The FTC's Credit Practices Rule and your rights as a cosigner, explained

Agreeing to cosign a loan is a specific, standalone legal decision, not a formality attached to someone else's application. A federal rule dating to 1985 requires a written warning before you can be bound, and separately bans a short list of contract terms outright in any consumer credit contract it covers. It's a narrower rule than most people assume, though — with a real, specific gap for exactly the kind of lender most people actually borrow from.

What the rule actually is

The Federal Trade Commission's Credit Practices Rule, codified at 16 C.F.R. Part 444, was adopted under Section 18 of the FTC Act (the Magnuson-Moss Warranty—Federal Trade Commission Improvement Act's trade-regulation-rule authority), published in final form on 1 March 1984, with a compliance date of 1 March 1985 for new contracts signed from that date forward. It targets a specific list of contract terms and cosigner practices the FTC found were, at the time, both widespread and demonstrably unfair — not a general disclosure regime like the Truth in Lending Act, but a set of outright bans and a mandatory warning.

Contract terms banned outright

Under 16 C.F.R. § 444.2(a), a covered creditor may not take a consumer credit contract containing any of the following:

A confession of judgment (cognovit) clause. Before this rule, some contracts had a borrower agree in advance to let a court enter judgment against them automatically, without notice or a hearing, if payments stopped — waiving the right to appear and raise any defense at all. Section 444.2(a)(1) bans this outright.
A waiver of a state exemption right — the same kind of state-law protection (a homestead exemption, a wage exemption) covered in our explainer on judgment-proof status — can't be signed away in the credit contract itself (§ 444.2(a)(2)).
An irrevocable wage assignment. A contract can't require you to sign over a share of future wages to the creditor unless the assignment is revocable at will, is an ordinary payroll-deduction or preauthorized-payment plan that started at the time of the transaction, or applies only to wages already earned at the time it's made (§ 444.2(a)(3)).
A non-purchase-money security interest in household goods. A creditor generally can't take a lien on household goods you already own as collateral for an unrelated loan — as opposed to financing the purchase of those goods themselves. "Household goods" here has its own narrow federal definition (§ 444.1): clothing, furniture, appliances, one radio, one television, linens, china, crockery, kitchenware, and personal effects including wedding rings — but not works of art, other electronic entertainment equipment, items acquired as antiques, or jewelry besides a wedding ring (§ 444.2(a)(4)).

Pyramiding late fees, banned separately

Section 444.4 bans a separate, specific practice: charging a late fee on a payment that was itself made in full and on time, where the only reason it looks short is that an earlier late fee was subtracted from it first. Concretely, if a $50 late charge from last month is deducted from this month's otherwise-full, on-time payment, that shortfall can't itself trigger a second late charge — the rule stops a single missed payment from compounding into a self-perpetuating chain of new late fees on payments that were actually made correctly.

The cosigner notice you're legally owed

Section 444.3 separately targets the moment someone is asked to cosign. A covered creditor can't misrepresent the nature or extent of a cosigner's liability, and generally must give a specific, federally worded "Notice to Cosigner" before the cosigner becomes obligated at all. The required text states, in full: "NOTICE TO COSIGNER: You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount. The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record."

The line most people skip past: a creditor doesn't have to chase the borrower first. Cosigning is commonly assumed to be a backup role — "they'll only come to me if the borrower really can't pay." The notice says the opposite is legally true: the creditor can pursue the cosigner directly, immediately, using the same collection tools (including a lawsuit or wage garnishment) that apply to the borrower, without exhausting any option against the borrower first.

The real gap: who this doesn't actually cover

The FTC's own rulemaking authority reaches only creditors within the FTC's jurisdiction — which, by statute, excludes banks, savings associations, and federal credit unions. In 1985 the Federal Reserve adopted a nearly identical rule of its own, as an amendment to Regulation AA, so that banks were covered by an equivalent (though separately enforced) rule; savings associations and federal credit unions had their own parallel versions through the agencies that then regulated them. That symmetry didn't survive the Dodd-Frank Act: in 2010, Dodd-Frank removed the Federal Reserve's, the former Office of Thrift Supervision's, and the National Credit Union Administration's independent authority to issue this kind of trade-regulation rule, and by 2016 those agencies had formally repealed their own credit-practices rules rather than try to keep enforcing them without the underlying authority. The banking agencies replaced them with joint interagency guidance, issued in 2014 alongside the repeal proposal, stating that the same list of practices can still be treated as evidence of an unfair or deceptive act or practice under the general standard that already applies to banks — but that's guidance describing a factor regulators may weigh, not an automatic, per-se-banned list the way § 444.2 still is for a creditor squarely within FTC jurisdiction.

In practice, that means the same loan term — an irrevocable wage assignment, say — sits in a genuinely different legal position depending on who's actually extending the credit: automatically void under a codified federal rule if the creditor is a finance company or retailer within FTC jurisdiction, but a fact regulators would have to separately argue amounts to an unfair practice if the creditor is a bank, thrift, or federal credit union. Knowing which kind of creditor you're actually dealing with — not just what the loan is called — is what determines which version of this protection, if either, actually applies.

How the rule is actually enforced

The Credit Practices Rule itself doesn't create a federal private right of action the way the FDCPA or FCRA do — a violation is enforced by the FTC itself, through the same authority behind any other trade-regulation-rule violation, since Section 5 of the FTC Act (the authority behind this rule) doesn't give an individual consumer a federal right to sue over it directly. Some states' own consumer-protection ("Little FTC Act"/UDAP) statutes separately allow a rule violation like this to serve as the basis for a private claim under state law, but that protection (and whether it exists at all) varies by state and is worth confirming with a local consumer-law attorney rather than assumed.

What to actually check before you cosign

Read the Notice to Cosigner if one is presented — its absence, for a creditor actually covered by this rule, is itself a compliance problem worth asking about before signing anything.
Confirm who the actual creditor is — a bank, a credit union, or a non-bank finance company or retailer — since that answer determines whether § 444.2's outright bans apply at all, or only the banking agencies' more general guidance.
Assume you can be pursued first and directly, not as a last resort after the borrower is chased down, and decide whether you can actually afford the full obligation on that basis — not on the assumption you're a backup.
Ask specifically about a wage-assignment or household-goods-collateral clause if you're cosigning for a non-bank lender, since those are the two contract terms this rule was written to eliminate.

Related: see private student loan default, explained for the specific cosigner risks (including "auto-default" clauses) that arise in that industry, and what your credit repair contract legally has to say for a comparable federally mandated disclosure in a different consumer-contract context.