When Neil Kaplan got the good news recently that Equitable Trust Bank had approved his mortgage for a $120,000 house in Chevy Chase, he decided to try to save some money. He arranged to have an old law school friend who specializes in real estate handle the settlement for a nominal fee.

But the bank flatly vetoed this idea. If Kaplan wanted to borrow at Equitable, he was told, he had to have the deal closed by the Kensington law firm of Staley Prescott & Ballman, whose settlement charges are among the highest around.

"I didn't have much choice," said Kaplan, a federal prosecutor, who ended up paying hundeds of dollars more than he had planned. "You don't want to jeopardize your chances for a mortgage in these tight financial days, and I knew the bank's policy."

What Kaplan did not know at the time was that the law firm Equitable insisted on keeps an average daily balance of $500,000 in an interest-free account at the bank and that law partner George Ballman serves on the bank's advisory board.

Kaplan's experience dramatizes a common practice in suburban Maryland, where nearly half the state-based banks and savings and loan firms steer their mortgage customers to settlement attorneys who have business ties to the lenders.

In some cases, such as Kaplan's, the steering is direct. More often it is a form of subtle inducement: The lender allows a free choice of attorney but charges an extra review fee of up to $150 for borrowers who pass up the bank's counsel.

The result in many cases is the same -- settlement work goes to lawyers who serve as directors or counsel for the lender, give legal help to the banks without charge, rent offices in bank buildings and sometimes deposit large sums in interest-free or interest-bearing accounts that the banks can invest at their own profit.

This arrangement often carries a high price for home buyers who become what is known as "captive clients" of bank lawyers and pay steep fees -- as much as twice the rate of some experienced real estate lawyers -- for settlement services.

But it is a lucrative deal for many bank lawyers who charge up to $500 to settle a $100,000 house transaction. For the legal fee, these lawyers examine the title for defects, prepare loan documents and coordinate the final settlement.

In addition to legal fees, there are commissions averaging 60 percent of the premium on title insurance, which the lender requires of the home buyer to protect his property title against unforseen claims or liens.

Insurance commissions alone brought in more than $71,000 last year to the Silver Spring law firm of Herbert W. Jorgensen, who represents Citizens Savings & Loan association and handles dozens of that firm's settlements each year. Citizens charges borrowers an extra $100 fee if the Jorgensen firm does not close their loan.

"The whole system is a classic sweetheart deal with the bank and the lawyer helping each other out and the consumer being left out," said Charles Brown, the antitrust chief in the West Virginia attorney general's office who is trying to break up bank-lawyer tie-ins in his state.

"It's an economic system that simply can't work for the consumer," he said. "The one [lender] who chooses the lawyer has absolutely no economic incentive to keep costs down and the one [consumer] with the economic incentive has little opportunity to choose."

The Washington Post reported yesterday how more than half and as much as 70 percent of the premiums home buyers in this area pay to protect their property titles goes to middlemen, chiefly lawyers, who do little more than refer their clients to insurance firms.

Today's story discusses how lawyers in Maryland get their clients in the first place. The two primary sources of business are real estate agents and lenders, especially those banks and savings and loan firms in Montgomery and Prince George's counties that steer home buyers to their favorite lawyers.

Lenders in the Washington area often give their borrowers a free hand in selecting a settlement attorney. Normally, the sole requirement is that the lawyer is approved by licensed title insurance company, which ultimately insures the lender and home buyer for problems the lawyer may have missed.

This freedom of choice is somewhat limited in suburban Maryland, however, where 15 lenders -- nearly half the state based commercial banks and savings and loan firms making mortgage loans -- still directly or indirectly influence the home buyer's selection of a settlement attorney.

Two Baltimore banks with numerous branches in this area -- Equitable Trust and Savings Bank of Baltimore -- actually mandate one or more attorneys. Savings Bank, for example, gives nearly all its cases to a Columbia lawyer picked by the bank's counsel to handle settlements.

"It would be imprudent on our part," explained Savings Bank president Bill Beasman, "to loan tens of millions of dollars and allow anyone who comes along to handle that money. If we want to protect our interest and those of our borrowers, we should have the right to determine who does our work."

