Oct. 19 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd is introducing legislation aimed at limiting bank overdraft fees.

“American consumers are being hit with hundreds of dollars in penalties for overdrawing on their account by just a few dollars,” Dodd said in a statement. “Banks should not be trying to bolster their profits at the expense of their customers.”

The bill, introduced today, covers ATM and debit-card transactions as well as checks, according to the statement. It’s co-sponsored by Senator Charles Schumer, a New York Democrat, and Rhode Island Senator Jack Reed, a Democrat and chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment, as well as Senator Sherrod Brown, an Ohio Democrat, and Senator Jeff Merkley, a Democrat from Oregon.

Representative Carolyn Maloney, a New York Democrat, introduced similar legislation in March to require consumer consent for overdraft protection and alert consumers at the point-of-sale about insufficient funds in their accounts. The House Financial Services Committee hasn’t voted on the bill.

Fees related to overdrawn U.S. accounts may rise to $38.5 billion this year from $36.7 billion in 2008, according to research firm Moebs Services Inc. in Lake Bluff, Illinois.

Monthly Limits

Dodd’s legislation would prohibit financial companies from levying more than one overdraft fee a month and more than six per year. Companies would be able to continue to fund consumers’ overdrafts for free or reject the transactions, according to Dodd’s statement. The bill also requires fees to be “proportional to the cost of processing.”

The Senate measure, by putting a cap on the number of fees in a month, may end up limiting choices for consumers and would put smaller, community banks at a competitive disadvantage, said Edward Yingling, president and chief executive officer of the American Bankers Association in Washington.

“It is likely to encourage irresponsible personal financial management,” Yingling said in a statement. “It may also make it cost prohibitive for banks -- especially community banks -- to offer the service if customers can regularly overdraw their accounts without incurring any penalty.”

Opting In

The opt-in requirement in the Senate bill would apply to ATM withdrawals and debit-card purchases. The measure would prohibit banks from punishing customers who choose not to enroll. Customers would have to be warned at an ATM or by a bank teller if they are about to overdraw their accounts and be given the chance to cancel the transaction.

JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. announced “moderate changes” in overdraft fees in September, days after Dodd announced his intention to draft a bill, according to the statement.

Overdraft programs allow customers to make purchases even if there isn’t sufficient money in their accounts. Lawmakers have criticized banks for enrolling customers in the programs, and charging fees, without their consent. Fees are typically $30 or more per transaction, according to Dodd’s statement.

Customers are shifting to debit transactions from charge cards as credit lines have been lowered and banks have closed inactive accounts. Debit cards will be used in 60.2 percent of card transactions in 2010, or about $40 billion, up from 58.2 percent in 2008, according to the Nilson Report, an industry newsletter in Carpinteria, California.

To contact the reporter on this story: Jeff Plungis in Washington at jplungis@bloomberg.net.

Last Updated: October 19, 2009 18:54 EDT