WASHINGTON — Democratic lawmakers are expected to announce today a deal on legislation that would allow judges to modify certain mortgages in the bankruptcy process.

Though the banking industry has opposed such a bill for two years, lawmakers have agreed to narrow the scope of the legislation to win industry support. So far, Citigroup Inc has indicated it would back the compromise. (View Citigroup CEO Vikram Pandit's letters to senators and representatives.)

At a press conference this afternoon, lawmakers are expected to unveil a bill that would only apply to nontraditional loans originated before the law’s enactment date.

The legislation would also require that borrowers made good-faith efforts to work with their lenders to rework their mortgages before initiating the bankruptcy process. Lenders who violated the Truth in lending Act would also waive certain priority creditor rights afforded under bankruptcy protection.

Citigroup — which has received $45 billion in federal support from the Troubled Asset Relief Program — first approached Sen. Charles Schumer, D-N.Y., in mid-December to begin working on a deal. Sources said the banking company was concerned a tougher version could be enacted because President-elect Barack Obama supported the concept and Democrats strengthened their majorities in Congress.

Citigroup’s negotiations continued this week with Sen. Richard Durbin, D-Ill., the primary Senate sponsor of the mortgage bankruptcy bill, and Senate Banking Committee Chairman Chris Dodd, who has been a vocal advocate of the legislation.

“The senator has been in touch with Citi since last year and as recent as this week and is working together with Dodd and Durbin to try to make this happen,” said an aide to Sen. Schumer.

It’s unclear how quickly the legislation could move — or whether other banks will sign on to the Citi deal. Sen. Schumer said in a statement he wants to attach the bill to the economic stimulus package.

“We believe that judicial loan modifications is the best option for delivering relief for homeowners and belongs on the stimulus and we will be pushing to add it to the stimulus when it comes up,” said Sen. Schumer.

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