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Request from Lender

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#1
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I have a client...contractor who flips single-family houses. Organized as an LLC taxed as an S Corp.

As of 12/31/2020, the S Corp owned one single-family house that was mortgaged. For the 2020 return, we showed the house on Schedule L, along with the mortgage. The mortgage was reported on line 17 (Mortgages, notes, bonds payable in less than 1 year) as the mortgage is due on demand by the bank, or in December of 2021, whichever happens first.

This client usually turns over properties in 2-4 months, and has a track record of making a profit on each one. There's no doubt in my mind that this property will be sold by May.

Client is getting some of his rentals refi'ed. Lender contacts client who contacts me. The lender is subtracting line 17 from net taxable income (which wipes out all of my clients taxable income and creates a loss). Lender wants a letter from me that the debt is "rollover debt". Threatens that the loan can't be made without the letter from me.

I have reviewed the loan docs, and I see no provision for extension of the terms. It's clear that the debt is due on-demand or in Dec 2021, whichever happens first. Even if I wanted to, I don't think that I can write this letter.

How would you approach this?
 

#2
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NEVER write a letter of that nature to a lender. They know damn well you are not in a position to state it is "rollover debt" and their threat is most likely idle. I have never actually experienced a bank turning down a loan/refi or triggering a demand payment due to a CPA declining any such letter. Banks are pr***s on this front, but hold your position because 1) it is inappropriate and 2) it is high risk, as you know.

Find a way to put it back on the bank. I do that every single time when I respond to a bank saying I cannot write such a letter (except confirming I did prepare the tax return), including stating that due to the nature of the Internal Revenue Code, tax returns should not be relied upon for any lending decisions. I know it pisses them off, and I truly do not care--if the client is as good of a client to the bank and as profitable as you indicate, they are not going to want to ruin the relationship over something so petty when they have alternative methods for underwriting.
 

#3
JAD  
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Agreed. I also have been threatened with causing the loss of the transaction, which has never happened.

Dear Lender,

I understand that you want me to state that client's debt is "rollover debt". Doing so would be an attestation service, for which I am not engaged. Preparing such a report would require me to perform work in accordance with regulations promulgated by the AICPA, (state society), (whoever else you can think of). This work would be quite expensive for client.

I am sure you have attorneys on staff. I suggest that your team review the loan documents and reach a conclusion. I hereby formally notify you that I cannot provide any such assurance.

Sincerely,
MvT
 

#4
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Thank you Cornerstone and JAD.

I didn't want to write the letter, even if the loan documents stated what the lender wanted to hear. And I suspect that if the documents stated what the lender wanted to hear, the lender wouldn't have reached out to me.

I emailed and referenced my engagement letter, told them I'm not able to write the letter and suggested an alternate route that doesn't involve me.
 

#5
Frankly  
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"The loan documents should clearly state the terms of the loan. The client should be able to provide you a copy for your review."
 

#6
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+1 on not writing such a letter.

I would 100% not write such a thing.

I use something like JAD's response for these.

I also mention that getting such a letter from a firm that could provide such a service would be very expensive.

Additionally, I add something like, "I'm very sorry about that, I understand that this financing is very important to you, it's not that I don't want to help you", to make it more about the client and less about why you can't do it.
 

#7
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That has to be one of the most incredible requests I have seen. It seems like the bankers are becoming more brazen in their requests for us to do their job.

My response would be somewhere between JAD's and Frankly's response.
 

#8
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I don't even address the question when writing these letters. I provide a very "form letter" that says (paraphrasing): I prepared a tax return, didn't audit it, creditworthiness is your job not mine, and this letter doesn't make you a client or connect us in any way.
I rarely receive any further requests.
~Captcook
 

#9
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Points all well taken.

To add more color, this client's income dropped in 2020 as in 2019 the client had a large capital gain that did not repeat. The client had expressed concern about his debt-to-income ratios prior to return preparation. I am clear that I prepare the returns for filing with the IRS and state/local agencies, and that the returns aren't suitable for any other purpose, including determining creditworthiness, but I am sensitive to the client's needs and was able to help toward that end while preparing the returns (e.g. make an election to capitalize R&M for the client's rentals).

The client is a good client, and I think you can see that I wanted to help him out without violating the standards of my office and my profession.

It's unfortunate. And I look like the bad guy for declining to write the letter (I can tell the client is slightly agitated), but it is what it is. I don't know what to tell the client other than (frankly) make more money and/or decrease expenses.

There's no magic pill here.
 

#10
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Yeah - ^^ there's no easy answer and we lose sleep when this happens with our best clients.

Then, the loan brokers, often hungry for the commission, bad mouths us to the client in an effort to make us do it.

It's definitely one of the more stressful aspects of the job.

Hang tough and sleep well, you are doing all you can. Unfortunately, you can't attest to what they are asking. It's not an option.
 


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