A Closing Disclosure lists a $780 appraisal fee and a $1,450 homeowner-insurance premium paid in advance. Which classification correctly distinguishes the appraisal service from the prepaid insurance within the Closing Disclosure?
Correct Answer
A) Appraisal: Loan Costs; advance insurance premium: Prepaids under Other Costs
A. The appraisal is a Loan Cost; advance homeowner insurance is a Prepaid under Other Costs. Classify by the purpose of the charge, not simply the day it is paid. The $780 purchases the appraisal service; the $1,450 pays insurance for a coverage period in advance. Scope and exceptions: Prepaids still contribute to closing-cost totals. An advance premium is also distinct from an initial escrow deposit for future payments. Source: 1026.38(f), (g)(2)–(3), (h) — https://www.consumerfinance.gov/rules-policy/regulations/1026/38/ 1026.37(g)(2)(i), incorporated by 1026.38(g)(2) — https://www.consumerfinance.gov/rules-policy/regulations/1026/37/
Why This Is the Correct Answer
A. The appraisal is a Loan Cost; advance homeowner insurance is a Prepaid under Other Costs. Classify by the purpose of the charge, not simply the day it is paid. The $780 purchases the appraisal service; the $1,450 pays insurance for a coverage period in advance. Scope and exceptions: Prepaids still contribute to closing-cost totals. An advance premium is also distinct from an initial escrow deposit for future payments.
Why the Other Options Are Wrong
Option B: Appraisal: Prepaids; advance insurance premium: appraisal service charge
It reverses the nature of the charges.
Option C: Both belong in Loan Costs because both are paid at closing
Payment at closing does not put every charge in Loan Costs.
Option D: Both belong in Prepaids because payment occurs at closing
A charge is not a Prepaid merely because it is paid at closing.
Exam Tip
Use the disclosure category, not the broad phrase “closing expense.”
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