Audit Report 2026-LA-1003 — California Department of Housing and Community Development ESG CARES Act Program
Summary
Audit Report Number 2026-LA-1003 of the Office of Audit and Evaluation, Office of Inspector General, U.S. Department of Housing and Urban Development, dated March 17, 2026, on the California Department of Housing and Community Development (HCD) and the Emergency Solutions Grant (ESG) CARES Act program. The report states that HCD made improper payments because it did not consistently follow HUD's requirements. It reports that 318 landlord incentives (holding fees, signing bonuses and additional security deposits) totaling $1.02 million were not determined eligible, reasonable, and necessary, that risk mitigation overpayments to landlords were $6,549, and that payments to a contractor for kitchen services totaled $96,561.
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“Audit Report 2026-LA-1003 — California Department of Housing and Community Development ESG CARES Act Program.”
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California Department of
Housing and Community
Development Needed Stronger
Controls to Prevent Improper
Payments in Its ESG CARES Act
Program
Audit Report Number: 2026-LA-1003
March 17, 2026
Office of Audit and Evaluation | Office of Inspector General
U.S. Department of Housing and Urban Development
Highlights
California Department of Housing and Community Development
Needed Stronger Controls to Prevent Improper Payments in Its ESG
CARES Act Program| 2026-LA-1003
What We Audited and Why
In August 2024, we issued an audit report on the California Department of Housing and Community
Development’s (HCD) fraud risk management practices, finding that HCD was not adequately prepared to
prevent, detect, and respond to fraud due to the lack of focus it placed on fraud risks and establishing a
robust fraud risk management framework for the Coronavirus Aid, Relief, and Economic Security Act
(CARES) Act funding for the Emergency Solutions Grant (ESG) program to prevent, detect, and respond to
fraud. 1 Building on that work, we audited HCD’s ESG CARES Act program to determine whether improper
payments existed.
What We Found
HCD made improper payments in its ESG CARES Act program because it did not consistently follow HUD’s
requirements. Specifically, HCD and its subrecipients did not, (1) determine whether 318 landlord
incentives for holding fees 2, signing bonuses, and additional security deposits totaling $1.02 million were
eligible, reasonable, and necessary; (2) properly draw risk mitigation expenses, which resulted in an
overpayment of $6,549 to landlords and, therefore, called into question the remaining $185,731 of risk
mitigation expenses as unsupported; and (3) properly determine the reasonableness of payments to a
contractor that provided kitchen services totaling $96,561. We determined that these conditions
occurred because HCD and its subrecipients believed their practices were in line with the flexibility HUD
allowed for landlord incentives under the ESG CARES Act, and because these entities did not have policies
and procedures for determining the types of landlord incentives that should be used and when to
negotiate them. In addition, both HCD’s Emergency Solutions Grants Financial Management and
Monitoring Policies and Procedures were silent on subrecipients’ monitoring responsibilities over sub-
subrecipients and contractors. These results reduced the number of participants that could have been
served by the program intended to reduce or mitigate homelessness and impacted on HCD’s ability to
maintain program and payment integrity of the ESG CARES Act program. Although the ESG CARES Act
program has concluded, HCD could make some of the same types of improper payments in the annual
ESG program and other HUD-funded program it operates, since these programs allow expenses for
similar activities.
1
HUD OIG audit report 2024-LA-1001 (California Housing and Community Development Should Improve Its
Fraud Risk Management Practices for its ESG CARES Act Program), issued August 2, 2024. (See Background and
Objectives)
2
Unlike a signing bonus or security deposits, landlords received the holding fee subsidies only had to hold their
units available for 2 months and not have to successfully rent the units to any participants.
What We Recommend
We made recommendations in this report to address the control deficiencies identified within the ESG
CARES Act program, as well as ensure the risk of the deficiencies occurring within the annual ESG
program is mitigated. Specifically, we recommend that the Director of HUD’s San Francisco Office of
Community Planning and Development instruct HCD to (1) repay HUD from non-federal funds for the
ineligible landlord holding fees of $964,952 drawn from ESG CARES Act funds, (2) determine whether the
$58,878 drawn for 18 signing bonuses from ESG CARES Act funds were reasonable under the program
participant’s particular circumstances, and not more than necessary to house the program participants,
or repay HUD from non-federal funds, (3) repay HUD from non-federal funds for the risk mitigation
overpayments of $6,549 drawn from ESG CARES Act funds, (4) determine if the remaining risk mitigation
expenses of $185,731 drawn from ESG CARES Act funds were reasonable and necessary in accordance
with program requirements, or repay HUD from non-federal funds, (5) support the cost reasonableness
of $96,561 drawn from ESG CARES Act funds for the kitchen services contractor, or repay HUD from non-
federal funds, and (6) develop and implement additional written procedures and internal controls for the
ESG program to ensure that it and its subrecipients do not charge holding fees, risk mitigation expenses,
and that adequate ESG contracts are properly executed and maintained.
Table of Contents
Background and Objectives ...................................................................................... 1
Results of Audit ............................................................................................................. 5
HCD Made Some Improper Payments in Its ESG CARES Act Program ...................................................... 5
Scope and Methodology ............................................................................................. 13
Appendixes ..................................................................................................................... 15
Appendix A – Schedule of Questioned Costs .......................................................................................... 15
Appendix B – Management Response .................................................................................................... 16
Appendix C – Schedule of Improper Payments by Subrecipient ............................................................ 28
Background and Objectives
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed on March 27, 2020, provided $4
billion for the Emergency Solutions Grant (ESG) program to “prevent, prepare for, and respond to
coronavirus among individuals and families who are homeless or receiving homeless assistance and to
support additional homeless assistance and homeless prevention activities to mitigate the impacts
created by coronavirus.” The Act provided funding in two rounds:
• Round 1: $1 billion allocated under the ESG formula to grant recipients
• Round 2: $2.96 billion under a formula targeted toward communities with a high incidence of
sheltered and unsheltered homeless and those at the greatest risk for homelessness.
The requirements for the ESG program (24 CFR Part 576) applied to the use of the ESG CARES Act funds.
ESG funds may be used for the five program components: (1) street outreach, (2) emergency shelter, (3)
homelessness prevention, (4) rapid rehousing, and (5) Homeless Management Information System
(HMIS). In addition, recipients are allowed to use ESG funds for administrative activities.
The ESG program provides funding to states, local governments, and territories to
• Engage with homeless individuals and families living on the street,
• Improve the number and quality of emergency shelters for homeless individuals and families,
• Help operate these shelters,
• Provide essential services to shelter residents,
• Rapidly rehouse homeless individuals and families, and
• Prevent families and individuals from becoming homeless.
HUD established alternative requirements and flexibilities, as authorized by the CARES Act, through
Community Planning and Development (CPD) notices that were issued and posted on its website. For
example, HUD included landlord incentives as an eligibility activity. These landlord incentives included (1)
signing bonuses up to two months of rent, (2) security deposits of up to three months of rent, (3) paying
the costs of repair damages incurred by the program participant, and (4) paying the costs of extra
cleaning or maintenance of a program participant’s unit or appliances.
California Department of Housing and Community Development
HUD awarded the California Department of Housing and Community Development (HCD) over $319.5
million in ESG CARES Act funds through three allocations, as shown in table 1. This amount represents a
2,505 percent increase from the annual formula ESG grant allocation HCD received from HUD for 2000.
In fact, between 2020 and 2024, HCD received annual ESG funds totaling over $62 million, as shown in
table 2.
