Nationwide Mortgage Licensing System (NMLS) Practice Exam

According to the Truth-in-Lending Act (TILA), which of the following fees is EXCLUDED from the calculation of the annual percentage rate?

1. Hazard insurance

2. Wire transfer

3. Prepaid interest

4. Mortgage insurance premiums

The correct answer is: Hazard insurance

Under the Truth-in-Lending Act (TILA), the annual percentage rate (APR) is a measure intended to give borrowers a clearer understanding of the true cost of their loans. When calculating the APR, certain fees are included while others are excluded. Hazard insurance fees are typically considered part of the costs associated with protecting the property rather than costs of obtaining the loan itself, and thus they are not included in the APR calculation. This is because TILA focuses on fees that are directly tied to the credit provided, such as interest rates and certain other loan-related charges. In contrast, wire transfer fees, prepaid interest, and mortgage insurance premiums are generally included in the APR calculation because they are directly related to the cost of obtaining the loan. Specifically, wire transfer fees relate to the processing of funds for the transaction, prepaid interest impacts the cost of borrowing as it is interest paid in advance, and mortgage insurance premiums can affect the lender's overall risk and the cost to the borrower. Thus, the exclusion of hazard insurance from the calculation of the APR aligns with the intent of TILA to provide a standardized measurement of loan costs by excluding those fees that do not relate directly to the lending costs themselves.