Lending industry representatives, state officials and consumer advocates clashed before a committee of the Virginia General Assembly today over a proposal to put a ceiling on rates charged for second mortgages.

The second-mortgage-rate issue drew added attention because of the revelation last week that State Sen. Peter K. Babalas (D-Norfolk) accepted a $3,000 payment earlier this year from a mortgage company three days after he killed legislation in committee that would have regulated rates on the loans.

The legislature's ethics committee is scheduled to meet Monday to consider whether Babalas violated conflict-of-interest statutes in taking $61,480 in legal fees from Landbank Equity Corp. of Virginia Beach. Landbank has filed for reorganization in bankruptcy and is facing charges that it defrauded its customers and creditors of millions of dollars.

At today's hearing, Will Robertson, president of the 22-member Virginia Mortgage Association, said he would support legislation to limit prepaid interest charges, commonly called "points," to 10 percent of the loan value.

He conceded that action is needed to curb abuses in an industry in which some lenders have charged the equivalent of 40 percent interest on loans. But Robertson said he is wary of "legislative overreaction that will impose so many restrictions that we'll be put out of business."

Robertson, who is vice president of U.S. Credit Mortgage Corp. of Virginia Beach, said publicity about the Landbank collapse is drying up investing sources and hurting consumer confidence in his industry.

Sidney A. Bailey, commissioner of the state's financial institutions bureau, responded that "you haven't convinced me at all" that the state should not take action. He described some of the testimony from industry representatives as "fiction . . . too transparent to even bother with."

He said second-mortgage firms "say they are special, that they deserve to recover their costs. They want a subsidy. But if they can't compete under a cap, they should go out of business. It's an iron law of business."

Carter B. Foulds, a Culpeper attorney representing Rappahannock Legal Services, said Landbank "was not the disease, but only the symptom." He told the committee that "as long as there is a loophole, someone will gas up a truck and drive right through it." He said the "only way to protect the consumer is with a cap. Five points sounds thoroughly reasonable, 10 if necessary."

Frank Howard of Capital Associates, a Virginia Beach mortgage broker, said a cap on points "would not be fair to customers" because it might deprive them from getting a loan. He said the legislature in neighboring North Carolina is "protecting people to the point that they can't get loans, and often must sell their homes" to pay off other debts.

Howard said his company "doesn't charge a penny" if it can't get a loan for its customers, while "doctors and lawyers charge, even if their guy dies or goes to jail."