How do Qualified Mortgages protect lenders?

Qualified Mortgages (QMs) provide legal protections to lenders by adhering to specific criteria set forth by the Consumer Financial Protection Bureau (CFPB). These criteria ensure that lenders offer loans that are more likely to be repaid, thereby reducing the risk of default and enhancing the stability of the lending institution. When a mortgage is classified as a Qualified Mortgage, lenders benefit from a "safe harbor" provision, which protects them from certain legal liabilities and claims related to the ability-to-repay rules mandated by Regulation Z.

The legal protections mean that if a borrower struggles or defaults, the lender cannot easily be accused of lending irresponsibly, as they followed the guidelines that determine what constitutes a Qualified Mortgage. This structured framework aids in risk management for lenders, essentially ensuring that their lending practices foster financial responsibility and compliance with the law.

In contrast, the other options do not describe the protective measures inherent in the design of Qualified Mortgages. Higher interest rates do not inherently protect lenders; they could potentially deter borrowers. Limiting loan amounts and requiring lower credit scores are not features of QMs designed to provide protection to lenders, and both could actually increase risk rather than mitigate it.