The title insurance industry has recently been under fire from various state regulators for the practice of kicking back some of its fees to homebuilders willing to direct business their way. As reported by my colleague, Richard Gibbons, First American (NYSE:FAF) was the first company to agree to stop the practice and to pay affected homeowners an amount equivalent to the referral fees paid to the homebuilders.

Yesterday, First American surprised the industry and shareholders by streamlining and lowering title insurance charges an average of 30% for mortgage refinancing in California (the leading state in refinanced mortgages). The company has combined title insurance and escrow charges into its "First American One Rate." The new rates have to be reviewed by the California Department of Insurance, but they should be effective in about 30 days.

When I spoke with CEO Parker Kennedy yesterday, he said that although this will cost FirstAm about $0.06 per share in 2005, he expects to make up the difference through increased business, since lower title insurance costs may be significant for homeowners in the decision to refinance. He also said lower cost structures are more feasible for companies with large, efficient centralized databases.

I asked how this concept might spread to other states and to resale title insurance. Each state is independently regulated, and each has different fee structures and levels of automation. FirstAm can do this in California because of the higher margins there. The company plans to consider refinance fee changes in each state on an individual basis. Title insurance for the resale of homes is more complicated and won't be included for the time being, though.

I also asked whether Parker thought competitors, such as Fidelity National (NYSE:FNF), LandAmerica (NYSE:LFG), and Old Republic (NYSE:ORI), would follow suit, and he said he expected they would. Refinancing fees would have come down throughout the industry sooner or later, he said, because centralized databases have increased efficiency and lowered cost structure.

FirstAm's stock is down by more than 8% today -- excessive, in my opinion, given that the fee cut won't have much effect on the company's bottom line, but it has great potential for increasing business.

Philip Durell is the advisor for the Motley Fool Inside Valuenewsletter, and First American is one of his recommendations. Want to see his other recommendations? Then why not take a no-obligation30-day free trial?

Philip Durell does not own any stocks mentioned in this article. The Fool has a disclosure policy.