The credit terms a seller may not take from you

The short answer

A Federal Trade Commission trade regulation rule titled Credit Practices makes it an unfair act or practice, in connection with the extension of credit to consumers, for a lender or retail installment seller to take or receive from a consumer an obligation containing any of four specific terms.

The four are a confession of judgment or similar waiver of the right to be heard, a waiver of exemption from attachment or execution on property, an assignment of wages outside three named exceptions, and a nonpossessory security interest in household goods other than a purchase money security interest.

The rule adds a fifth requirement about cosigners, and a sixth about how late charges may be pyramided. Everything in it is about the position a consumer is in after something goes wrong, rather than about the price of the credit.

The rule defines who it reaches. A lender is a person who engages in the business of lending money to consumers within the jurisdiction of the Federal Trade Commission, and a retail installment seller is a person who sells goods or services to consumers on a deferred payment basis or under a lease-purchase arrangement within that same jurisdiction.

Four terms an obligation may not contain

The first prohibited term is one that constitutes or contains a cognovit or confession of judgment, a warrant of attorney, or other waiver of the right to notice and the opportunity to be heard in the event of suit or process. The rule carves out executory process in the State of Louisiana.

A confession of judgment is a clause agreeing in advance that judgment may be entered without the usual process. The rule treats agreeing to that at signup as the problem, which is why it appears first.

The second is a term constituting or containing an executory waiver or limitation of exemption from attachment, execution, or other process on real or personal property held, owned by, or due to the consumer. There is an exception where the waiver applies solely to property subject to a security interest executed in connection with the obligation.

The third is an assignment of wages or other earnings, unless one of three conditions is met: the assignment by its terms is revocable at the will of the debtor, or it is a payroll deduction plan or preauthorized payment plan commencing at the time of the transaction under which the consumer authorizes a series of wage deductions as a method of making each payment, or it applies only to wages already earned at the time of the assignment.

The fourth is a nonpossessory security interest in household goods other than a purchase money security interest. In other words, a lender may take a security interest in the item the credit paid for, and this term addresses taking one in things it did not.

What the rule counts as household goods

The definition is a list rather than a standard, which makes it unusually checkable.

Household goods means clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal effects, including wedding rings, of the consumer and the consumer's dependents.

Four categories are then excluded from the term: works of art, electronic entertainment equipment other than one television and one radio, items acquired as antiques, and jewelry other than wedding rings. The rule separately defines an antique as any item over one hundred years of age, including such items repaired or renovated without changing their original form or character.

The one-radio-and-one-television construction, and the single carve-out for wedding rings, tell you what the drafters were protecting. It is the ordinary contents of a home rather than anything of resale value.

The notice a cosigner has to be handed

The rule treats cosigners in two ways. Misrepresenting the nature or extent of cosigner liability to any person is declared a deceptive act or practice. Obligating a cosigner without informing them, before they become obligated, of the nature of their liability as cosigner is declared an unfair one.

It then supplies a safe harbour: a lender or retail installment seller who complies with the preventive requirements does not violate that provision. The requirement is a disclosure consisting of a separate document containing a specified statement and no other, given to the cosigner before becoming obligated. For open end credit, that means before the agreement creating the cosigner's liability for future charges is executed.

The prescribed text is short and unusually direct. It opens by saying the cosigner is being asked to guarantee this debt and to think carefully before doing so, because if the borrower does not pay the debt, the cosigner will have to.

It continues that the cosigner may have to pay up to the full amount of the debt if the borrower does not pay, and may also have to pay late fees or collection costs, which increase that amount. It states that the creditor can collect the debt from the cosigner without first trying to collect from the borrower, and can use the same collection methods against the cosigner that can be used against the borrower, such as suing or garnishing wages. It notes that if the debt is ever in default, that fact may become part of the cosigner's credit record.

It closes by saying the notice is not the contract that makes the cosigner liable for the debt. That last line is the reason the rule requires it as a separate document containing that statement and no other.

The rule's definition of cosigner is broader than the label. It means a natural person who renders himself or herself liable for the obligation of another person without compensation, includes any person whose signature is requested as a condition of granting credit to another or as a condition for forbearance on a defaulted obligation, and applies whether or not the person is designated as a cosigner on the document. It excludes a spouse whose signature is required to perfect a security interest under state law.

The late charge that cannot be built on a late charge

One section addresses a narrow mechanic with an outsized effect on a balance over time.

It is an unfair act or practice for a creditor, in connection with collecting a consumer debt, to levy or collect any delinquency charge on a payment which is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period, when the only delinquency is attributable to late fees or delinquency charges assessed on earlier installments.

That describes the situation where a single missed payment produces a fee, the fee makes the next on-time payment look short, and a new fee is assessed for that shortfall, indefinitely.

The section defines collecting a debt for its own purposes as any activity other than the use of judicial process that is intended to bring about, or does bring about, repayment of all or part of a consumer debt.

Where the rule can stop applying

The final section provides for state exemptions, and it is worth knowing because it means the rule's reach is not uniform across the country.

On application by an appropriate state agency, the Commission may determine that a state requirement or prohibition is in effect that applies to a transaction the rule covers, and that the state requirement affords a level of protection to consumers substantially equivalent to or greater than the rule's. If it so determines, that provision of the rule will not be in effect in that state to the extent the Commission specifies, for as long as the state administers and enforces its own requirement effectively.

Two limits on the rule are visible on its face and both belong in any honest description of it. Its definitions of lender and retail installment seller are both qualified by the phrase within the jurisdiction of the Federal Trade Commission. And the state exemption mechanism means the answer to whether a given provision applies can differ by state.

What the rule is useful for, read from outside, is knowing which clauses in a credit document are the ones a federal rule singled out. Their presence or absence is readable on the page. Whether any particular agreement is inside the rule's definitions is not something this site can determine, and nothing here says that it is.

Sources

Each document below is named as it names itself, with the date printed on that document rather than the day it was read.

1. Title 16 Code of Federal Regulations Part 444, Credit Practices, read in full — the definitions at 444.1 including lender, retail installment seller, household goods, antique and cosigner; the four prohibited obligation terms and three wage-assignment exceptions at 444.2(a); the cosigner provisions and prescribed Notice to Cosigner at 444.3; the pyramiding of late charges at 444.4; and the state exemption mechanism at 444.5; Source note 49 FR 7789, Mar. 1, 1984 — Electronic Code of Federal Regulations, Office of the Federal Register, September 2026