Structured finance is back, and with it comes all of the duediligence requirements, including the often misunderstoodProbableMaximum Loss Report. Credit officers and underwritersneed to understand a few basics about the Probable Maximum LossReport to meaningfully use these reports as an underwritingtool.

The goal of the process of rating buildings for seismic risk isto protect your portfolio and downstream investors from a doublehelping of seismic risk. The PML Report cannot completely eliminaterisk from a seismic event—we don’t report the distance of the assetto a nuclear reactor—but the PML will fail buildings that are atgreatest risk during an earthquake. Note lenders that don’trequire PMLs might find that their portfolio suffers from adverseselection; essentially getting a double helping of seismicrisk.

To use the Probable Maximum Loss Report well a lender needsconsistency. If you are going to measure anything, youwant to do it by the same method every time. So here are fourbasic steps to get consistency.