Office of Audit and Evaluation | Office of Inspector General Page | 1
Table 1: ESG CARES Act funding allocated to HCD between 2020 and 2022 (as of August 11, 2025)
ESG CARES Act
Allocation Total
Allocation Contract date Balance expenditure
amount disbursed
deadline
September 30,
ESG CARES Act 1 July 23, 2020 $43,990,603 $43,990,603
2023
November 30, September 30,
ESG CARES Act 2 $271,730,986 $271,730,986
2020 2023
ESG CARES Act September
$3,818,845 3 $3,745,974 $72,872 June 30, 2024
Reallocation 23, 2022
Total ESG CARES
$319,540,434 $319,467,563 $72,872
Act
Table 2: ESG Funding allocated to HCD between 2020 and 2024
Fiscal Year Grant Amount
2020 $12,757,275
2021 $12,634,701
2022 $12,513,276
2023 $12,412,939
2024 $12,442,477
Total ESG $62,760,668
HCD is a department within the California Business, Consumer Services, and Housing Agency (BCSH) of
the State of California. HCD provides loans and grants to a range of entities, including public and private
housing developers, nonprofit agencies, and various government partners. The Division of Financial
Assistance (DFA), an operational division within HCD, is responsible for administering approximately 15
state and federal programs. In February 2021, due to the continued increase in funding HCD received,
DFA split into two distinct divisions – State and Federal financial assistance divisions – to address housing
and homelessness. As a result, the Division of Federal Financial Assistance (DFFA) assumed the
responsibility for administering funding that HCD received from the U.S. Department of the Treasury and
HUD, including the ESG CARES Act grant funds.
3
Allocation Amount ($3,818,845) = Total Disbursed ($3,745,974) + Balance ($72,872). Difference of $1 between
Total Disbursed plus Balance Amount due to rounding.
Office of Audit and Evaluation | Office of Inspector General Page | 2
HCD’s Subrecipients Selected for Review4
We selected three 5 HCD subrecipients for review because they drew $94 million of the $319.5 million in
total ESG CARES Act funds HCD received from HUD. The subrecipients used $43 million (or 46 percent)
for a rapid rehousing program. The rapid rehousing program was designed to quickly move homeless
people to permanent housing through relocation, and stabilization services and for short- and/or
medium-term rental assistance. In addition, through CPD Notice 21-08, HUD allowed the ESG CARES Act
program and the subrecipients to include landlord incentives as an eligible activity.
A monitoring of funding sequence, shown in table 3 below, traces the inflow and outflow of funds from
HCD, the direct grantee, to the three subrecipients, and its lower tiered subrecipients or contractors of
the ESG CARES Act program.
Table 3: ESG CARES Act Monitoring of Funding Sequence
Subrecipients: Sub-subrecipients: Sub-sub-
Direct Recipient: HCD awarded the The three subrecipients/
funds to a number of subrecipients awarded Contractors:
HUD awarded ESG
CARES Act Funds to subrecipients. Three funds to sub- The two selected sub-
HCD. of the subrecipient subrecipients. We subrecipients (A-1 and
were selected for questioned draws A-3) awarded funds to
review (see Scope and related to two sub- sub-sub-subrecipients
Methodology), which subrecipients (see and contractors. We
we will refer to as Results of Audit), questioned draws
Subrecipients 1, 2, and which we will refer to related to a sub-sub-
3 in the report. as A-1 and A-3 in the subrecipient and a
report. contractor, which we
will refer to as A-1-a
and A-3-a.
Sub-sub-
Sub-subrecipient
Subrecipient 1 subrecipient
A-1
A-1-a
HCD Subrecipient 2
Sub-subrecipient Contractor
Subrecipient 3
A-3 A-3-a
4
See Scope and Methodology section for selection method.
5
Based on PR 91 report, as of May 7, 2025, HCD had 51 subrecipients. We selected three subrecipients for review
using a risk-based approach.
Office of Audit and Evaluation | Office of Inspector General Page | 3
Improper Payments
Appendix C to OMB Circular A-123, Requirements for Payment Integrity Improvement, defines an
improper payment as a payment that was made in an incorrect amount under statutory, contractual,
administrative, or other legally applicable requirements. All improper payments fall into one of two
categories: (1) improper payments resulting in a monetary loss or (2) improper payments that do not
result in a monetary loss.
• Monetary loss improper payments can be either intentional or unintentional. Intentional
monetary loss improper payments are referred to as financial fraud and overpayments that
occur on purpose. Unintentional monetary loss improper payments are overpayments that
are accidental in nature because at the time of the payment the program is unaware that the
payment is an overpayment and the recipient has also not purposefully falsified information
for gain.
• Non-monetary loss improper payments can be either underpayments or technically improper
payments. Technically improper payments are instances where payments were made to the
right recipient and for the right amount, but the payment process did not follow all applicable
statutes and regulations.
Prior HUD OIG Audit Report: California Housing and Community Development Should Improve Its Fraud
Risk Management Practices for Its ESG CARES Act Program
We issued audit report 2024-LA-1001, dated August 2, 2024, reviewing HCD’s fraud risk management
practices for its ESG CARES Act program and reporting that HCD was not adequately prepared to prevent,
detect, and respond to fraud. Based on our audit findings, we recommended that HUD require HCD to:
1A Establish a fraud risk management framework consistent with GAO's Standards for Internal
Control in Federal Government (Green Book), and in alignment with best practices from GAO's A
Framework for Managing Fraud Risks in Federal Programs and the Chief Financial Officers
Council's Antifraud Playbook.
1B Obtain training or technical assistance on the implementation of fraud risk management
practices.
HCD addressed both recommendations and HUD closed them on April 9, 2025.
Based on our results reported in 2024-LA-1001, we initiated this follow-on audit with an audit objective to
determine if improper payments existed in HCD’s ESG CARES Act program.
Office of Audit and Evaluation | Office of Inspector General Page | 4
Results of Audit
HCD Made Some Improper Payments in Its ESG CARES Act Program
HCD made some improper payments in the ESG CARES Act program. Specifically, HCD and its
subrecipients did not (1) determine that 318 landlord incentives for holding fees, signing bonuses, and
additional security deposits totaling $1.02 million were eligible, reasonable, and necessary; (2) properly
draw risk mitigation expenses, which resulted in an overpayment of $6,549 to landlords and, therefore,
calls into question the remaining $185,731 of risk mitigation as unsupported; and (3) properly determine
the reasonableness of 7 payments made to one contractor that provided kitchen services totaling
$96,561. These conditions occurred because we determined that HCD and its subrecipients believed
their practices were in line with the flexibility HUD allowed for landlord incentives under the ESG CARES
Act, and because these entities did not have policies and procedures for determining types of landlord
incentives that should be used and when to negotiate them. In addition, both HCD’s Financial and
Monitoring Policies and Procedures were silent on subrecipients’ monitoring responsibilities over sub-
subrecipients and contracts. These results reduced the number of participants that could have been
served by the program, intended to reduce or mitigate homelessness, and impacted HCD’s ability to
maintain program and payment integrity of the ESG CARES Act program. Although the ESG CARES Act
program has concluded, HCD could make some of these types of improper payments in the annual ESG
program and other HUD-funded program it operates, since these programs allow expenses for similar
activities.
Subrecipients Improperly Paid $1.02 Million in Landlord Incentives
HCD and its subrecipients made improper payments of $1.02 million for landlord incentives, including
holding fees, signing bonuses, and additional security deposits.
A Subrecipient Paid Ineligible Holding Fee Subsidies to Landlords as Incentives to Hold Units Available for
2 Months
HCD’s subrecipient 1 provided ESG CARES Act funding to its own subrecipient (A-1) for rapid rehousing,
who, in turn, passed the funding to a subrecipient nonprofit (A-1-a).
Sub-sub-subrecipient A-1-a used the ESG CARES Act funds to supplement a pre-COVID holding fee
program using non-federal funds. Specifically, sub-sub-subrecipient A-1-a paid to landlords 300 holding-
fee subsidies, limited to 2 months’ rent, for the purpose of keeping some units available without having
any prospective participants/tenants identified for or interested in those units. Unlike a signing bonus or
a security deposit, landlords that received the holding fee subsidies only had to hold their units available
for 2 months and not have to successfully rent the units to any participants. If the units were not rented
after the 2 months, the landlords kept the holding fee subsidies without further obligation to rent the
units at a future time.
