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Qualified Mortgage (QM) is a category of residential mortgage that meets federal ability-to-repay (ATR) standards and, when applicable, limits on points and fees. Lenders that originate QMs receive certain legal protections (safe harbor or rebuttable presumption) against borrower claims that the lender did not make a reasonable determination of ability to repay. QM rules are issued by the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Act and Regulation Z. A loan cannot be a Qualified Mortgage if its points and fees exceed the permitted cap. That cap is often referred to as the QM fee cap or points-and-fees cap.

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Why QM matters

  • Lender protection — QM status gives lenders a defined legal safe harbor (or rebuttable presumption) for ATR compliance.
  • Consumer protection — QM rules restrict certain risky features and, for covered loans, cap upfront points and fees so that total loan cost stays within prescribed limits.
  • Pricing and eligibility — When you run pricing or optimal-structure calculations, a proposed structure may be flagged as ineligible if it would violate the QM fee cap. Pylon surfaces this as a QmFeeCapViolation in pricing response types (e.g. in the full rate sheet or most-optimal-structure flow). See Pricing optimizations (Overview) for how ineligibility and structuring errors are returned.

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QM fee cap (points and fees)

The QM rule limits the amount of points and fees that can be charged on a loan that is to be treated as a Qualified Mortgage. The cap is expressed as a percentage of the total loan amount (or a fixed dollar amount for certain smaller loan sizes). If points and fees exceed the cap, the loan does not meet the QM points-and-fees test and is not a QM for that reason.

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Cap structure

The cap varies by loan size. For larger loans (e.g. $100,000 and above), the cap is typically 3% of the total loan amount. For smaller balances, the percentage is higher and/or a fixed dollar amount applies. Exact thresholds and dollar amounts are set by the CFPB and are adjusted periodically (e.g. for inflation). Lenders and systems must use the current regulatory values when determining QM eligibility.

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What counts as points and fees

Under Regulation Z, points and fees generally include:
  • Origination and lender charges — Loan origination fees, underwriting fees, processing fees, and similar charges retained by the lender or affiliate.
  • Compensation to loan originators — Broker fees and certain compensation paid to the lender’s or broker’s loan originators.
  • Items included in the finance charge — Certain premiums or charges that are part of the cost of credit (e.g. some credit insurance premiums if they are required or retained by the lender).
  • Prepayment penalties — Amounts that would be charged if the borrower prepays, to the extent they are included in the points-and-fees calculation under the rule.
Excluded from points and fees (in general) are:
  • Bona fide third-party charges — Fees paid to unaffiliated third parties for services (e.g. appraisal, title) that are not retained by the lender, to the extent permitted by the rule.
  • Certain government and recording fees — Recording fees, transfer taxes, and similar charges as specified in Regulation Z.
  • Bona fide discount points — Under the rule, discount points may be excluded in certain circumstances if they meet the regulatory definition of bona fide discount points.
The precise list of included and excluded items is determined by Regulation Z and CFPB guidance. Systems like Pylon apply the regulatory definition when evaluating whether a loan structure would exceed the QM fee cap.

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QM and pricing in Pylon

When the pricing engine evaluates loan structures (e.g. full rate sheet or most optimal structure), it checks whether a structure would violate program rules and constraints. One of those checks is the QM fee cap. If a structure’s points and fees would exceed the permitted cap for a QM loan, that structure is marked ineligible and the response includes a QmFeeCapViolation (or similar) so you can show the borrower why that option is not offered or adjust the structure. This allows you to:
  • Only present options that comply with the QM points-and-fees limit when you intend to originate QMs.
  • Explain to borrowers or internal users why a given rate or fee combination is not available (e.g. “This structure would exceed the Qualified Mortgage fee cap”).
For where QmFeeCapViolation appears in the API, see Overview – Pricing response types and the Full rate sheet documentation.