A borrower has a 7-year ARM with a prepayment penalty clause that charges 3% of the outstanding balance if the loan is paid off in years 1-3, and 1.5% in years 4-5, with no penalty in years 6-7. The loan originated post-Dodd-Frank as a Qualified Mortgage. The borrower refinances in month 30. The outstanding balance is $185,000. What is the penalty, and is this QM-compliant?

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$5,550; this is NOT QM-compliant because Dodd-Frank limits prepayment penalties on ARM QMs to a maximum of 2% in years 1-2 and 1% in year 3, making the 3% charge in month 30 (year 3) non-compliant Month 30 = year 3 (months 25-36). Dodd-Frank (Regulation Z, 12 CFR 1026.43) permits prepayment penalties only on fixed-rate QMs under specific conditions, but for adjustable-rate QMs, prepayment penalties are limited to: 2% of outstanding balance if paid off in year 1 or 2, and 1% if paid off in year 3. After year 3, no prepayment penalty is permitted on any QM. The 3% charge in year 3 (month 30) exceeds the 1% cap. Penalty calculation: 3% × $185,000 = $5,550. This charge is NOT QM-compliant. "$5,550; this is NOT QM-compliant because Dodd-Frank..." applies the 3% charge and incorrectly validates it. "$5,550; this is QM-compliant because the loan is an..." applies the wrong rate (1.5% = $2,775) and incorrectly validates it. "$5,550; this is NOT QM-compliant because Dodd-Frank..." is wrong because QM rules DO permit limited prepayment penalties on ARMs (just not exceeding 2%/1%); the issue is the excessive rate, not a blanket prohibition.

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