Office of Audit and Evaluation | Office of Inspector General Page | 5
The CARES Act authorized HUD to establish alternative requirements to the ESG regulations found in (24
CFR part 576), allowing recipients of ESG CARES Act funds to use the funds for paying certain incentives to
landlords. These landlord incentives included signing bonuses, security deposits, costs of repairs not
covered by the security deposits, and costs of extra cleaning or maintenance of the participant’s unit or
appliances. The alternative requirements limited the landlord incentives to ensure they were used only
when necessary to secure housing for an eligible household. This was meant to avoid the issuance of
landlord incentives in cases where, for example, a landlord would have otherwise rented a unit to a
program participant without the incentive, or the payment of an incentive would not have resulted in an
eligible household obtaining a unit. Further, the alternative requirement established by the CARES Act
did not identify “holding” fees arrangements as an eligible landlord incentive. HUD also required the
grantees to support the landlord incentive costs by documenting that each cost was reasonable under the
program participant’s particular circumstances, and not more than necessary, which Sub-sub-
subrecipient A-1-a did not do. In addition, since the holding fee arrangement was established with the
landlords before prospective program participant(s) had been identified, it did not show reasonableness
under the program participant’s particular circumstances as required by HUD. We determined that HCD,
Subrecipient 1, Sub-subrecipient A-1, and Sub-sub-subrecipient A-1-a all believed that they were in line
with the flexibility allowed under ESG CARES Act for landlord incentives. However, they misinterpreted
the landlord incentives requirements. HCD also had no policies and procedures properly defining the
eligible types of landlord incentives on how it should be used or how to negotiate them. Consequently,
we determined $964,952 used to pay holding fee subsidies to landlords to be ineligible costs to the
program.
A Subrecipient Paid Signing Bonuses and Additional Security Deposits to
Landlords Without Supporting the Costs Were Reasonable
HCD’s Subrecipient 2 paid 18 landlord incentive signing bonuses or additional security deposits 6 totaling
$58,878 on behalf of program participants but did not document the costs paid were reasonable, and
necessary as required by HUD alternative requirements to the ESG regulations (24 CFR 576), as
authorized under the CARES Act for landlord incentives, and were therefore improper payments.
Subrecipient 2 only documented the amount of the landlord incentives and not differentiating whether
they were signing bonuses or security deposits. 7 Further, the negotiation of the signing bonuses or
security deposits with landlords were not documented. It stated that it had relevant case notes from its
system reflecting the circumstances surrounding the incentives; however, for the three sample items
reviewed totaling $9,070, the notes and records provided only showed that the participants were on a
6
ESG CARES Act funded security deposits, equal to up to 3 months of rent, in addition to security deposit amounts
allowed and funded by annual ESG funds.
7
Of the 3 landlord incentives reviewed, the invoices or supporting records did not specify the type of landlord
incentives used. It was through our request for additional information, we were informed, via email, that one
was for signing bonus and two were for additional security deposits for the 3 sample items we reviewed.
Office of Audit and Evaluation | Office of Inspector General Page | 6
fixed monthly income and homeless. It also stated two 8 of the 3 samples reviewed were used to pay for
additional security deposits (3 months’ rent). However, the amount funded by the ESG CARES Act
program had not been incorporated into the participants’ lease agreements, which only showed the
amount of security deposit9 from its annual ESG. Subrecipient 2 indicated that there were no agreements
with the landlord, documenting the additional security deposits received and held by the landlords. As a
result, this meant that tenants did not have something in writing to show that they were entitled to an
additional 3-month security deposit, separate from the security deposits under 24 CFR 576.105(a)(2),
provided by the ESG CARES Act. Contrary to California State Law 10, which subrecipient 2 said it defers to,
subrecipient 2 said that “there was no expectation or requirement for the landlord to reimburse the
[additional security deposits] funds.”
Subrecipient 2 also did not follow HCD’s Emergency Solutions Grant Program – Program Income Policy,
which encourages subrecipients to require security deposits paid with grant funds to be disbursed by the
landlord directly to the participant when they leave their subsidized unit or exits the project. California
Civil Code Section 1950.5(h)(1) states that, no later than 21 calendar days after the tenant has vacated
the premises, the landlord shall furnish the tenant, a copy of an itemized statement indicating the basis
for, and the amount of, any security received and the disposition of the security, and shall return any
remaining portion of the security deposit. The rental agreements signed by the tenants and landlords
also had this stipulation like the California State Law. However, we determined that the landlords did not
return to the tenants’ ESG CARES Act funded security deposits. Subrecipient 2 did not track whether
security deposits go back to tenants, leaving it to the owner/tenant, which resulted in the landlords not
returning the security deposits as required by the California Civil Code section 1950.5. Further, there
were no policies and procedures for determining when the signing bonuses should be used or how to
negotiate them based on the program participant’s particular circumstances. As a result, we determined
$58,878 used for landlord incentive signing bonuses or security deposits were unsupported costs to the
program.
A Subrecipient Improperly Paid Risk Mitigation Expenses for Damage
Claims, Delinquent Rent, and Vacancy Loss, in Excess of Three Months
HCD’s second-tiered subrecipient (A-1) set aside risk mitigation funds up to $10,000 per unit for damage
claims, delinquent rent, and vacancy loss.
According to HCD’s How-to Guide: Being Proactive About Potential Unit Damage, under section ESG and
Unit Damage, ESG program funds can pay for security deposits, which can be used to pay for unit
damages. In addition, neither ESG program funds, nor other funds recognized as ESG match, can pay for
damage caused by participants. However, ESG recipients may leverage other funds to pay for damage
8
Due to personal identifiable information (PII), we provided the specific sample items including names of
participants and addresses separately to HCD and HUD (see appendix C)
9
Not to exceed two times the monthly rent for unfurnished apartments or three times the monthly rent for
furnished apartments.
10
California Civil Code Section 1950.5
Office of Audit and Evaluation | Office of Inspector General Page | 7
caused by participants if permitted by the leverage funder. Grants from organizations, such as local
charitable foundations are a common course of unrestricted funds that can be used as leverage.
Although risk mitigation is not an eligible ESG expense, HUD’s CPD notice 21-08 allowed payments for
damage claims as landlord incentives under ESG CARES Act, but not to exceed 3 months’ rent.
Despite HCD’s How-to Guide, Sub-subrecipient A-1 used ESG CARES Act funds for risk mitigation to cover
excessive damage to the rental units caused by program participants. Overall, there were 56 payments
towards risk mitigation totaling $200,366, ranging from $74 to $14,105. Our review of risk mitigation for
2 clients, $14,634, identified payments over the maximum allowed for owner incentives, resulting in
ineligible overpayments of $6,549 (45 percent). Due to Sub-subrecipient A-1’s risk mitigation policies not
aligning with CPD’s requirements and the overpayments identified in our review, it calls into question the
remaining risk mitigation expenses of $185,731 (see appendix C) as unsupported. HCD lacked sufficient
written procedures and internal controls to ensure its subrecipients followed program requirements and
its own guidance concerning the use of landlord incentives for risk mitigation costs, resulting in improper
payments of $192,280. 11
A Subrecipient Did Not Properly Determine Cost Reasonableness for
$96,561 Paid to a Food Services Consulting Contractor
HCD’s subrecipient 3 did not ensure its own sub-subrecipient, A-3, properly determined and documented
the reasonableness of costs paid to its kitchen services contractor totaling $96,561 12.
