According to the Truth in Lending Act, which of the following fees is excluded from the calculation of the annual percentage rate?

Under the Truth in Lending Act (TILA), the annual percentage rate (APR) is an important figure that reflects the total cost of borrowing, expressed as an annual rate. Certain fees are excluded from this calculation to ensure that the APR accurately represents the financing costs of obtaining credit.

Hazard insurance, which is a type of insurance that protects against damage to the property being financed, is considered a necessary expense for obtaining a mortgage but is not finance-related in the sense that it does not contribute directly to the cost of borrowing money. Because TILA is designed to provide borrowers with a clear picture of the costs associated with borrowing, it excludes expenses like hazard insurance from the APR calculation, as they are not finance charges.

On the other hand, wire transfer fees, prepaid interest, and mortgage insurance premiums are costs associated directly with obtaining the loan or securing the borrower’s financing and are thus included in the APR calculation. This distinction helps to prevent borrowers from being misled by the APR figure, as it reflects only the costs that are directly related to credit cost rather than ancillary costs like insurance. As a result, hazard insurance is the fee that remains excluded from the APR under TILA guidelines.