I am trying to grab a schema and validate against my xml.
XmlReaderSetting settings = new System.Xml.XmlReaderSettings();
settings.Schemas.Add(
the problem is that the xml in your xmlreader.create function should be a uri if the argument is a string.
eg.
XmlReader reader = XmlReader.Create("http://ServerName/data/books.xml", settings);
In your case the xml file is being interpreted as the url and hence it is complaining about the limit.
look at this msdn doc XmlReader.Create Method for different overloaded methods..
I am guessing you should use the TextReader one.