Last week was an interesting one for title insurer, mortgage-information provider, and Inside Value pick First American Corporation
Under the scheme, homebuilders would refer a homebuyer to First American and, in return, receive a fee from the title insurer. The main concern was that homebuyers would, in effect, be paying higher prices for title insurance to cover these referral fees.
The news is noteworthy for the company, but not huge. The $24 million charge is relatively small compared with First American's $1.8 billion in revenue. Plus, since these referral fees have been going on for several years, the impact to expenses in a typical year will be negligible. Insurance regulators are also investigating First American's primary competitors, Fidelity National Financial
One of the barriers to entry for new competitors is gone, but many others still exist. First American still has cheap access to title information. Its systems, processes, and relationships are still in place. It's still a strong, established name in the industry.
I believe these sorts of schemes are unethical. They do cost consumers money and are a deceptive practice. Homebuyers may think that they are getting an unbiased reference from their homebuilder, but that impartiality is compromised when the homebuilder receives kickbacks for its advice. It's a black mark on First American for enabling that deception.
Nevertheless, I can understand First American's position as well. From its perspective, referral fees are permissible under the Real Estate Settlement Procedures Act, the primary title insurance regulation. Plus, once one company in the industry starts paying referral fees, others are almost required to do so, or face the loss of referral business to its competitors. It's a very difficult position.
Now that regulators have notified First American that they see the practice as dubious and possibly illegal, the company is taking steps to not only cease the practice, but also fully compensate any homebuyers who may have been overcharged due to these fees. It is cooperating with the authorities, as opposed to Fidelity National and LandAmerica, which were served subpoenas to testify in a hearing in April.
I don't think that these actions excuse the deed, but it is noteworthy that First American has voluntarily taken every reasonable step to make redress.
Fool contributor Richard Gibbons does not own any companies mentioned in this article but thinks the kickbacks that mutual fund companies pay investment advisors -- while pretty similar -- are worse than these fees.