecessary liability and within profesisonal standards. Click here.
Look for more guidance from us to help you with risk management with all these and other areas that are in flux.
And this is great time to register for CPA Day in Annapolis on January 16, 2013 where we expect professional liability to come up again and we will need to mobilize! Register for free here.
Be safe out there!