The executed agreement between Sub-subrecipient A-3 and Contractor A-3-a was not adequate, resulting
in the entire amount charged to ESG-CV being unsupported and therefore an improper payment. The
agreement lacked essential information necessary to determine whether the services being procured
were reasonable and allowable. For example, the agreement only stated that operational management
for nutritional services would be provided for the period beginning on or around January 10, 2022, and
ending July 31, 2022, with some billing information and minimal contract terms information concerning
termination notice. The agreement did not clearly identify number of people being trained, the number
of meals produced, days or hours of training, or the costs/rates. The biweekly invoices also had no details
other than the total amount. Our review of procurement and bidding information found that sub-
subrecipient A-3 had not obtained competitive bids, stating it considered the situation to be an
emergency and that no other vendors were interested. It therefore could not provide cost information
obtained from other sources at the time of the award. While Sub-subrecipient A-3 is a nonprofit that
does provide meal services, we could not determine whether the cost paid to the contractor was
reasonable due to the lack of information available regarding the number of individuals being trained, the
number of meals produced, or through Subrecipient 3’s non-existent competitive procurement practice.
According to HUD’s CPD notice 21-08, the recipient may deviate from the applicable standards under ESG
11
Improper payments of $192,280 includes $6,549 of ineligible overpayments and $185,731 of unsupported costs
12
The contractor was paid $138,764 for their services, but only $96,561 was charged to ESG CARES Act funds.
Office of Audit and Evaluation | Office of Inspector General Page | 8
CARES Act; however, it must establish alternative procurement standards used to safeguard, and
maintain documentation on the alternative written standards, and maintain documentation on the
alternative procurement standards used to safeguard against fraud, waste, and abuse in the procurement
of goods and services, which Sub-subrecipient A-3 had not done. Both HCD’s Emergency Solutions Grants
(ESG) Financial and Monitoring Policies and Procedures are silent on subrecipients’ monitoring
responsibilities over sub-subrecipients and contract term requirements. Without sufficient policies and
procedures, in addition to adequate monitoring, HCD may become more vulnerable to making payments
that should not have been made or were incorrect amounts.
Conclusion
HCD and its subrecipients paid over $1.2 million in improper payments from its ESG CARES Act program
funds for landlord incentives, and risk mitigation funds because we determined that they believed that
they were in line with the program’s flexibility but misinterpreted the requirements. Also, HCD did not
have policies and procedures for determining when and the types of landlord incentives that should be
used or how to negotiate them. Proper interpretation of the ESG CARES Act program requirements and
the flexibilities allowed would ensure that these funds could have been used to further maximize the
impact of the ESG CARES Act program had on the population intended to benefit from it -those who were
homeless or at risk of homelessness. There were also improper payments of $96,561 in cost
reasonableness paid to a kitchen services contractor, because both HCD’s Emergency Solutions Grants
Financial Management and Monitoring Policies and Procedures are silent on subrecipients’ monitoring
responsibilities over second tiered subrecipients and contract term requirements. Without adequate
monitoring, HCD will be more vulnerable to making payments that should not be made or are in incorrect
amounts. While the ESG CARES Act program is over, some of the deficiencies identified related to holding
fees, risk mitigation expenses, or unsupported contractor costs could be occurring in HCD’s annual
ongoing ESG program, resulting in additional improper payments.
Recommendations
We recommend that the Director of HUD’s San Francisco Office of Community Planning and Development
instruct HCD to:
1A. Repay ineligible landlord holding fees of $964,952 drawn from ESG CARES Act funds to HUD from
non-federal funds.
1B. Determine if the $58,878 drawn for 18 signing bonuses or additional security deposits from ESG
CARES Act funds were reasonable under the program participant’s particular circumstances, and
not more than necessary to house the program participants or repay HUD from non-federal
funds.
1C. Repay risk mitigation overpayments of $6,549 drawn from ESG CARES Act funds to HUD from
non-federal funds.
1D. Determine if the remaining risk mitigation expenses of $185,731 drawn from ESG CARES Act
funds were reasonable and necessary in accordance with program requirements or repay HUD
from non-federal funds.
Office of Audit and Evaluation | Office of Inspector General Page | 9
1E. Support the cost reasonableness of $96,561 drawn from ESG CARES Act funds for the kitchen
services contractor or repay HUD from non-federal funds.
1F. Develop and implement additional written procedures and internal controls for the annual ESG
program to ensure that it, and its subrecipients, do not charge holding fees and risk mitigation
costs as expenses to the program, and that contracts are properly executed and maintained.
Management Response
HCD’s Response
HCD generally agreed with our recommendations, except for recommendations 1A and 1B regarding the
landlord incentives. HCD stated that during the COVID-19 pandemic, the environment for homelessness
and housing faced unprecedented challenges that made housing people experiencing or at risk of
homelessness increasingly difficult. HCD further specified that HUD waivers were meant to incentivize
risk-averse landlords to rent to high-barrier individuals and families.
For subrecipient 1 and its lower-tiered subrecipients that administered the holding fee program
(Recommendation 1A), HCD further explained that CPD-21-08 lists specific landlord incentives that are
“included” in the definition; however, the notice does not specify that the list of included landlord
incentives provided is exhaustive. This program was only available to landlords of high demand units, and
85 percent of those units were leased to participants in the Coordinated Entry System (CES).
Regarding subrecipient 2, which used landlord incentives for signing bonuses or additional security
deposits (Recommendation 1B), HCD stated that the subrecipient’s policies and procedures did include
the approval and use of the ESG-CV landlord incentives, and that both signing bonuses and security
deposits are allowed under the CPD Notice 21-08. HCD further explained that the lease-incentive security
deposits allowed under the ESG-CV waiver were invoiced and tracked separately from the security
deposits identified in tenant rental agreements. HCD confirmed that these lease-incentive security
deposits were not returned to HCD or to Subrecipient 2 because they were not part of the rental
agreement and, therefore, not subject to California Civil Code Section 1950.5(h)(1).
HUD CPD San Francisco Field Office Response
HUD’s Office of Community Planning and Development (CPD) provided comments for recommendations
1A (ineligible landlord holding fees of $964,952). HUD had no comments on the other findings and
recommendations.
HUD stated that the alternative requirements established by the CARES Act (the notice) for the payment
of landlord incentives includes a “non-exhaustive list of eligible landlord incentives, which does not
explicitly include holding fees, nor does it explicitly exclude holding fees” Therefore, the cost that the
subrecipient is classifying as a holding fee would be acceptable if it meets the other program
requirements; 1) did not exceed three times the rent charged 2) reasonable and necessary to obtain
housing for individuals and families; and 3) determined to be reasonable under the program participant’s
particular circumstances, and not more than is necessary to house the program participant. HUD further
explained that in many communities, before, during, and after the COVID-19 pandemic, recipients and
subrecipients were demonstrating that landlords were reluctant to rent to people experiencing
homelessness and that additional incentives were, and continue, to be needed to convince landlords to
Office of Audit and Evaluation | Office of Inspector General Page | 10
rent to people experiencing homelessness. HUD considered the presence of a pre-COVID holding fee
program to demonstrate the community need for this type of assistance combined with program
participant case files that demonstrate ESG eligibility, e.g., low-income and homeless status
documentation, as reasonable certification of the need and the program participant’s particular
circumstances. HUD also asserted that the draft report stated that in certain cases the subrecipient paid
less than two months of rent allowed by the notice which demonstrated that the incentive was limited to
the need of that particular program participant.
HUD agreed that instances in which an individual was not placed in housing would be considered
ineligible cost based on the intent of the waiver but offered an alternative consideration that could make
the costs acceptable. HUD believes the subrecipients documentation would need to be viewed on a case-
by-case basis, and suggested the recommendation be consistent with the others, to review supporting
documentation to determine eligibility.
Both the HCD and HUD CPD management’s comments are included in Appendix B.
