Mortgage Loan Originator (MLO) Licensing Practice Test

According to TILA, which of the following is excluded from the APR calculation?

1. Hazard Insurance

2. Closing Costs

3. Loan Origination Fees

4. Escrow Fees

The correct answer is: Hazard Insurance

The Annual Percentage Rate (APR) is a key metric that reflects the total yearly cost of borrowing expressed as a percentage. The Truth in Lending Act (TILA) regulates how lenders disclose the APR to borrowers, emphasizing transparency and standardization in lending practices. Hazard insurance is not included in the APR calculation because it is considered a separate expense from the loan itself. The costs that contribute to the APR are primarily those that are directly associated with the loan, such as interest and certain fees that the lender charges. Since hazard insurance is a type of insurance that protects the borrower’s property against damage, it does not represent a cost of borrowing money from the lender. Instead, it is seen as a necessary expense that the borrower must incur for risk management purposes. In contrast, closing costs, loan origination fees, and escrow fees are all integral to the loan transaction process and are included in the APR calculation. These costs impact the overall cost of the loan and provide borrowers with a clearer picture of how much they will be paying over the life of the loan. By excluding hazard insurance from this calculation, TILA ensures that borrowers are not misled about the cost of credit based solely on additional expenses that are not fundamentally related to the terms of the loan.