What situation classifies a second lien loan as a Higher Priced Mortgage Loan (HPML)?

A second lien loan is classified as a Higher Priced Mortgage Loan (HPML) when its annual percentage rate (APR) exceeds the Average Prime Offer Rate (APOR) by more than 3.5 percentage points. This classification is significant because it triggers additional regulatory requirements aimed at protecting borrowers, as HPMLs are considered to carry a higher risk due to their cost structures compared to other loan types.

The rationale behind this threshold is to ensure that loans priced significantly above prevailing market rates are monitored closely for potential predatory lending practices. Borrowers with HPMLs may face greater costs, so added regulatory scrutiny is intended to promote fairness and transparency in the lending process.

The other options do not accurately define the criteria for classifying a second lien loan as an HPML. The first option, which mentions a 2.5% threshold, is not the correct measure for HPML classification. Similarly, being a fixed-rate mortgage or not meeting debt-to-income (DTI) requirements does not directly influence whether a second lien loan is classified as an HPML; these are different factors that pertain more to the borrower's overall risk profile and loan structure rather than pricing relative to the APOR.