A California lender discloses an APR on a deed of trust loan that is higher than the loan's stated interest rate on the promissory note. Which of the following best explains why the APR exceeds the stated rate?
Correct Answer
B) The APR incorporates additional finance charges such as discount points and origination fees, spreading them across the loan term as an annualized rate
Under the Truth in Lending Act (TILA), lenders must disclose the APR, which represents the true cost of borrowing by incorporating the stated interest rate plus certain finance charges — such as discount points, origination fees, and mortgage broker fees — expressed as an annualized percentage. Because these costs effectively increase the total amount paid beyond what the note rate alone reflects, the APR is higher than the stated rate.
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Related Topics & Key Terms
Key Terms:
Related Concepts
RESPA is a federal law that requires lenders to provide borrowers with information about settlement costs, prohibits kickbacks and referral fees, and limits escrow account deposits. It applies to federally related mortgage loans.
The secondary mortgage market is where existing mortgage loans are bought and sold between lenders, investors, and government-sponsored enterprises (GSEs) like Fannie Mae, Freddie Mac, and Ginnie Mae.
TILA is a federal law that requires lenders to disclose the true cost of credit to borrowers, including the annual percentage rate (APR), total finance charges, and loan terms. It is implemented by Regulation Z.
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