James Matthews was delighted last spring when the loan officer at Intercity Mortgage Corp. said he could arrange financing for the Northeast Washington house Matthews had agreed to buy from his stepfather.

The loan officer, Leonardo Aden, told Matthews he would need a real estate sales contract before a loan could be approved for the $26,500 house -- but he added that he knew someone who could do it.

The contract was drawn up, the loan was subsequently approved, and Aden told the grateful Matthews, a 32-year-old telephone company employe, that the deal would be closed at a conveniently located office just a few doors down Georgia Avenue from the mortgage company.

Not until months later did Matthews realize that his financial interests were not the only ones Aden was looking out for:

Aden had the real estate contract -- a one-page standard document -- drawn up by his wife, an agent for Murchison Realty Co., which incidentally also is the primary stockholder of Intercity.

The cost to Matthews' stepfather: $800 for the contract -- eight times more than lawyers charge for the same work.

Aden steered the settlement work to Municipal Escrow & Title Co., whose stockholders include Aden and whose chairman is John P. Murchsion Jr., the president of Murchison Realty and Intercity.

The cost to Matthews and his stepfather: $267.

The title insurance policy was also issued by Municipal.

The cost to Matthews: $100, of which $60 went to the Municipal as a commission.

"I didn't know the first thing about buying a house," Matthews said last week. "The bank, supposedly being a reputable establishment, I thought they'd have my welfare in mind. I thought the bank just makes its money on the interest."

But what Matthews ran into was a new and controversial phenomenon in the real estate settlement industry: close financial and corporate ties between traditionally separate businessmen who participate in the sale of a house.

In the District of Columbia, Virginia and other parts of the country, these businessmen -- bankers, lawyers, real estate brokers and developers -- have banded together in corporations known as "title companies" to handle the lucrative settlement and insurance work of their clients.

This new business development has been criticized by consumer and title industry groups, which have even coined a phrase for the practice -- controlled business." It describes a financial network in which persons with an economic stake in the selection of a settlement firm actually control the flow of business and have more interest in guiding the home buyer to their own companies than getting the best and cheapest services for him.

Last week, the American Land Title Association, a trade group for the nation's title insurers, issued a 96-page "white paper" harshly critical of controlled business, which it describes as "more pernicious than the direct kick-back practices" that were rampant years ago.

"If brokers, lenders, attorneys and real estate developers are permitted to have a financial interest in title insurance service providers to which they refer their clients and borrowers," the report said, "such recommendations or referrals will almost inevitably be made on the basis of the financial interests of the controller of the business."

While a few title companies date back many years, most of them have sprung up since Congress passed a law in 1974 that prohibits the payment or receipt of fees, kickbacks or any "thing of value" for a simple referral of business in a settlement transaction.

Federal regulators view title companies as an attempt to get around the ban of referral fees because the law does not specifically prohibit so-called stockholders from earning "corporate dividends" from firms where they refer home buyers.

Besides Murchison's combine in the District (Intercity, Murchison Realty and Municipal), two active title companies -- United Title & Escrow Co. and Dolphin & Evans Title Insurance Agency -- include among their stockholders real estate brokers who steer many of their customers to their firms for settlement and title insurance work.

In Virginia, lawyers who are prohibited by the state bar from handling insurance for their settlement clients, have formed separate title companies -- usually run by an office secretary -- where home buyers are sent for their insurance policies.

Title companies have two sources of income -- settlement fees for examining the property title, closing the loan and preparing the loan documents and insurance commissions as high as 70 percent of the title policies that the companies issue for home buyers on behalf of the large title insurance firms.

The defenders of controlled business view their arrangements as a consumer service. By directing home buyers to title companies they own, defenders say, they can guarantee the quality of the work and make sure it is delivered in a convenient fashion.

The story of James Matthews, who touched all three corners of Murchison's business operation, illustrates some of the benefits and pitfalls of controlled business.

The story began last May when Matthews, a cable splicer at Chesapeake & Potomac Telephone Co., agreed to pay his stepfather, Bernard Morton, $26,500 for his two-story brick house in the River Terrace section of Northeast Washington.

Once the agreement was made, Matthews paid a visit to Intercity Mortgage to apply for a loan. There, he met Leonardo Aden, the loan origination manager, who told him he had to have a real estate sales contract before he could get FHA financing.

"He told me I needed a real estate lawyer or somebody to draw up a contract," recalled Matthew. "He said I could get someone myself or he could get someone in the real estate company [Murchison Realty] to do it for me. He said his wife was an agent."

"As long as I was there, I said I might as well get it done," said Matthews, noting that the mortage company and real estate firm are in the same building.

Aden then gave him some forms to sign and asked him for such details as the prearranged purchase price, location of the house and name of the seller. There was no further discussion of the real estate contract, according to Matthews.

Sometime later, Matthews learned that the loan had been approved and called Aden to find out the next step. "He [Aden] set up an appointment with the guy at Municipal [the title company] and he gave me the address," Matthews said.

The settlement took place Aug. 15 at Municipal's office a block south of the mortgage company. Matthews was there, along with his mother and stepfather and Municipal's executive vice president, Frank Harris. No one came from the real estate firm.

It was a routine closing. Harris read off the list of charges: $100 for the title examination, $75 for the settlement, $99.95 for title insurance and $7.50 for the insurance binder. The seller was charged $85 for the closing and document preparation.

Among other costs listed by Harris was $799.50, a brokerage fee for Murchison Realty that was charged to the seller even though no work was done infinding the buyer.