OIG Evaluation of Management Response
OIG Evaluation of HCD’s Response
While we recognize the extraordinary circumstances of the coronavirus pandemic, we disagree that no
repayment is owed to HUD because HCD did not follow HUD’s requirements for the landlord incentives.
Regarding subrecipient 1 and its lowered tiered subrecipients, the CPD Notice of 21-08, strictly defines
the types of costs eligible for landlord incentives to only include signing bonuses equal up to 2 months of
rent, security deposits equal up to 3 months of rent, the cost of repairing damages incurred by the
program participant not covered by the security deposits, and the costs of extra cleaning and
maintenance of a participant’s unit or appliances. We determined that the system used by the sub-sub-
subrecipient A-1-a to track landlord incentives for holding fees and the placement of participants could
not report out on ESG CARES Act funded activity. The manually generated spreadsheet and the data it
used to pull the information had multiple errors. As a result, HCD’s claim that 85 percent of those units
were leased to participants was based on unreliable system data.
Regarding subrecipient2, we acknowledge that its ESG-CV Written Standards include basic information
about landlord incentives. However, they lack detailed policies and procedures regarding when to use
them, which types to use, and how to negotiate them based on the program’s particular circumstances.
While we acknowledge that both signing bonuses and landlord-incentive security deposits are allowed
under the CPD Notice 21-08, the subrecipient did not keep proper records of these deposits. Upon our
request for information, the subrecipient contacted the landlord and found that the landlord could not
provide a valid reason for withholding the tenant’s security deposits. It also said that it verbally informed
the landlord of its violation of the state law, adding in the email that it is their policy to adhere to the
California State Law. Finally, CPD Notice 21-08 states that requirements at 24 CFR Part 576 apply to the
use of these (CARES Act) funds, unless otherwise provided by alternative requirements.
Office of Audit and Evaluation | Office of Inspector General Page | 11
OIG Evaluation of HUD CPD San Francisco Field Office Response
We disagree with HUD that the CPD Notice 21-08 for the payment of landlord incentives was a “non-
exhaustive list” of eligible landlord incentives and that holding fees met the other requirements. The
notice establishes a closed set of four specific categories (i) signing bonuses; (ii) security deposits; (iii)
repair damages incurred by the program participant not covered by the security deposits; and (iv) extra
cleaning or maintenance. Because HUD chose to enumerate these specific costs, any cost not explicitly
listed, such as a holding fee, falls outside the scope of the waiver’s authority. CPD Notice 21-08
references back to the requirements at 24 CFR Part 576 unless provided by the alternative requirements.
While we acknowledge the extenuating circumstances of COVID-19, holding fee subsidies were not
identified as an eligible landlord incentive. Furthermore, holding fee arrangements were established with
landlords before prospective program participants had been identified. Therefore, they did not
demonstrate reasonableness under the program participant’s particular circumstances, as required by
HUD.
We believe HUD has misinterpreted a statement in the draft report regarding the 300 holding fee
subsidies. HUD indicated that instances of subrecipient paying less than two months of rent
demonstrated that incentive were limited to individual participant need. However, our report was
describing the (lower-tiered) subrecipient’s policy regarding their holding fee program structure, noting
that payments were allowed for up to two months of rent and that 300 holding fee payments were paid
out. We didn’t find any instances of holding fee subsidies that were less than two months’ rent as part of
our sample review. We made a minor adjustment to the applicable sentence in the report for better
clarity.
We can further discuss the recommendation (1a) and how to address the 300 ineligible holding fee
subsidies paid to landlords with HUD as part of the audit resolution process.
Office of Audit and Evaluation | Office of Inspector General Page | 12
Scope and Methodology
We conducted our audit offsite from August 2024 through July 2025. Our audit covered the period April
1, 2020, through June 30, 2024. Most interviews and discussions were conducted offsite, with a few
conducted on-site in the greater Los Angeles area. Our audit focused on whether improper payments
existed in HCD’s ESG CARES Act program.
To accomplish our objective, we performed the following:
• Reviewed pertinent criteria, including applicable laws, regulations, policies, procedures, and
other relevant documentation related to HUD’s ESG and ESG CARES Act programs.
• Interviewed and/or obtained information from officials from HCD, HCD’s subrecipients, the HUD
San Francisco field office, and HUD CPD Headquarters.
• Reviewed the policies and procedures for HCD and its subrecipients, as well as other relevant
documentation.
• Obtained and reviewed the general ledgers from HCD and its subrecipients for the ESG CARES Act
program.
• Selected a sample of three subrecipients, based on risk factors, and reviewed transaction-level
data.
• Reviewed the supporting documentation for sampled expenditures to determine if improper
payments existed.
• Reviewed the general ledger for HCD’s subrecipients to determine the number and amount of
landlord incentives for holding fees, signing bonuses, and additional security deposits paid to
landlords.
• Reviewed the general ledger for HCD’s subrecipient to determine the number and amount of risk
mitigation expenses paid to landlords.
• Reviewed HCD’s subrecipient food service operation contract to determine the cost
reasonableness paid to a kitchen services contractor.
Initially we selected a sample of three subrecipients, based on risk factors, to include in our review. 13
From these three subrecipients, we obtained a universe of 30,273 ESG CARES Act expenses and selected
a statistical sample of 90 records to determine if the payments were proper or improper. Based on our
initial review of the 15 out of 90 expenses, we did not proceed with reviewing the remaining 75 expenses
and instead focused our review on risk areas we identified. These areas included landlord incentives for
holding fees, signing bonuses, additional security deposits, food services contract, and risk mitigation
13
Due to the significant number of sub-subrecipients awarded ESG CARES Act funds by some of our three selected
subrecipients, we further refined our scope to focus on Subrecipient 1’s largest sub-subrecipient of ESG-CV funds
and Subrecipient 2’s internal departments/divisions.
Office of Audit and Evaluation | Office of Inspector General Page | 13
expenses. Therefore, in addition to the 15 statistical sample expenses initially reviewed, we selected 11
more sample expenses from our statistical sample, and an additional 2 expenses outside our statistical
sample from general ledger data that were related to these risk areas.
We relied in part on data provided by HCD and its subrecipients. We determined that the data was
sufficiently reliable for the purposes of our review because we corroborated the data with supporting
documentation that was provided by HCD and its subrecipients.
We conducted the audit in accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our objective. We believe that the
evidence obtained provides a reasonable basis for our conclusions based on our objective.
Office of Audit and Evaluation | Office of Inspector General Page | 14
Appendixes
Appendix A – Schedule of Questioned Costs
Table 4. Schedule of Questioned Costs
Recommendation
Ineligible 1/ Unsupported 2/
Number
1A $964,952
1B $58,878
1C $6,549
1D $185,731
1E $96,561
Totals $971,501 $341,170
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that
the auditor believes are not allowable by law; contract; or Federal, State, or local policies or regulations.
In this instance, the ineligible costs associated with recommendations 1A and 1C represent the (1) 300
holding fee subsidies paid to landlords as incentives to hold units available for two months, and (2)
overpaid payments, not to exceed 3 months’ rent, paid over the maximum allowed for landlord
incentives charged to risk mitigation expenses for unit damage claims, delinquent rent, and vacancy loss,
on behalf of the program participants.
2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or
activity when we cannot determine eligibility at the time of the audit. Unsupported costs require a
decision by HUD program officials. This decision, in addition to obtaining supporting documentation,
might involve legal interpretation or clarification of departmental policies and procedures. In this
instance, the unsupported costs associated with recommendations 1B, 1D, and 1E represent the (1) the
missing documentation that the 18 signing bonuses or additional security deposits totaling $58,878, (2)
the universe of $200,366 less $14,634 of the tested risk mitigation expenses, totaling $185,731 in
untested but questionable risk mitigation expenses, and (3) grant funds of $96,561 drawn with no
support for cost reasonableness.
