Leading Democrats introduced legislation yesterday to rein in banks' widespread practice of automatically paying overdrawn transactions, then charging customers a steep fee.

The bill, sponsored by Senate Banking Committee Chairman Chris Dodd, D-Conn., will require banks to get customers' consent before paying ATM and debit card transactions, limit the number of overdraft fees charged and tie the fees to banks' processing costs.

Dodd said he and other Democrats introduced the bill because "banks should not be trying to bolster their profits at the expense of their customers."

The legislation follows reports that banks have gotten more aggressive about fee income — including overdraft charges — as their financial conditions have deteriorated. USA Today has reported that major banks, including Wachovia, now part of Wells Fargo, have put in place tools that make it harder for employees to refund overdraft fees. Wachovia has told employees in an e-mail these fees "make up a big percentage of our revenue and is a HOT button among leadership."

Banks have also sought out the advice of consultants on how to boost overdraft fees, implementing such policies as allowing customers to overdraw at the ATM up to a bank-imposed limit, USA Today has revealed.

The result: In 2009, banks are expected to earn $38.5 billion in overdraft fees, up 42 percent from 2003, says Moebs Services, an economic research firm. Banks' overdraft income is nearly double the $20.5 billion the industry will collect in credit card penalties.

Banks are expected to collect a record amount from overdraft income despite recently backing away from practices such as charging consumers steep fees for overdrawing by a few dollars.

Dodd says moves by Bank of America, Chase and Wells Fargo represent only "moderate changes" to overdraft policies.

Yet, the industry's changes are an acknowledgement that "banks have a serious legitimacy problem," says Simon Johnson, a former chief economist for the International Monetary Fund who now teaches at MIT's Sloan School of Management.

Scott Talbott, who represents large banks, says the industry has taken steps "to address consumer concerns." Banks have "serious concerns" about the effect Dodd's bill will have on consumers and merchants if signed into law, he adds.