The Chicago City Council passed a historic ordinance Wednesday that would prohibit city agencies from working with any bank that has made predatory loans or has any connection to such lenders.

Under the law, the 27 Chicago banks that accept municipal fund deposits, and the other financial institutions that have city contracts, must prove that they do not fund predatory loans either directly or indirectly.

The law defines a predatory loan as one with an interest rate 5 percentage points or more than the yield on U.S. Treasury securities or points and fees that exceed 6% of the total loan amount. A predatory lender, by the council's definition, is an institution that has made 25 such loans within the last year or whose predatory loans made up 5% of its portfolio.

The city will review past loans to determine if the financial institutions have engaged in predatory lending. The banks - ranging from $604.7 billion-asset Bank of America Corp. to $48 million-asset Community Bank of Lawndale -must pledge in writing that they will not take part in predatory lending. Chicago will work with no institution failing to meet these criteria.

The law is the first in the country aimed specifically at banks linked to predatory mortgage lenders. Its passage comes after five months of negotiations with the banking industry - which wanted to narrow the predatory lending guidelines defined by the council - and community groups that argued that the new guidelines are weak.

The ordinance was introduced in March 1999, and since then Mayor Richard M. Daley has backed it, blaming predatory loans for a rise in foreclosures and, by extension, in crime in and around vacant lots that can result from foreclosures.

Mr. Daley and other city officials said they hope the ordinance will greatly reduce the amount of mortgage lenders that target poor families and elderly people with exorbitant interest rates and fees.

Though the city council was unanimous in supporting the ordinance - the vote was 47-0 - some community groups were upset with the final version, arguing that lobbying from Citigroup and other companies took the teeth out of the ordinance. Among many changes, the council deleted sections that prohibited all balloon payments and any prepayment penalties, and changed the points and fees criterion: A loan now is considered predatory if points and fees are 6% of the loan amount, instead of 4%.

Even with these banking-friendly changes, Jeff Rodman, executive vice president of the Illinois Bankers Association, said the ordinance puts arbitrary restrictions on banks that may have issued predatory loans through its subsidiaries or recent acquisitions.

Mr. Rodman added that his group wants to work with the city to prohibit predatory lending. But he said he does not agree with the city's guidelines, which do not acknowledge legitimate subprime lending practices that are grouped under the law's definition of predatory lending.

"It will be very difficult for banks to work with the city and maintain a relationship with the city and still continue to give credit to prime and subprime borrowers," Mr. Rodman said. An example of a company that might have such a problem, he noted, is Bank of America, which owns the subprime lender Equicredit Corp. of America.

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