WASHINGTON - The Federal Reserve Board has granted the First National Co. of Storm Lake, Iowa, permission to enter the title abstracting business, giving some Fed watchers hope that the central bank is warming to banks' selling title insurance.
The June 30 decision allows the $177 million-asset First National to acquire Buena Vista Abstracting, opening up for the first time this source of fee income to holding companies.
Title abstracters normally recreate each county's title records, often converting the paper trail to electronic form. They then charge a fee for the title search.
The Fed found that title research is "closely related" to banking and thus permitted under the Bank Holding Company Act. The decision comes seven years after the Office of the Comptroller of the Currency allowed national banks to acquire title abstracters.
Holding companies currently cannot underwrite or sell title insurance.
"We are pleased they gave us permission," First National president George Schaller said. "Our plan now is to look at the abstracting company and determine if we can use electronic data processing and imaging to replace the traditional way of doing it."
The holding company was confident of approval, he said.
"It really is just the reporting of a history of a piece of property," Mr. Schaller said. "It is similar to a credit report."
But Fed watchers said the decision goes a step further.
"It is functionally a step toward title insurance," said Melanie Fein, a partner at Arnold & Porter. "So, if and when title insurance becomes permissible for banks, this would enable those banks to be positioned to enter the business. It is an incremental step."
The decision shows the Fed can be forward-looking on insurance issues, she said.
"That is a fairly significant development," agreed David Roderer, a partner at Winston & Strawn. "Title insurance remains a hot and heavy battleground."
He said the fight has spread into the legislative arena, where insurance industry lobbyists want to block bank entry into title insurance permanently.
Despite the decision, most banks probably won't rush into the business. Stephen Morrison, general counsel at Norwest Mortgage Co., said the start- up costs are enormous because a company must copy all of a county's records.
The only cost-effective entry is to acquire an existing abstracter, said Mr. Morrison, whose Norwest operates abstracting under a grandfather clause allowing banks to continue offering services that they had before Congress passed the holding company act.
