Why Mortgage Comfort Letters Breach CPA Professional Standards

What Are Mortgage Comfort Letters Anyway?

At first glance, a mortgage comfort letter might seem like no big deal. A lender asks a CPA to confirm a client’s income, verify their self-employment, or “assure” them that a borrower is financially sound. Seems simple, right?

Not exactly.

These letters aren’t just friendly confirmations. What lenders are really after is assurance, a formal, professional opinion that gives them confidence about the borrower’s ability to repay the loan. But assurance isn’t something CPAs can casually hand out. In fact, doing so can get them in serious trouble.

Why Lenders Ask for Comfort Letters

Lenders want comfort letters because they believe they provide an extra safety net. If the borrower defaults on the loan, the lender wants documentation that shifts liability to someone else, often the CPA.

So, when a CPA writes a letter confirming income or business viability outside the scope of an engagement, it opens the door to lawsuits. That’s why many CPA firms simply refuse to provide these letters.

In plain terms: Lenders are asking CPAs to take responsibility for things outside their scope, and that’s a major problem.

Where These Letters Cross the Line

According to the American Institute of Certified Public Accountants (AICPA), comfort letters like these often cross ethical and legal lines. Here’s why:

• They violate assurance standards. CPAs are only allowed to provide assurance (i.e., verification or confirmation) through specific, regulated services like audits, reviews, or agreed-upon procedures.
• They create legal liability. If a CPA provides a comfort letter and the loan goes south, the CPA can be sued, even if they had no control over the outcome.
• They breach E&O insurance policies. Most Errors and Omissions insurance providers won’t cover claims arising from unauthorized third-party letters. That means the CPA firm is left holding the bag.

As the AICPA outlines in their official guidance on Third-Party Verification Letters, issuing these types of letters can easily go beyond what’s permissible and expose firms to risk.

What Professional Standards Say

The AICPA, state boards, and CPA insurance providers have been crystal clear: CPAs should not issue these types of letters because:

1. They are not part of an assurance engagement.
   1. These letters don’t meet the requirements for a compilation, review, or audit.
2. They violate attestation standards.
   1. Comfort letters often imply assurance without following the procedures required to back it up.
3. They may constitute the unauthorized practice of law or financial advising.
   1. Confirming the viability of a borrower’s business could be interpreted as offering financial guarantees, which CPAs are not allowed to provide unless properly engaged.
4. They mislead the recipient.
   1. When a CPA says something in writing that sounds like an opinion or confirmation, it’s often misunderstood as factually or professionally backed, something that can only happen in formal assurance services.

Real Talk: What Happens if a CPA Writes the Letter Anyway?

Well, here’s what might go down:

• The lender approves the loan based on the CPA’s letter.
• The client defaults on the mortgage.
• The lender sues the CPA firm, claiming they relied on the CPA’s assurances.
• The CPA’s insurance denies the claim because it wasn’t a covered service.
• The firm ends up paying legal fees or settlements out of pocket.

In other words, what might have seemed like a helpful gesture turns into a professional and financial nightmare.

Common Lender Responses and How to Handle Them

Lenders often push back when a CPA refuses to issue a comfort letter. Here’s what they might say and what you (or your CPA) can say in return:

Lender: “Other CPAs do this all the time.”

CPA Response: “That may be, but they are either violating AICPA standards, operating without a CPA license, or exposing themselves to legal risk. We don’t operate that way.”

Lender: “We just need something in writing for our files.”

CPA Response: “We can provide a letter stating we prepared the tax return in accordance with IRS rules, but we cannot offer opinions or guarantees about future income or business viability.”

What Can CPAs Do Instead?

Good news, just because comfort letters are off the table doesn’t mean clients are out of options. Here’s what your CPA can legally do:

1. Call the lender directly.
   1. Sometimes a conversation clears things up. Once the lender understands the professional boundaries, they often back down from their initial request.
2. Provide a tax return verification letter.
   1. CPAs can confirm they prepared the tax return and that it was filed with the IRS in compliance with all applicable laws.
3. Direct the lender to public or submitted documentation.
   1. If the lender needs specific info, your CPA can help them locate it in previously submitted documents like tax returns or financial statements.
4. Suggest a formal assurance engagement.
   1. If the lender insists on assurance, the CPA can offer a compilation, review, or audit, but these come with cost, time, and scope commitments.

Types of Assurance Work (And Their Limitations)

To understand why comfort letters fall short, let’s briefly go over the actual forms of assurance CPAs are allowed to provide:

• Compilation:
  • The CPA organizes and presents financial data with no assurance.
  • Cost: $2,000–$4,000
• Review:
  • The CPA does limited testing and provides moderate assurance.
  • Cost: $5,000–$10,000
• Audit:
  • A deep dive into financials with high-level assurance, usually for investors or public reporting.
  • Cost: $15,000–$25,000
• Agreed-Upon Procedures:
  • A forensic-style engagement where specific tests are done per the client’s request.
  • Cost: $10,000+

Still, none of these services guarantee what a mortgage lender typically wants from a comfort letter, which is a personal financial endorsement.

Why This Matters for Clients

If you’re a borrower, we get it. You’re just trying to close a loan, and the lender is asking for something they claim is standard. But here’s the thing:

• Comfort letters aren’t standard.
• They put your CPA in a compromising position.
• Most lenders will back off when the issue is explained.

Your CPA isn’t trying to make your life harder. They’re protecting their firm, their license, and ultimately, you, from entering a shady legal gray area.

The Bottom Line (And What to Do Next)

Instead of pushing for a comfort letter, talk to your CPA about alternative documentation. Most lenders just need verification that someone credible prepared your tax returns or that your business income is being reported properly.

If your lender insists on a letter that crosses the line, consider:

• Having your CPA explain the issue directly to them
• Asking the lender to revise the request
• Seeking a formal assurance engagement, if absolutely necessary

Remember: comfort letters are a red flag, not a requirement. Follow the professional standards, and you’ll still get that mortgage without putting your CPA in legal jeopardy.

FAQs

Can a CPA verify self-employment for a mortgage lender?
Yes, but only in very limited ways, such as confirming tax return preparation, not confirming the success or viability of the business.

Why do lenders insist on comfort letters?
Many are misinformed or are looking to shift liability. Once informed, most are willing to revise the request.

What’s the difference between a comfort letter and a verification of tax return?
A comfort letter provides informal assurance or confirmation of financial matters. A verification letter simply states that a return was prepared and filed.