Equitable Trust distributes its settlement work among a handful of law firms in Montgomery and Prince George's that can, in the words of second vice president Ted Coleman, "give us a correct settlement with the kind of documentation and verbiage that gives the bank the kind of protection it feels it needs."

Dozens of settlement cases this year, said Coleman, have been directed to the firm of Staley Prescott & Ballman, which maintains a large interest-free account at the bank -- $500,000 on an average day. The firm also keeps an average day. The firm also keeps an interest-free office account at the bank, said partner Geroge Ballman. Coleman said he is not swayed by the firm's banking arrangements in making refferrals. "I never related the two together," said the banker. "These people are selected on their reputations as specialists in title work."

Ballman, who serves without pay on Equitable Trust's advisory board, said most of the interest-free money concentrated at the bank is escrow funds held for clients, which by law cannot earn interst for the firm.

He said the funds are deposited at Equitable Trust instead of spread around several banks -- which is normal practice for many settlement attorneys -- because of "convenience." He added that "its nice to get the business," but the escrow funds "are not a reward for any work we get."

Federal law prohibits settlement attorneys from keeping "abnormally large" interest-free balances at banks that refer them settlement work. An exception is made, however, for maintaining "any accounts reasonable needed . . . in the normal course of business."

Not all of Equitable Trust's work in Montgomery County flows to the Ballman firm. Some of it goes to the firm of Joseph A. Lynott Jr., who serves as chairman of the bank's influential regional board.

Lynott's firm and the three other firms that receive Equitable Trust referrals in Prince George's and Montgomery keep interst-free escrow accounts at the bank, said Coleman.

Although no other lenders in suburban Marylnd have so direct a steering practice, many bring about the same result by charging review fees ranging from $75 to $150 for borrowers who choose their own attorneys for settlement.

The fee supposedly goes to the bank's counsel to review the work of the home buyer's lawyer -- who has the backing of title insurance except in the case of specific exceptions to the policy -- and prepare the loan documents, which often are standardized, straightforward forms.

The review fee policy means that the borrower pays once for a title examination to identify any claim, lien or encumbrance that could cloud his title, a second time for insurance to protect the title against any unforeseen claim and then a third time to make sure the examination and title insurance work are in order.

"The lender is saying he wants one more mind to look over the documents to decide whether or not this is what they've bargained for," explained James Lauderman Jr., whose firm earns $150 to review cases for the Baltimore Federal Savings & Loan Association. "We supply the one active mind.

Officials of the 13 lending institutions that levy review fees say the policy is strictly motivated by the need to protect the lender against shoddy legal work -- not the desire to bring in business for their counsel.

Wallace L. Davis, executive vice president of the Metropolitan Federal Savings & Loan Association, said his company charges $100 for a review by the Bethesda firm of Jones O'Brien & Widmayer because, "we don't have as much confidence in other attorney firms as our own. If something goes wrong, we don't go back to the [borrower's] settlement attorney. We hold our attorneys responsible."

One of Metropolitant Federal's directors, Ellis M. Jones, is a partner in the law firm. As often as three times a month, Davis said, Jones' firm will be asked for a "spur of the moment legal opinion" when the lender's counsel is not available.

"They do it as a courtesy," said Davis. "They fill an obligation to Metropolitan Federal because they are our atttorneys. It would be a little unaruthorized if we sent an employe up with a problem and they charged for it."

The law firm also gives discounts to Metropolitan Federal employes who need settlement work, rents office space in the lender's Bethesda building and keeps occasionally large, interest-bearing accounts there, according to Davis.

A review of home sales in suburban Maryland during a six week period last summer shows that most of the home buyers who borrowed at Metropolitan Federal chose Jones O'Brien &Widmayer to close the loan. Donald Thompson, a Coast Guard admiral who bought a $127,400 home in Rockville last summer, said he used the Jones firm because "the lending institution had the guy's name typed in [the loan commitment letter] . . . and it struck me it was going to cost me more if I didn't take the recommended attorney."

