Tennessee Realtor State Practice Exam

In title theory states, who holds legal title to the property while the borrower has equitable title?

1. The lender or trustee.

2. The borrower only.

3. The state government.

4. The title insurance company.

The correct answer is: The lender or trustee.

In title theory states, the lender or trustee holds the legal title to the property while the borrower retains equitable title. This arrangement means that the lender has the formal ownership rights, which grants them control over the property until the borrower repays the loan in full. Although the borrower occupies and utilizes the property, they do not have the full ownership rights associated with legal title until the mortgage is satisfied. This distinction is crucial in understanding the dynamics of property ownership under lien theory versus title theory. In lien theory states, for example, the borrower typically holds both the legal and equitable title, whereas in title theory states, the lender’s legal interest allows them to enforce the loan contract through foreclosure if the borrower defaults. This unique structure creates a clear line of responsibility and risk between the parties involved in the transaction.