When applying for a loan, a bank will use different ways to verify the income of a borrower.
With the continued uncertainty of COVID and the desire of many lending institutions to “shift” the credit risk away from the lender, we are seeing more and more situations where Accountants are being asked to provide letters to support a loan application.
Some examples of information that has been requested to be provided on an Accountants letter include:
- That past income is representative of future income;
- Ability to service a loan;
- That you will use an asset for business purposes; and
- Confirming future distributions from a trust.
Why is this a problem?
Put simply, we are unable to predict or confirm any of the above information any better than the client that we would be providing the letter for. Therefore, the question is why will the bank require a signature on a letter from an Accountant confirming any of the above if we are simply relying on information already provided by the client?
Put simply, the Lender is looking to hold the Accountant liable if anything was to go wrong!!
Why can’t we sign these letters?
1. The National Credit Act prevents any person or corporation that is not properly licensed to provide a certificate or assessment relating to the ability to make loan repayments.
2. Our Professional Indemnity Insurance does not cover these types of letters. We therefore are unwilling to put our business at risk to provide such letters.
3. CPA Australia (of which we are proud members) has provided guidance that specifically warns against providing letters for a bank that do more than confirm any factual information.
Click here to view the guidance notes from CPA Australia.
What letters can we provide?
As a guide, there are circumstances where we can provide you with a letter to support your loan application. Generally where we are asked to confirm “factual” or “historical” information we will be able to provide you with a letter.
Examples of such letters will include:
- Confirming your business structure;
- That tax returns have been lodged and pending processing; or
- That an entity is not currently trading.
We understand that lenders will ask for letters from us as your Accountant’s and you may feel that we are not supporting you if we do not provide this for you. Nothing is further from the truth – we want to help you and not hold you back.
However, you must understand that there are boundaries with what we can provide and therefore you should be aware of these boundaries before you agree to obtain a letter from us.
If you are asked to provide a letter from an Accountant, consider the following:
1. Suggest to the lender that it is not the responsibility of your Accountant to confirm future income. (This works and we have seen many situations where lenders still approve the loan without the letter.)
2. Providing interim or year-to date financial information.
Remember, every client’s situation is unique and as such it is important that you discuss your specific circumstances with us to address your specific questions.
We are here to help!