"It's a trap," Thompson said of the review fee. "It certainly puts pressure on the buyer to go along with the deal or spend a lot more time and money shopping around for a lawyer. If you don't play the game, you might not end up with a house."

Many home buyers who decided to skip the review fee and hire the lender's counsel for their settlement work said they did so to save money. But in many cases, they ended up paying higher settlement costs than they might have if they had shopped around for more competitive prices and paid the bank's fee.

Edward Easton III, who bought a $136,000 home in Bethesda and borrowed at Citizens Savings & Loan, said he was planning to select his settlement lawyer until learning of the lender's $100 review fee. "it was no contest at all," he recalled. "Why get somebody else involved if its going to cost more money?"

When the settlement charges were rung up, however, Easton paid $588 to the firm of Herbert Jorgensen, the lender's counsel, in addition to $414 in title insurance. Experienced settlement attorneys in Montgomery County charge as little as $300 for the same legal work.

"You know you've been had," said Easton, repeating a common home buyer complaint, "but they [lender] have the strap on you. You just hold your breath until it's over."

The review fee policy -- which has been upheld as proper by the U.S. Appeals Court for the District of Columbia -- frequently draws criticism from lawyers who do not enjoy banking contacts and feel unfairly restricted in obtaining settlement business.

"It's [review fee] simply motivated by the desire to keep settlements in a particular lawyer's office by putting a $100 roadblock in the purchaser's way," said Douglas Bregman a Montgomery County real estate lawyer and instructor of real estate at the University of Maryland. Most settlement, he said are "standard affairs" that take no special expertise. "I'm not even sure the banks send the work to their lawyers [for review]," he added. "If they do, it can be a very quick review process if it's all standard forms."

Another frequently stated criticism is that an attorney who represents the bank, the borrower and the title insurance company if he issues the title policy has an inherent conflict of interest.

In Virginia, the state bar prohibited attorneys from providing both settlement and insurance services. A lawyer with such dual representation might take insurance risks to get his commission even if the risks are not in the best interest of the client, state bar officials reasoned.

Clifton M. Eisele Jr., whose Hyattsville firm represents the Maryland Federal Savings & Loan Association and receives $100 review fees for cases settled by outside attorneys, said he sees no conflict in counseling the lender and the borrower because they have a common interest in protecting the purchased property.

The consumer certainly has more in common with the lender's counsel, said Eisele, than a lawyer who gets business referrals from real estate agents and developers in return for some inducement, such as cut-rate legal work or cash kickbacks.

Eisele said that two or three years ago, a builder suggested that he direct home buyers to the lawyer in exchange for $50 per client."I pretended that I didn't hear him," Eisele recalled in an interview.

"I remember the days [in the early 1970s] when they [developers and real estate agents] were advertising $50 a case," said the lawyer. "Then they [Congress] passed a law. Now it's going under the table."

Today, attorneys who solicit business from real estate agents and brokers extend different forms of inducements. They range from social favors -- sumptuous crab feasts and tickets to a Washington Redskins game -- to business favors, such as free legal help.

In suit filed in Prince George's County Circuit Court, Hyattsville attorney Robert L. Edwards is accused by a former business partner of diverting settlement escrow accounts for loans to a real estate broker who needed money to buy properties.

According to a source familiar with the case, the broker settled all of his cases at Edwards' firm, Maryland Title & Escrow Corp. Edwards, who left the company last year, denied all charges.

Most lawyers who get clients referred by real estate agents acknowledge giving occasional legal advice to the agents without charge. In some cases, lawyers will even recommend certain brokers if a client plans to sell a house.

"If we're just talking about giving some qualified advice on the telephone, where to put a paragraph in a contract or something like that, we won't charge them [real estate agents]," said John J. Dwyer, a Prince George's lawyer, who gets most of his business through real esate agent referrals.

Augustino Catalano, manager of the Landover branch of Nyman Realty-Gallery of Homes, who sends most of his cases to Dwyer, said, "If a [legal] matter comes up, it's a question of courtesy [the lawyer] extends. Anything that has to do with legal ramifications, he'll do."