Office of Audit and Evaluation | Office of Inspector General Page | 15
Appendix B – Management Response
The Department of Housing and Community Development’s Response
The following comments were provided by HCD:
STATE OF CALIFORNIA - BUSINESS CONSUMER SERVICES AND HOUSING AGENCY
DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT
DIVISION OF FEDERAL FINANCIAL ASSISTANCE
May Lee State Office Complex
651 Bannon Street
Sacramento, CA95811
(916)283-2771
www.hcd.ca.gov
HCD Response to OIG Draft Audit Report
February 13, 2026
MEMORANDUM FOR: Office of Audit/Office of Inspector General /US Department
of Housing and Urban Development
FROM: Gustavo Velaquez, Director of the California Department of Housing and
Community Development
SUBJECT Office of Inspector General Audit Report Number: 2026-LA-100X
Dear Tanya Schulze:
Thank you for the opportunity to review and provide comments on the audit titled,
“California Department of Housing and Community Development Needed Stronger
Controls to Prevent Improper Payments in Its ESG CARES Act PROGRAM.” Thank you
also for meeting with us to discuss the recommendations in the Draft Audit Report
I would like to mention once again how much HCD appreciates its very productive
working relationship with the HUD OIG team, throughout the course of th is audit. HCD
is immensely grateful for its federal resources, such as through this ESG CARES Act
Program (ESG-CV), and extremely proud of its accomplishments in preventing
homelessness and serving vulnerable Californians experiencing homelessness during
the unprecedented Covid-19 pandemic.
I would also like to emphasize that, of the $319.5 million in ESG-CV funds awarded to
HCD, this Draft Report reflects recommendations relating to just 0.41% of total
expenditures made under this grant.
Office of Audit and Evaluation | Office of Inspector General Page | 16
As we have discussed, HCD disagrees with the conclusions drawn from the audit
process and the recommendations OIG is making to the HUD San Francisco Office of
Community Planning Development (CPD) However, HCD will take appropriate steps
under the direction of the HUD CPD San Francisco Office to implement the
recommendations provided by OIG, where feasible.
HCD is committed to adhering to the regulations for each program activity it awards and
assisting grantees/subrecipients in administering funded programs within the regulatory
framework. From October 2020 to October 2024, HCD administered $319.5 million in
ESG-CV funds, urgently and compliantly serving 47 communities, including seven tribal
communities and 100,054 individuals across California during an unprecedented global
pandemic, where housing vacancy rates were at historic lows and the risk of
homelessness at historic highs. Below, HCD is pleased to provide a response for each
of HUD-OIG’s recommendations (Note: 100% of funds were expended The $72,872
balance referenced in the HUD OIG report is a result of repayments for equipment sold
after grant close-out in adherence with 2 CFR 200 rules around acquired property
disposition.)
During the COVID-19 pandemic, the environment for homelessness and housing faced
unprecedented challenges that made housing people experiencing or at risk of
homelessness increasingly difficult. There was an urgency to move people off the
streets and into non-congregate shelter or permanent living situations quickly, so they
were not at risk of transmitting or being exposed to coronavirus. Non-congregate shelter
and permanent housing were life-saving interventions to prevent hospitalization and
reduce deaths.
During the pandemic, landlords became increasingly risk-averse, particularly as
California's eviction moratorium temporarily limited their ability to remove tenants for
nonpayment or lease violations The very low rental vacancy rate made it even more
difficult to secure units for high-barrier clients with unstable/inconsistent rent histories in
this environment.
HUD released several CPD Notices beginning in 2020 that implemented waivers that
lifted restrictions in the ESG federal regulations, 24 CFR 576. Landlord Incentives were
presented in CPD-21-08. The Notice stated that "waiving the limitation of paying for
landlord incentives would increase the number of housing units available for quickly re-
housing people experiencing homelessness or at risk of homelessness, especially in
tight rental markets, which is critical to preventing the spread of coronavirus and helping
mitigate the economic impact of the crisis."
HCD strongly supports the rapid rehousing and emergency shelter programs that were
developed and expeditiously implemented by Subrecipients 1,2, and 3. These
programs met the directive by HUD to mitigate the effects of the COVID-19 pandemic in
the homeless population by quickly housing those on the streets. This often required
expanding an already existing program to meet heightened need during the pandemic.
2
Office of Audit and Evaluation | Office of Inspector General Page | 17
Responses to HUD recommendations
Recommendation 1A: Repay ineligible landlord holding fees of $964,952 drawn from
ESG CARES Act funds to HUD from non-federal funds.
HCD Response: Overall, HCD disagrees with OIG’s restrictive interpretation of landlord
incentives described in CPD-21-08 The HUD waivers were meant to incentivize risk-
averse landlords to rent to high-barrier individuals and families. The open rental market
requires prospective tenants to meet strict eligibility criteria, a minimum credit score
(typically 600 or above), verifiable monthly income equal to 2-3 times the rent, and a
clean rental history with no evictions or outstanding balances owed to previous
landlords. People who are experiencing homelessness typically do not meet these
standard screening criteria. Without additional assurances, landlords are unwilling to
approve a rental application from someone in these circumstances, and the
individual/family will remain on the streets.
Subrecipient 1, Sub-subrecipient A-1 (A-1)and Sub-sub-subrecipient A-1-a (A-1-a)
administered the holding fee program in good faith with the understanding that the
program design was compliant with ESG-CV, which waived the prohibition on landlord
incentives usually present for ESG. The subrecipients classified holding fees as a type
of landlord incentive. CPD-21-08 lists specific landlord incentives that are “included" in
the definition; however, the notice does not specify that the list of included landlord
incentives provided is exhaustive. The CPD Notice capped landlord incentives at no
more than three months of rent The subrecipient's holding fee program policies and
procedures clearly stated a landlord could receive up to two months of rent per unit. We
firmly believe they stayed within the overall guidance stated in the CPD Notice.
This holding fee program helped ensure all Coordinated Entry System of Care (CES)
participants had a fair opportunity to secure stable housing and gave them a "right of
first refusal” for a two-month period In which they could view and apply for units, and
units could undergo quality inspections and then get leased up. Per Sub-subrecipient A-
1 (A-1)’s 2021-22 Housing Location Scope of Required Services (SRS), the holding fee
program was only available to landlords of high demand units that would best fit the
needs of clients in CES, such as one-bedroom units, studios or efficiency units. In
Subrecipient 1’s county, vacancy rates were lower than the national average, ranging
between 3-5 percent while the holding fee program was being administered during the
years of the pandemic. Of the units for which landlords received a holding fee with ESG-
CV funds, 85-percent of those units were leased to participants in CES. In the limited
instances where it took longer than 60 days to get a CES participant qualified for a held
unit, the landlord never received more than the two-month holding fee incentive.
The holding fee created a system-wide method for engaging with landlords that was
much more effective than when individual case managers tried to advocate on behalf of
a single client or tenant This leveled the playing field, negotiating a standard holding
fee and a standard rent that would bring the unit to the CES.
3
Office of Audit and Evaluation | Office of Inspector General Page | 18
Recommendation 1B: Determine if the $58,878 drawn for 18 signing bonuses or
additional security deposits from ESG CARES Act funds were reasonable under the
program participant’s particular circumstances, and not more than necessary to house
the program participants or repay HUD from non-federal funds.
HCD Response: HCD disagrees with the restrictive interpretation of the types of
documentation required to support a landlord incentive. Landlord incentives served as a
critical tool to mitigate the perceived financial risk and encourage landlord participation
in the ESG-CV program. The landlord incentives served to mitigate the landlord’s
perceived risk in renting to a high-barrier tenant and were critical in successfully
securing permanent housing for the clients in alignment with the goals of the ESG-CV
program to rapidly rehouse individuals and families.
