A backlash is brewing on Capitol Hill against banks that charge large fees for overdrafts without asking or telling customers, the latest sign that the financial crisis is shifting the balance of power from banks toward borrowers.
Banks struggling to survive have become increasingly reliant on the fees, which could total $38.5 billion this year.
But congressional Democrats, who pushed through new restrictions on credit cards this spring, now are promising a crackdown on overdraft fees, using words like "criminal" and "rip-off" to describe the practice of letting people overspend and then charging them fees without warning. Most overdrafts are now incurred on debit card transactions.
Sen. Christopher J. Dodd (D-Conn.) plans to introduce legislation requiring banks to get permission from customers, rather than allowing overdrafts automatically.
If customers decline and then try to overspend, the transaction would be rejected. A similar bill is pending in the House.
Dodd dismissed concerns about the impact on ailing banks.
"People out there are getting whacked," he said. "They should have the right to say, 'Deny me the transaction.' "
The attack on overdraft fees comes as Congress is considering a fundamental overhaul of financial regulation. The Obama administration has proposed the creation of a new agency empowered to write and enforce rules protecting consumers in financial transactions, removing that power from banking regulators. Dodd also favors the creation of a single agency to oversee the health of banks, consolidating a responsibility held by four agencies.
Even as that debate unfolds, however, some members of Congress see a need for more immediate action in specific areas, such as credit cards and overdraft fees.
There is outrage that some banks have raised fees, squeezing consumers even as the government is investing vast sums to rescue the industry. Average overdraft fees at large banks have increased 4 percent this year, according to Moebs Services, a financial research firm.
Industry groups argue that customers are responsible for monitoring their account balances, that overdrafts should not happen unintentionally and that overdraft loans -- the money advanced automatically to cover the overdraft -- are a service that banks offer.
The issue has been simmering for years. In the age of handwritten checks, banks rarely made overdraft loans, but as the rise of debit cards vastly increased the volume of transactions, the industry gradually perfected a new strategy. Banks began to honor transactions, up to a preset limit, and then charge a fixed fee on top of the amount of the loan.
Most banks automatically offer the loans to all account holders, according to a study by the Federal Deposit Insurance Corp. released last year. They also do not notify customers when an overdraft is about to occur, nor do they offer them a chance to cancel the transaction. Furthermore, many banks process transactions in ways that increase the number of overdraft charges, for example by debiting large transactions before small ones, exhausting available funds more quickly.
Moebs Services projects that the industry will make $38.5 billion off the fees this year, up from $18 billion in 1999, in part because the average fee large banks charge for each overdraft has climbed by $10, to $35.
Because most overdrafts are now prompted by debit card transactions, consumer advocates argue that the industry in effect has created a new kind of unregulated credit card. But the Federal Reserve ruled in 2004 that banks were providing a service rather than a loan, and therefore the customer's decision to spend the money was sufficient to indicate approval. The Fed did require banks to detail the fees on the customer's next statement.
When Amanda Miller Littlejohn went to her bank to deposit money after returning from a Labor Day weekend trip to Nashville, she was surprised at how low her balance was.
Too embarrassed to cause a ruckus at the counter, she went home and checked her account summary online.
She discovered that she had been charged five separate $36 fees for spending more than she had in her checking account.
"I had used the check card a couple of times, and they took it and no one said anything," said Littlejohn, a 28-year-old Northwest Washington resident and owner of a public relations company.
When she called SunTrust to ask why money could not be pulled from her savings account, where she had thousands of dollars, the customer service representative said that she had never asked to link her accounts.
When she asked why the bank had lent her money if she had never asked for overdraft protection either, she said, she was told that the bank was protecting her.
Barry Koling, a spokesman for SunTrust, said that he could not comment on Littlejohn's situation but that "we do offer a variety of products by which clients can avoid overdraft fees."
A survey released by the American Bankers Association last month showed that 82 percent of 1,000 customers did not pay an overdraft fee in the previous 12 months. Of those who paid the overdraft fee, 96 percent said they were glad the payment was covered.
"Clearly, consumers who pay overdraft fees are the minority, and that number is shrinking," Nessa Feddis, ABA senior federal counsel, said in a release for that study. "More importantly, most consumers want banks to pay their overdrafts so they can avoid the inconvenience, embarrassment and potential costs of having a payment or transaction rejected."
An ABA spokesman declined on Friday to comment on Dodd's upcoming bill because the details were not yet available.
The contours of the legislation remain undefined. The Federal Reserve has now proposed a new requirement that banks must sign up customers for overdraft programs.
That is the minimum standard under consideration by Dodd's staff.
The House bill, authored by Carolyn Maloney (D-N.Y.), would require banks to obtain permission from customers before each overdraft loan, but Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he considered that idea unwieldy.
Sen. Charles E. Schumer (D-N.Y.) also favors a requirement making the fee proportional to the amount of the loan.
The fate of the bill is intertwined with the broader debate over financial reform. Frank said new rules clearly were necessary, but if Congress voted to create a new consumer protection agency, it could write the rules. If the banking industry succeeds in its opposition to the new agency, he said, he would favor a strong overdraft bill.
"Banks should understand that they can't have it both ways," Frank said. "If that should falter, then we will pass a tough overdraft bill."