Definition
Minimum Retention Requirement (MRR)
The Minimum Retention Requirement is the share of a securitised loan pool that the originator must keep, ensuring it retains skin in the game.
To prevent the 'originate-to-distribute' abuses that fuelled the 2008 crisis, the RBI requires loan originators to retain a minimum economic interest in any securitisation. This aligns the originator's incentives with investors, since it shares in any losses.
Alongside the MRR, the RBI sets a Minimum Holding Period that loans must season on the originator's books before they can be securitised. Together these rules ensure the originator has underwritten the loans properly before passing them on.
Related terms
- Direct AssignmentDirect assignment is the sale of a pool of loans by an NBFC or bank directly to another lender, transferring the cash flows and a share of the risk.
- Securitisation (Loans)Securitisation is the pooling of loans and issuing of tradable securities backed by their cash flows, letting originators raise funds and transfer risk.
- Pass-Through Certificate (PTC)A Pass-Through Certificate is a security issued in a securitisation that passes the principal and interest from an underlying loan pool to investors.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.