Orbitofrontal reality filtering (ORFi) is a thought-filtering mechanism, separate from medial temporal lobe (MTL) memory functions. ORFi enables perception of reality and is associated to a known electrophysiological marker. We hypothesized the orbitofrontal cortex (OFC) is filtering thoughts as they are being generated in the MTL. First, an electrophysiological marker of memory encoding generated by the MTL was identified. This marker was associated with increased theta-band coherence in the MTL. It was found this marker sets in about 35 ms before the marker reflecting ORFi. Both were associated with increased theta coherence, the former from the MTL and the latter from the OFC, both were targeted at one another. At last, a group of patients with schizophrenic spectrum disorders (i.e. psychosis) were recorded. They displayed significantly reduced, albeit present, marker of ORFi. The magnitude was predictive of the diagnosis. Theta coherence increase observable in the control group was absent in the patient group from OFC and left HC and, for the latter, correlated with scores of hallucination.