The vacancy rate in Subrecipient 2’s county for the second quarter of 2021 was I 9
percent This low vacancy rate warranted the use of sign-on bonuses and security
deposits in an environment where a tenant on the open market who was able to afford
rent without any subsidy would be preferred over a tenant with no rental history, a
history of homelessness, and extremely low income. In addition, there was an eviction
moratorium in place in California which made it hard to motivate landlords to take
tenants with unstable rental history.
Furthermore, HCD contends that homeless individuals share the same common
eligibility barriers in the open rental market: minimum credit score, verifiable monthly
income equal to 2-3 times the rent, and a clean rental history with no evictions or
outstanding balances owed to previous landlords. People who are experiencing
homelessness do not meet these strict standards of screening.
Subrecipient 2’s policies and procedures document did include the approval and use of
the ESG-CV landlord incentives. Both the signing bonuses and security deposits
allowed under the CPD Notice 21-08, Landlord Incentives section, served as a
negotiation tool with a purpose to mitigate potential risks perceived by the landlord and
to facilitate access to stable housing for homeless tenants
HCD confirmed with Subrecipient 2 that there was a landlord incentive approval process
in place. Social workers were responsible for presenting each case to the manager,
ensuring they were fully aware of the client’s situation before authorizing the incentive.
The regional manager of the administering department was required to review the
circumstances and approve all assistance prior to issuance.
Landlord signing bonuses of up to two-month’s rent and security deposits of up to three-
month’s rent were documented and allowed in Subrecipient 2’s ESG-CV policies and
procedures. Caseworkers were meeting with program participants, obtaining homeless
status intake information, documenting the history and confirming all other financial and
housing resources were exhausted This information was completed for every person
experiencing homelessness who came into the CES during the COVID-19 pandemic
due to their vulnerability.
4
Office of Audit and Evaluation | Office of Inspector General Page | 19
Lease-incentive security deposits allowed under the ESG-CV waiver were invoiced and
tracked separately from the security deposits identified in tenant rental agreements. The
security deposits identified in tenant rental agreements were allowed under ESG
regulation (24 CFR 576.105(a)(2)) but could not exceed two months rent. Under
California Civil Code Section 1950.5(h)(1), any unused portion of a security deposit
identified in a rental agreement or lease must be returned to the tenant no later than 21
calendar days after the tenant has vacated the premises. The rental agreements signed
by tenants and landlords under this program had this stipulation. Subrecipient 2
confirmed that lease-incentive security deposits were over and above the security
deposit identified in the rental agreements and were not listed there. The lease-
incentive security deposits were not returned to HCD or to Subrecipient 2, as they were
not part of the rental agreement and therefore not subject to the aforementioned
California civil code, which is intended to protect consumers from paying more than is
reasonable for individual renters.
Recommendation 1C: Repay risk mitigation overpayments of $6,549 drawn from ESG
CARES Act funds to HUD from non-federal funds.
HCD Response: HCD will work with the HUD CPD San Francisco Office to address this
issue.
Recommendation 1D: Determine if the remaining risk mitigation expenses of $185,731
drawn from ESG CARES Act funds were reasonable and necessary in accordance with
program requirements or repay HUD from non-federal funds.
HCD Response: HCD will work with the HUD CPD San Francisco Office to address this
recommendation.
Recommendation 1E: Support the cost reasonableness of $96,561 drawn from ESG
CARES Act funds for the kitchen services contractor or repay HUD from non-federal
funds
HCD Response: HCD agrees with the recommendation and will work with Subrecipient
3 and its sub-recipient A-3 to analyze the cost reasonableness of the funds used for
kitchen services. Sub-sub recipient A-3 operates a homeless shelter and during this
period, provided dinner for up to 44 individuals per day. Since the pandemic, they have
expanded to 59 beds.
During the pandemic the Sub-subrecipient A-3 lost its kitchen staff and was unable to
find new employees. In order to keep providing services, they needed to find a
commercial kitchen operator who would be willing to provide meal service to clients and
train interested program participants.
They contacted six or seven restaurants and catering companies by phone; however,
only one entity responded to Sub-subrecipient A-3’s calls. Contractor A-3-a, provided
5
Office of Audit and Evaluation | Office of Inspector General Page | 20
high quality services and trained new staff cooks to take over at the end of the
agreement, which included training several of the individuals living at Sub-subrecipient
A-3’s shelter. The contract between Subrecipient 3 and Sub-subrecipient A-3 outlined
the scope of services which included purchase of food for meals, training shelter staff
how to operate the commercial kitchen, and preparing meals for shelter clients. The
contract was short term, beginning on January 10, 2022, and running through July 31,
2022. The length of the contract demonstrated the goal was to meet the urgent need to
get shelter clients fed, train shelter staff to operate the shelter’s commercial kitchen, and
prepare shelter meals.
Although Sub-subrecipient A-3’s shelter had a sole respondent, their intention was to
get other vendors/suppliers to bid for this contract. The number of food service
vendors/suppliers in the marketplace was very minimal during this period.
While Sub-subrecipient A-3 did not document their procurement process, they did
attempt to get competition in an environment that was very difficult due to the pandemic
and HCD will work with Subrecipient 3, and the San Francisco HUD office to determine
and document cost-reasonableness of the program.
Recommendation 1F: Develop and implement additional written procedures and
internal controls for the annual ESG program to ensure that it and its subrecipients do
not charge holding fees and risk-mitigation costs as expenses to the program and that
contracts are properly executed and maintained.
HCD Response: HCD agrees that written policies and procedures as well as monitoring
are important for compliant program delivery; HCD is always open to adding additional
policies and procedures as warranted.
HCD monitored all ESG-CV subrecipients except for one that was monitored directly by
the San Francisco HUD Regional Office as part of routine grant monitoring.
HCD already has published policies and procedures on its ESG website, such as the
ESG Program Manual for Subrecipients, that clearly identify the eligible activities under
each ESG component. This program manual lists eligible expenses and does not
include risk-mitigation fees or holding fees as allowable expenses under the ESG
program, 24 CFR 576.
Internal control procedures are in place and are adhered to by ESG staff. Staff require
supporting documentation for each request for funds (invoice) received from an ESG
subrecipient. In addition, HCD’s ESG program staff conduct annual monitoring of all
ESG contracts.
HCD has recently published the ESG Subrecipient Monitoring Plan and
Procedures document that provides subrecipients monitoring guidance over their ESG
sub-subrecipients, including:
6
Office of Audit and Evaluation | Office of Inspector General Page | 21
• Developing a monitoring plan for their sub-subrecipients;
• Establishing a monitoring schedule based on a risk assessment;
• Use of standardized checklists for on-site and desk reviews; and
• Ensuring compliance with ESG requirements and improving program
performance.
Office of Audit and Evaluation | Office of Inspector General Page | 22
HUD Management’s Response
The following comments were provided by the HUD CPD San Francisco Field Office:
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-7000
OFFICE OF CCMMUNI1T PLANNING
AND DEVELOPMENT
MEMORANDUM FOR: Tanva Schulze. Resional Inspector General for Audit 9ZA
FROM: Angelo Tom Acting Director. Community Planning and Development. San Francisco
Field Office, 9AD
SUBJECT: Response to Draft Audit Report - Prevent Improper Payments
California Department of Housing and Development
ESG CARES Act Program
Overall, the Office of Inspector General (OIG) completed an improper payment audit of the
State of California Department of Housing and Community Development (HCD)’s administration
of the Emergency Solutions Grants CARES Act Program (ESG CARE) and provided a draft report
California Department ofHousing and Development Needed Stronger Controls to Prevent
improper Payments in Its ESG CARES Act Program for HUD to comment.
The draft audit report identifies questioned costs in the amount of $1,312,671.00 and
makes six recommendations for HUD. OIG recommends that the HUD Field Office instruct HCD
to:
1A. Repay ineligible landlord holding fees of $964,952 drawn from ESG CARES Act
funds to HUD from non-federal funds.
