Mortgage Loan Originator (MLO) Licensing Practice Test

In Title Theory States, what happens to the legal title after a deed of trust is executed?

1. The borrower retains legal title only

2. The lender holds legal title and equitable title

3. The borrower conveys legal title to the trustee

4. The lender has no claim to the title

The correct answer is: The borrower conveys legal title to the trustee

In Title Theory States, when a deed of trust is executed, the borrower conveys legal title to the trustee. This means that the borrower temporarily relinquishes the legal title to a neutral third party (the trustee) to secure the loan. The trustee holds the legal title on behalf of the lender while the borrower retains equitable title, which gives the borrower the right to use and control the property as long as they fulfill the terms of the mortgage or deed of trust. This arrangement allows the lender to have a form of security interest in the property, which can be exercised if the borrower defaults on the loan. The trustee's role is crucial, as they act as an intermediary who manages the legal title until the loan is paid off or in the event of foreclosure. Understanding this relationship is essential for recognizing how property ownership and security interests operate in Title Theory States, distinguishing it from Lien Theory States where the borrower retains both legal and equitable title until foreclosure.