Law of Small Unmanned Aircraft Systems

Updated: Feb 13, 2018

“Recent Developments in the Law of Unmanned Aircraft Systems (Drones) and Applications for Mortgage Lenders” by Imran Naeemullah and Janel M. Yoshimoto appeared in edited form in the Fall 2016 issue of The Abstract, published by the American College of Mortgage Attorneys.



One of the most significant technological developments in recent years is the use of small unmanned aircraft systems (“small UAS”), also known as “unmanned aerial vehicles” or, more colloquially, “drones.”Most readers probably know what a drone looks like from popular media; less widely known is the statutory definition of a drone as an “unmanned aircraft weighing less than 55 pounds.”[i]The use of drones has become widespread in just a few years, in part due to their small size, relatively low cost, and rapid improvements in their technological capabilities. Drone “use is becoming so pervasive that the lines are becoming increasingly blurred between the application of these aerial vehicles as toys, models, and professional aerial instruments,” so that what might “be thought of as a model or hobby aircraft taking pictures for the personal photo album of its operator, for example, can suddenly be classified as a commercial aerial application if one of the photographs is sold for a profit.”[ii]


Although media coverage of commercial drone use focuses on applications such as the delivery of products from retail giants like Amazon, this only paints a narrow portrait. From agricultural operations to bridge inspections to real estate marketing, “[t]he sky is truly the limit with the myriad uses” of drones.[iii]Because of the potential benefits of drones to the closing and administration of mortgage loans, mortgage lenders (and their attorneys) would be well-advised to consider the integration of drone use into the mortgage lending process and to understand the legal framework for such use.


Legal Framework

Until recently, the Federal Aviation Administration (“FAA”) has “accommodated non-recreational small UAS use through various mechanisms, such as special airworthiness certificates, exemptions, and certificates of waiver or authorization.”[iv]This patchwork approach did not easily address the proliferation of drone usage, in response to which Congress passed the FAA Modernization and Reform Act of 2012 (the “Act”).[v] The Act required the Secretary of the Department of Transportation to, among other things, determine whether “certain unmanned aircraft systems may operate safely in the national airspace system” and, if so, to “establish requirements for the safe operation of such aircraft systems in the national airspace system.”[vi]In other words,the Act required promulgating regulations on drone usage, an effort led by the FAA.


On June 28, 2016, a few months behind the schedule called for in the Act, the FAA published its final notice of proposed rulemaking.Those rules took effect very recently, on August 29, 2016. The bulk of the FAA’s rulemaking was to add Part 107 (Small Unmanned Aircraft Systems) to Chapter I of Title 14 of the Code of Federal Regulations (“Part 107”). Part 107 authorizes the routine civil operation of drones in the national airspace system and implements safety rules for such operations, providing a regulatory framework for drone usage.[vii]

The effect of Part 107 is an incremental advance over the previous regime,summarized as follows: (1) it limits the use of small UAS to operating during daylight and restricted twilight hours with appropriate collision lighting, in confined areas of operation, and maintaining visual-line-of-sight operations; and (2) it coversairspace restrictions, remote pilot certifications, visual observer requirements, and operational limits for safety and national security purposes.[viii]Note that because drone technology is evolving so rapidly, Part 107 provides a waiver mechanism by which individual operations can deviate from certain requirements of Part 107 if the FAA determines that “the proposed operation can safely be conducted under the terms of a certificate of waiver.”[ix]


Notably, 14 C.F.R. § 107.1 provides that, subject to certain exceptions, Part 107 primarily governs drone operations going forward. This is significant because it appears that, for example, drone operations under the previously created FAA exemption system willnow be the exception rather than the rule. A drone operator that currently holds an FAA exemption for drone operation can continue to operate under the terms of that exemption until its expiration, although the operator can elect to operate in accordance with Part 107 if so eligible.[x]Consequently, mortgage lenders should focus on how Part 107 governs drone operations, select provisions of which are the focus of the remainder of this section.


14 C.F.R. § 107.7discusses the required inspection, testing, and demonstration of compliance. This means, for example, that the remote pilot in command, owner, or person manipulating the controls of a small UAS must make available to the FAA Administrator the remote pilot certificate with a small UAS rating.[xi] It also means that the FAA Administrator can test or inspect the small UAS, the remote pilot in command, the person manipulating the flight controls of the small UAS, and, if applicable, the designated visual observer.[xii]Other safety-related rules include, for instance, the requirement that the remote pilot in command inspect the small UAS prior to each flight.[xiii]


