What is a Qualified Mortgage (QM)?
A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that a borrower will be able to afford their loan. Lenders that originate QM loans gain a 'safe harbor' or a rebuttable presumption of compliance with the Ability-to-Repay (ATR) rules.
To be designated as a QM, a loan must avoid risky features like negative amortization, interest-only periods, and balloon payments. Critically, it must also pass the points and fees cap test under Regulation Z (12 CFR 1026.43).
The CFPB Points and Fees Thresholds
The most well-known cap is the 3% limit, but the Consumer Financial Protection Bureau (CFPB) actually uses a tiered system based on the total loan amount. These thresholds are adjusted annually for inflation.
For standard loans (typically those over a threshold around $125,000 to $130,000, depending on the current year's limits), the total points and fees cannot exceed 3% of the total loan amount. For smaller loans, the allowable percentage is higher, up to 5% or 8%, or a fixed dollar amount, to allow lenders to cover fixed origination costs.
What Fees Are Included in the Cap?
Not all closing costs are considered 'points and fees' under the QM rule. The calculation specifically targets fees that compensate the lender or broker.
Included fees generally encompass origination charges, broker compensation, real estate-related fees paid to an affiliate of the lender, and certain prepayment penalties. Third-party fees (like appraisals or credit reports) paid to non-affiliates are usually excluded, as are bona fide discount points meant to lower the interest rate.
How to Calculate the QM Points and Fees Limit
Calculating the cap requires identifying the exact total loan amount and applying the relevant CFPB tier percentage.
The Formula: Maximum Allowable Fees = Total Loan Amount x CFPB Tier Percentage. Total QM Fees = Sum of all applicable origination, broker, and affiliate fees.
Worked Example: Consider a standard loan of $200,000. Because it is above the higher threshold, the 3% cap applies. 3% of $200,000 is $6,000. If the borrower's origination fee is $3,500, broker fee is $2,000, and a non-affiliate appraisal is $600. The included QM fees are $3,500 + $2,000 = $5,500. The $600 appraisal is excluded. Because $5,500 is less than $6,000, the loan passes the points and fees test.
Frequently asked questions
What happens if a loan exceeds the points and fees cap?
If a loan exceeds the applicable cap, it cannot be classified as a Qualified Mortgage. The lender loses the safe harbor protection under the Ability-to-Repay rule, opening them up to significant legal and financial liability.
Are discount points included in the QM points and fees calculation?
Bona fide discount points used to permanently lower the interest rate are generally excluded from the calculation, up to a certain limit (usually up to 2 points), provided the pre-discount interest rate meets certain benchmarks.
Do the QM thresholds change every year?
Yes, the CFPB adjusts the loan amount thresholds and the fixed dollar cap amounts annually to account for inflation, using the Consumer Price Index (CPI).
Are title insurance fees included in the cap?
Title insurance fees are excluded from the points and fees calculation if the title company is entirely unaffiliated with the creditor. If the title company is an affiliate of the lender, the fees must be included.