Leona Morton, Matthews mother, remembers hearing that charge and thinking it was customary. "He went down the list," said Mrs. Morton, a retired government clerk. "(not knowing, we just didn't ask. We thought it was just part of the costs.

"We never did need a real estate agent. It was my son and it was going to be paid for. It was a family deal. They [Murchison Realty] certainly didn't do anything as far as selling the house is concerned."

The name of Christy Aden, the agent who signed the sales contract, drew a blank from Lenora Morton and her son. "If she helped me," said Matthews, "I don't know how. I never did meet her and neither did my parents."

John Murchison, who made the decision to set the fee at 3 percent of the house purchase price, said in an interview that "the $800 charge was for services rendered. I think that fee is fair and that's an adequate explanation."

Asked what services were rendered, Murchison replied, "I don't have to tell you."

Pressed for a reply, he said: "Preparing the contract and doing everything else in handling a real estate contract. We had to get the information on the people. Somebody had to sit down and think about the contract and make sure everything was correct. We monitored the settlement, even though we weren't there."

Asked how long such a job takes he answered, "It might take five minutes if you know what you're doing. It might have taken longer. I don't know how long it took and I don't have to tell you,"

Benny L. Kass, a Washington real estate lawyer, said such contracts take no longer than 15 minutes to gather information and 15 minutes to type the data into the blank spaces on the standard sales contracts. For that work, he charges between $50 and $100.

"Did you say $800?" asked Kass. "That's outright fraud, and you can quote me at that."

Leonardo Aden, the loan officer who steered the contract work to his wife and the settlement work to a firm in which he and other bank officers have an ownership interest, said he saw no conflict of interest in his actions.

"I direct business to anybody I'm familiar with," he said in an interview. "Why should I refer it to someone else and make their family better off?"

Murchison organized Municipal about two years ago, he said, to provide fuller service to his real estate and banking customers. Although many of them settle their loans at the title company, he said, they are free to go wherever they like.

"We tell people that Municipal is available," he said. "If people want to take advantage of it, that's fine. We don't insist on it."

Municipal's Harris estimated that a third of the title company's business originates at Intercity or Murchison Realty, but added, "He [Murchison] not hustling clients for me and he's not receiving a fortune for bringing us clients."

The title company plans to divide profits among its stockholders, but has yet to make a dividend payment in its 18 months of operation, said Harris, who added, "We're just trying to make an honest living. We don't charge any more than anybody else, and we don't get away with anything."

A longer established company in Washington, United Title & Escrow, also was set up by real estate brokers -- Melvyn Friedman and Marvin Gitelson -- each of whom owns 30 percent of the firm and funnels customers to it for settlement and insurance work.

Friedman, who also makes mortgage loans, said he "more or less insists" that his borrowers go to United Title because "the other title companies generally screw it up. I tell 'em [borrowers], "If you want the loan, you have to settle there."

For his real estate customers, he said, "We try to get 'em all there [United Title]. We suggest it, but I don't insist on it."

Is there a conflict of interest in directing customers to a title company of which it is a part owner?

"These people are getting good service," he replied. "They're very happy. Where's the conflict?"

Gitelson said half his customers settle at United Title, although, he insisted, "there's no suggestion made. If they ask who do we usually use, we'll recommend United Title. I will recommend whoever gives good service. Financial rewards [annual dividends from the title company] have no bearing whatsoever. Zilch."

A third Washington title company, Dolphin & Evans, has brokers among its stockholders, including Samuel Reynolds, who said that 20 to 30 percent of his customers settle at the title company.

"If they [customers] want a recommendation," said Reynolds, "we recommend. Number one on our list is Dolphin & Evans. Principally, that's because it's a totally minority [owned] firm. We tell them it's minority. We tell them I have an interest. If they want to go there, that's okay. It's their choice."

A different species of title company began popping up in Virginia a few years ago after the state bar ruled that performing legal settlement services and underwriting insurance policies for the same client was "dual representation" and a conflict of interest for lawyers.

The lawyers of Virginia moved quickly to satisfy the ethical standards of the bar and their own pocketbooks. To retain the lucrative insurance work, they set up title companies, hired a secretary to run them, channeled their settlement clients to them and then picked up corporate dividends at the year's end.

A successful example of this practice is Falls Church lawyer Robert A. McGinnis, who formally separated his settlement and title insurance work in March 1976 when he formed Peoples Title Insurance Agency and paid a secretary to operate it.

Since then he has maintained a careful division of responsibilites. As the settlement attorney, he examines the client's title, helps resolve any problem to the title, coordinates the loan closing and records the documents.

The title insurance work is done in the next office, at Peoples Title. McGinnis and his wife are the sole owners of the title company, he said, "but the decision to insure the title is somebody else's. I don't represent the title insurance company."

At People's Title, a secretary acts as the representative for First American Title Insurance Co., a California-based outfit that pays McGinnis' firm a commission of 70 percent of the premiums written and assurmes the risk of insuring the title.

In return for the commission, the secretary issues a one-page form assuring the lender that First American will insure the loan. After settlement, she types out title insurance policies and sends one to the lender and one to the home buyer.

The arrangement has paid off handsomely. In its first 33 months, while receiving just 60 percent commissions as the representative of a different title insurer, Peoples Title earned more than $400,000 in commissions, according to a recent court suit.

Almost all the home buyers who come to him for settlement services (he charges $325 for each closing), McGinnis said, end up at Peoples Title for their insurance work. "We tell them we have a title agency that we have confidence in," he explained.

"I felt it was a more complete service," said McGinnis, explaining why he set up Peoples Title. "It saves people a lot of time."