14 C.F.R. §§ 107.11 through 107.51 set forth provisions that detail the limitations imposed on drone operations. These provisions, along with those discussed in the above paragraph, are important to mortgage lenders because they provide a framework for evaluating the suitability of a proposed drone operator for a given mission. Among the listed provisions are prohibitions on hazardous operation, such as operating a small UAS “in a careless or reckless manner so as to endanger the life or property of another,”[xiv]and operating a small UAS in violation of restrictions on the use of alcohol and drugs.[xv]Among other thing, the limitations also restrict flying hours,[xvi]operating a small UAS out of the visual line of sight,[xvii]the carriage of hazardous material (as defined in 49 C.F.R. § 171.8),[xviii] operating a drone in the vicinity of airports and prohibited or restricted areas,[xix] and the maximum speed and altitude at which the small UAS may be operated.[xx] The visual-line-of-sight restriction is particularly relevant to, for instance, land surveyors, some groups of whom unsuccessfully urged the FAA to loosen this restriction to allow small UAS operations for surveying purposes out of the visual line of sight of the remote pilot in command as long as sufficient visual observers were stationed at appropriate locations (although a waiver may be possible as discussed below).[xxi]


Another provision, found at 14 C.F.R. § 107.9, mandates the reporting of an accident involving a small UAS. An accident report must be submitted to the FAA within ten days of a small UAS operation that causes “[s]erious injury to any person or any loss of consciousness” or “[d]amage to any property, other than the small unmanned aircraft” (unless the cost of repair is $500 or less or the fair market value of the property, if totally destroyed, is $500 or less).[xxii] Similar to how lenders often require borrowers to report prohibited discharges of hazardous materials to the appropriate federal and/or state authorities, as discussed in the following section, lenders should require that their contracted drone operators adhere to all applicable requirements, including the accident-reporting provision.


Finally, 14 C.F.R. §§ 107.200 and 107.205 address waivers from Part 107. The FAA Administrator can issue a certificate of waiver authorizing deviation from certain regulations, including those pertaining to operating a small UAS beyond the visual line of sight and outside of daylight hours.[xxiii] These waivers are particularly important because, for example, the visual-line-of-sight restriction could otherwise impede the ability of drone operators to effectively use small UAS to conduct land surveys or similar operations. The FAA will evaluate such waivers on a case-by-case basis, taking into consideration mitigating factors of the operating environment.[xxiv] At the time this article was submitted for publication, the FAA had not yet finalized the website on which waiver applications may be submitted, but the FAA did indicate that it would attempt to process waiver requests within ninety days from the date of application.[xxv]It appears that such waiver requests must be submitted for each proposed operation rather than, for example, seeking a blanket waiver for a given type of operation (e.g., land inspections). Accordingly, the waiver system may not be a practical solution if up to ninety days is needed to obtain the right to use a drone for the kinds of mortgage lending applications discussed below.


Practical Applications for Mortgage Lenders

To be clear, the FAA’s incremental approach does not allow the unchecked use of drones in applications relevant to mortgage lenders. Nevertheless, particularly as to drone operators that may be able to obtain certain Part 107 waivers for specific operations (the ease of obtaining those waivers remains to be seen), lenders will have substantially greater leeway to use drones in connection with the closing and administration of mortgage loans. These uses potentially offer substantial benefits to mortgage lenders when executed properly. Here are some examples:


Lender’s counsel in Hawaii will typically require in the normal course of closing a construction mortgage loan a mechanic’s lien endorsement to the lender’s title policy, insuring no loss of priority for the mortgage by mechanic’s liens. In order to issue that endorsement in Hawaii, title insurers will need to assure themselves that no “visible commencement of operations”[xxvi] exists at the mortgaged property as of the recording date of the mortgage.A title insurer will often have its representative inspect the construction site to confirm there is no physical evidence of construction commencement. It is not uncommon for loan closings to be held up because a title representative is unable to travel to the site in a timely manner, especially if the site is located in a remote part of the state.A digital aerial inspection of the construction site provided in real time by a small UAS would likely provide the verification needed for the title insurer to close on a timelier basis.


Similarly, in the preparation of land surveys, particularly for large tracts of undeveloped land, using aerial examination by a small UAS could accelerate finalizing the land survey by weeks and at significantly reduced cost, if a qualified operator for the surveyor can obtain a waiver for that purpose.


The same concepts apply to loan administration. Typical mortgage covenants require the mortgagor to keep the mortgaged property and its improvements in good condition and free from hazardous substances. Periodic verification of compliance with these covenants—or any other promise related to the use or condition of the property—could be more easily accomplished by a drone inspection. Draw requests for construction loan disbursements could also be facilitated by the use of drones to monitor progress of construction. From a competitive standpoint, the relative ease of inspecting mortgaged properties by drone could enable lenders to enter distant markets that might previously have been too remote to comfortably administer.


Implementation Concerns

The potential use of small UAS for mortgage lenders under the new rules remains hopeful, but is an unknown quantity at this time. Should mortgage lenders reach the point where drone use is possible through the waiver process, actual use should be implemented only after adequate policies and documentation are in place.


