Oct. 30 (Bloomberg) -- Bank overdraft fees as high as $39 on debit-card transactions aren’t “favors” for consumers if they haven’t asked for them, House Financial Services Committee Chairman Barney Frank said.

“We wouldn’t be in a situation where we’re considering legislation if you would have had an opt-in regime from the beginning,” said Frank, a Massachusetts Democrat, addressing the banking industry at a hearing in Washington today. “Don’t do people favors without asking them.”

Overdraft programs allow consumers to make purchases even if there’s not enough money in their accounts. Lawmakers have criticized banks for enrolling customers in the programs, and charging fees, without their consent.

Legislation under consideration in the House would prohibit financial companies from levying more than one overdraft fee a month or six per a year, according to Representative Carolyn Maloney, a New York Democrat who sponsored the bill.

“It’s not simply a question of how much money it is,” Frank said. “It’s a sense that people’s integrity and autonomy have been impaired when you do this to them, and then you tell them you did it for them.”

The House bill would make overdraft fees subject to the Truth in Lending Act, requiring consumers’ permission or opt-in before enrolling them, according a statement from Maloney. It would prohibit rearranging the order in which transactions are posted, which can trigger an overdraft. And it would require fees to be in proportion to the amount overdrawn, so a $5 cup of coffee won’t have a $35 fee, the statement said.

No Alert

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, introduced similar overdraft-fee legislation Oct. 19, saying “banks should not be trying to bolster their profits at the expense of their customers.”

Overdraft programs “maximize fees while jeopardizing the financial stability” of customers, said Jean Ann Fox, director of financial services at the Consumer Federation of America. Consumers don’t apply for them, and they’re not warned at the point of sale when they’re about to incur a fee, Fox said. The median fee at the largest U.S. banks is $35, Fox said.

“Rather than competing by offering lower costs and truly beneficial overdraft products and services, many financial institutions are hiding behind a smokescreen of misleading terms and opaque practices that promote costly overdrafts,” Fox said.

Consumer Education

Representative Spencer Bachus, an Alabama Republican, said he avoided overdraft fees with a credit line and asked if many of the problems could be eased with consumer education.

Ending overdraft protection and letting checks bounce would lead to “infinitely worse” consequences for people who don’t have sufficient funds, Bachus said.

“I’m not sure people appreciate that,” Bachus said. “For people short on cash, it can land them in jail.”

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.

The legislation would require retooling that would raise the cost of checking accounts, said Nessa Feddis, vice president and senior counsel at the American Bankers Association in Washington.

Avoiding Embarrassment

Consumers have come to expect payments to go through to “avoid embarrassment and inconvenience,” Feddis told the committee. Most consumers can easily avoid the fees by keeping track of their balances, she said.

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

Banks are relying more than ever on overdraft-fee revenue, said Eric Halperin, Washington director for the Center for Responsible Lending. The average overdraft fee was $29 in 2007, up from $16.50 in 1997, Halperin said. In 2004, about 80 percent of banks denied debit-card transactions for insufficient funds. Now, 80 percent approve the purchases and charge a fee, he said.

Overdraft protection in its current form “is neither a courtesy nor a privilege,” said Jim Blaine, chief executive officer of the State Employees’ Credit Union of North Carolina.

“It is a loan -- a very, very expensive loan,” Blaine said at the hearing. “Despite claims by proponents to the contrary, overdraft protection is never the best nor the fairest choice for an account holder.”

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

Last Updated: October 30, 2009 13:59 EDT