The District's 15 percent usury ceiling on second mortgages and deeds of trust is cutting homeowners off from a money source some had counted on to finance college educations, kitchen remodelings and a wide range of other nonbusiness expenses, city residents and banking executives report.

"Equity loans," or mortgages secured by owner-occupied homes, are one of the fastest-growing forms of borrowing, amounting to an estimated $18 billion to $20 billion nationwide last year. But the loans have been virtually unavailable in the District for the past five months.

The city's interest-rate ceiling on first mortgages and deeds of trust was overridden by federal statute last year, but the 15 percent cap on homeowner equity loans has remained in force.

Second mortgages made for financing an investment or business venture have no usury cap under city law, but "nonbusiness" consumer loans -- such as those for adding to a house or paying off personal debts -- are subject to the 15 percent limit.

With the prime bank rate over 20 percent and first mortgages going for 18 percent, "nobody in his right mind has been making (second mortgage) loans in the District lately," said Charles Falk, head of Perpetual Finance Corp., a subsidiary of Perpetual American Federal Savings and Loan Association.

Virginia has no usury limit for second mortgages. Maryland's ceiling for nonbusiness homeowner equity loans is 16 percent. Falk and other lenders say that a few second loans are still being written in the Maryland suburbs, but add that a complete cutoff of financing there is likely soon. Prevailing rates in Virginia range from 16 to 19 percent.

John A. Wilson, chairman of the D.C. City Council's Finance and Revenue Committee -- who held a special fact-finding hearing this week on the second-mortgage situation, says the District's rate cap cuts two ways.

On one hand, Wilson said, "it helps protect consumers from rip-off artists." But on the other hand, "it definitely reduces peoples' options to borrow" if they're in a serious financial pinch.

Wilson has sponsored a bill that would put business-purpose loans under the 15 percent usury ceiling if they're secured by a borrower's principal residence. But he says he's open to the possibility of raising the usury limit -- or changing the city's banking rules in some other way to make capital available -- "if the facts seem to justify such a move."

Lenders argue that the biggest problem with the current usury ceiling is that it hurts homeowners facing financial emergencies.

"I get calls every day from people (in the District) who are desperate for help, whatever the cost," said William I. Segal, president of The Money Store in Rosslyn, an equity finance lender.

"They've got to pay off a bunch of debts, or they've mortgaged the house they're living in with a balloon note that's about to push them into foreclosure," Segal said. "They're in great distress; they're in a panic. But I can't do anything for them because their property is located in the District."

A 43-year-old auto mechanic who lives in Southeast recounted a story earlier this week in an interview that illustrates the type of financial bind the usury ceiling makes worse:

The mechanic, who has owned his house on Alabama Avenue SE for the past 17 years, is required by a divorce settlement to split the $50,000 equity in the property with his former wife.

Divorce or separation "buy-out" loans -- second mortgages designed to pay a spouse or co-owner cash to close out his or her ownership interest in a house -- are an increasingly common form of equity borrowing. Buy-outs are often preferable to the alternatives of a sale or a complete refinancing because they generally cost less and permit one spouse to retain the property.

The mechanic, who asked that his name not be made public while his divorce settlement is pending, says he has called up "every bank, every lender in the city and the suburbs" during the past two months looking for a $25,000 second mortgage.

"Everywhere I've turned the answer's been the same: 'Sorry, if your house was in Maryland or Virginia, I could lend you the money. But I can't lend you money at a loss to comply with D.C. law.' "

In desperation, the mechanic called several firms he describes as "loan sharks."

"The fly-by-night, back-alley types were more than willing to lend me the money, no matter what the law says," the homeowner said. "But when I figured out what the interest charges would amount to if I signed on the dotted line, the lenders wanted $75,000 to $100,000 back from me over the next 10 years just so I could borrow $25,000 today. I couldn't go along with that."

Now the mechanic is afraid that his wife's lawyer will force him to put his house up for sale in the next few weeks at a low price guaranteed to produce quick cash. Not only will he and his child be pushed out of their home and neighborhood, he says, "but I don't know where we'll be able to buy anything at today's prices and interest rates.

"It's just a terrible, terrible situation I'm in."