Particularly given the public’s sensitivity to the infringing of drones on their privacy,privacy policies in connection with the use of small UAS and provisions relating to the mortgage lender’s use of drones for land inspection purposes in loan documentation should be established to mitigate against potential claims by borrowers and others. Notably, the FAA deemed privacy issues to be outside the scope of Part 107[xxvii] and also declined to include a preemption provision in Part 107.[xxviii] Accordingly, lenders should consider other privacy-related restrictions, such as those imposed by state law, which may affect their drone usage. Subject to jurisdiction-specific considerations, mortgage lenders should consider incorporating a blanket provision into their loan documents that permits the mortgaged property to be inspected by drone. This provision might specify that the drone inspection can be conducted in any manner permitted by law.


Mortgage lenders will also want to develop careful policies for the selection of and contracting with drone operators. In selecting a drone operator, lenders should ensure that the operator is appropriately licensed and certified for the assignment at hand. From a contract perspective, a drone operator should represent and warrant that he or she is appropriately licensed and certified, and should be contractually obligated (similar to any third-party consultant engaged by the lender) to comply with all applicable laws and regulations (including accident reporting requirements) in performing his or her services, maintain meaningful liability insurance, and indemnify the lender against any claims asserted by others relating to the drone operator’s performance under the contract.


Conclusion

By promulgating Part 107, the FAA has clarified the regulatory landscape governing the commercial use of drones. Although the FAA’s incremental approach contains certain key restrictions, such as those relating to the visual line of sight, there is now a better regulatory framework in place to facilitate commercial drone usage, such as in the closing and administration of mortgage loans.The doors to commercial drone usage therefore appear to be opening wider and soonthe skies may no longer be the limit!

[i]Pub.L. No. 112-95, § 331(6), 126 Stat. 11.


[ii]Donna A. Dulo, Introduction to Unmanned Aircraft Law, inUnmanned Aircraft in the National Airspace 4 (Donna A. Dulo ed., 2015).


[iii]Id. at 3-4.


[iv]Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42065 (June 28, 2016).


[v]Pub.L. No. 112-95, 126 Stat. 11.


[vi]Pub.L. No. 112-95, § 333(c), 126 Stat. 11. The “national airspace system” is a complex framework that encompasses “[t]he common network of U.S. airspace; air navigation facilities, equipment services, airports or landing areas; aeronautical charts, information and services; rules, regulations and procedures, technical information, and manpower and material,” and includes components shared with the U.S. military. Cameron R. Cloar,Unmanned Aircraft in the National Airspace, inUnmanned Aircraft in the National Airspace 90 (Donna A. Dula ed., 2015) (internal quotation marks and citation omitted) (alteration in original).


[vii]Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42066 (June 28, 2016).


[viii]Id.


[ix]Id.


[x]Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42084 (June 28, 2016).


[xi] The “remote pilot in command” is directly responsible for operating the small UAS and has the final authority as to operation of the small UAS. This person must be designated before or during the operation and must hold a remote pilot certificate with a small UAS rating and may, but does not have to be, the person manipulating the controls and/or the owner of the small UAS. The remote pilot certificate with a small UAS rating is the FAA equivalent to a driver’s license for a drone pilot; anyone who manipulates the flight controls of a small UAS must hold this certificate or be under the direct supervision of a remote pilot in commandwho is immediately able to take control of the small UAS if necessary. 14 C.F.R. § 107.12(a).


[xii]14 C.F.R. § 107.12(b). The “visual observer” is someone designated by the remote pilot in command to assist in operating the small UAS by identifying other air traffic and objects in the air and on the ground, a role that helps to implement the “see and avoid” principle that iscentral to safely operating a drone.14 C.F.R. § 107.3.


[xiii]14 C.F.R. § 107.15.


[xiv]14 C.F.R. § 107.23(a).


[xv]14 C.F.R. § 107.27.


[xvi]14 C.F.R. § 107.29.


[xvii]14 C.F.R. § 107.31.


[xviii]14 C.F.R. § 107.36.


[xix]14 C.F.R. § 107.43; 14 C.F.R. § 107.45.


[xx]14 C.F.R. § 107.51.


[xxi]Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42097 (June 28, 2016).


[xxii]14 C.F.R. § 107.9.


[xxiii]14 C.F.R. § 107.205.


[xxiv]Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42097 (June 28, 2016).


[xxv]https://www.faa.gov/uas/getting_started/fly_for_work_business/beyond_the_basics/ (accessed on August 1, 2016).Note that the FAA estimates that processing time is likely to vary depending on the complexity of the request, such that a waiver request for a drone operation in a low-density area with minimal air traffic would probably take considerably less time than a waiver request for a drone operation in congested airspace. Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42072 (June 28, 2016).


[xxvi]Haw. Rev. Stat. § 507-41.


[xxvii]Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42190 (June 28, 2016).


[xxviii]Operation and Certification of Small Unmanned Aircraft Systems, 81 Fed. Reg. 42064, 42194 (June 28, 2016).



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