Which feature would be classified as toxic under the qualified mortgage rule definition?

The correct answer is interest-only payments, as they can be classified as a toxic feature under the qualified mortgage (QM) rule. The QM rule was designed to protect consumers by ensuring that lenders evaluate a borrower's ability to repay the loan. Interest-only payment structures allow borrowers to pay only the interest for a certain period, which can lead to a situation where the principal balance does not decrease. This can create a financial burden later when repayments on the principal begin, potentially leading to default.

Interest-only loans can thus increase the risk of payment shock once the borrower transitions to paying both interest and principal, especially if property values decrease or the borrower's financial situation changes. This feature does not conform to the QM rule's standards for affordability and long-term repayment capacity, hence being considered toxic.

In contrast, adjustable-rate mortgages, defeasance clauses, and short-term loans may have their risks but do not inherently classify as toxic features under the QM guidelines. Adjustable-rate mortgages can be structured responsibly, and defeasance clauses relate more to prepayment penalties, while short-term loans can still align with safe lending practices if the borrower has the means to repay.