According to the Dodd-Frank Act, which type of loan is prohibited under the qualified mortgage (QM) rule?

The qualified mortgage (QM) rule, established under the Dodd-Frank Act, is designed to ensure that borrowers are provided with loans that are more likely to be sustainable and affordable. One of the key stipulations of the QM rule is the prohibition of interest-only loans.

Interest-only loans allow borrowers to pay only the interest for a set period, after which they are required to start repaying the principal. This structure can lead to payment shock when the borrower suddenly has to start making larger payments, which can increase the risk of default. By prohibiting interest-only loans under the QM rule, the Dodd-Frank Act aims to protect consumers from the potential pitfalls of taking on debt that could lead to financial instability.

While other loan types such as loans with upfront mortgage insurance premiums (MIP), adjustable-rate loans, and subprime loans have their own considerations and are not necessarily prohibited under the QM guidelines, interest-only loans pose a more significant risk of non-compliance with the QM standards focused on borrower debt sustainability.