1B. Determine if the $58,878 drawn for 18 signing bonuses or additional security
deposits from ESG CARES Act funds were reasonable under the program
participant's particular circumstances, and not more than necessary to house the
program participants or repay HUD from non-federal funds.
1C. Repay risk mitigation overpayments of $6,549 drawn from ESG CARES Act funds
to HUD from non-federal binds.
1D. Determine ifthe remaining risk mitigation expenses of $185,731 drawn from ESG
CARES Act binds were reasonable and necessary in accordance with program
requirements or repay HUD from non-federal funds.
1E. Support the cost reasonableness of $96,561 drawn from ESG CARES Act funds for
the kitchen services contractor or repay HUD from non-federal funds.
1F. Develop and implement additional written procedures and internal controls for the
annual ESG program to ensure that it. and its subrecipients, do not charge holding
fees and risk mitigation costs as expenses to the program and that contracts are
www.hud.gov espanol.hud.gov
Office of Audit and Evaluation | Office of Inspector General Page | 23
properly executed and maintained.
HUD appreciates OIG's review of California’s ESG-CV program, particularly the insights
into improvements for policies and procedures. In response to OIG’s January
30th correspondence and invitation to provide feedback on the draft report, the San Francisco Field
Office of Community Planning and Development (CPD) in consultation with the Office of Special
Needs Assistance Programs (SNAPS) submits the following comments for inclusion m the final
report.
1 EMERGENCY SOLUTIONS GRANTS (ESG) - CORONAVIRUS (CV)
LANDLORD INCENTIVES:
The draft report stated that HCD and its subrecipients made improper payments of $ 1.02
million for landlord incentives, including holding fees, signing bonuses, and additional security
deposits. Specifically, $964,952 of the $1.02 million was expended on holding fee subsidies to
landlords.
First, the draft report reads the alternative requirement established by the CARES Act to
not identify "holding" fees arrangements as eligible landlord incentive. However. HUD disagrees
with the draft report’s conclusion that "holding" fees are categorically ineligible landlord incentives.
• Section III.E.3.e of CPD Notice 21-08 (CPD-21-08). titled Waivers and
Alternative Requirements for the Emergency Solutions Grants (ESG) Program
Under the CARES Act, establishes the requirements for the payment of landlord
incentives. The notice includes a non-exhaustive list of eligible landlord
incentives, winch does not explicitly include holding fees, nor does it explicitly
exclude holding fees.
• CPD-21-08 does not define "holding fees.”
Therefore, if the cost that the subrecipient is classifying as a holding fee meets the other
requirements of Section III.E.3.e. HUD would have considered the holding fee an eligible landlord
incentive. These other requirements are that the expense:
• Did not exceed an amount that is three times the rent charged for the unit for
which the holding fee was paid;
• Was reasonable and necessary to obtain housing for individuals and families
experiencing homelessness; and
• Was determined to be reasonable under the program participant’s particular
circumstances, and not more than is necessary to house the program participant.
Second, the report correctly identifies that HUD required recipients to support landlord
incentive costs by documenting the cost was reasonable under the program participant’s particular
circumstances, and not more than necessary. However. HUD disagrees with the conclusion that
since the holding fee arrangement was established before prospective program participants) had
been identified, it did not show reasonableness under the program participant’s circumstances.
In many communities - before, during, and after the COVID-19 pandemic - recipients and
Office of Audit and Evaluation | Office of Inspector General Page | 24
subrecipients were demonstrating that landlords were reluctant to rent to people experiencing
homelessness and that additional incentives were, and continue, to be needed to convince landlords
to rent to people experiencing homelessness. The presence of a pre-COVID holding fee program
would demonstrate the community need for this type of assistance. HUD would consider this,
combined with program participant case files that demonstrate ESG eligibility, e.g., low-income and
homeless status documentation, as reasonable certification of the need and the program participant's
particular circumstances.
2 MANAGEMENT RECOMMENDATIONS
Related to holding fees, this draft report recommends that the San Francisco Office of
Community Planning and Development (CPD) require HCD to repay landlord holding fees of
$964,952 drawn from ESG CARES Act funds to its line of credit from non-federal funds.
In response to OIG’s January 30th correspondence and invitation to provide feedback on the
draft report. HUD is providing the following comments:
1. Under recommendation 1A. HUD acknowledges OIG’s concerns regarding the landlord
incentives. However. HUD does not believe that it has the authority to require HCD to
repay the entire amount of $964,952 without reviewing the eligibility of costs for each
program participant. OIG’s recommendation that the entire amount must be repaid appears
to be based on the criteria listed in items a-d below. HUD has provided its responses to each
of these criteria to support its opinion that it does not have the authority to require
BCD’s repayment without a review of the costs associated with each program participant.
a. OIG found that the subrecipient paid the landlord incentives as a "holding fee" to
hold the unit for two months while a prospective program participant
was being identified and prepared to be placed in the unit. The report stated that
“.. .the alternative requirement established by the CARES Act did
not identify holding” fees arrangements as an eligible landlord incentive.”
i. HUD's_perspective is that the notice provided multiple examples (but not
exclusive ones) of landlord incentives that are not so narrowly defined to
limit a grantee or subrecipient's innovative implementation of those
incentives. While a grantee may refer to an incentive using
different terminology than the notice, it could still meet the technical
requirements of the notice and be considered an eligible cost. If. in this
case, the grantee designed a process that provided a landlord incentive as a
"signing bonus” which the landlord then used to hold a unit for a prospective
tenant, then it could fit within the notice's intent for landlord incentives even
if the grantee did not explicitly refer to the incentive as a "signing bonus”.
b. OIG identified that the notice required grantees to support the landlord incentive
costs by documenting that each cost was reasonable under the program
participant’s particular circumstances, and not more than necessary. The
report states that OIG found that the subrecipient did not document that each cost
was reasonable and necessary under the program participant's particular
circumstances.
i. HUD agrees that the notice states that a grantee must determine and
document that each of the costs is reasonable under the program
Office of Audit and Evaluation | Office of Inspector General Page | 25
participant's particular circumstances: however, the notice does not
prescribe a method by which a grantee must make
this determination. HUD understands that in many cases a grantee or
subrecipient was operating in the emergency
situation of a highly competitive rental market and the rapid spread of
Coronavirus among its unhoused population. HUD’s perspective is
that the notice does not prescribe a method to determine the necessity and
reasonableness of costs to provide flexibility to grantees or subrecipients
to act quickly to move program participants into housing. HUD believes
that the recipient would need to review the subrecipient’s
documentation on a case-by-case basis to decide on the necessity' and
reasonableness of costs.
ii. The draft report also stated that in certain cases the subrecipient paid less
than the two months of rent allowed by the notice. HUD notes that the
instances in which an incentive was paid that was less than the allowable
maximum of two months of rent would demonstrate that the incentive
was limited to the need of that particular program participant (i.e., the
individual needed less than two months to be in a position to be
housed). In those cases, it appears that the subrecipient was able to
maximize the incentive (smaller payment to the landlord) while achieving
the incentive’s intended purpose (quickly securing affordable housing in a
competitive market).
c. OIG identified that since the holding fee arrangement was established with the
landlords before the prospective program participant was identified, it did not
show reasonableness under a particular program participant’s circumstances.
i. The notice states that “Waiving the limitation on eligible costs under
housing relocation and stabilization services to pay for the costs of
landlord incentives will increase the number of housing units available for
quickly re-housing people experiencing homelessness or at risk of
homelessness, especially in tight rental markets, which is critical to
preventing the spread of coronavirus and helping mitigate the economic
impact of the crisis.” Based on this statement. HUD's_perspective
is that the primary intention of the landlord incentives was to "increase the
number of housing units available for quickly re-housing people...” and
that a landlord incentive that resulted in the landlord holding available a
unit of affordable housing in a "tight rental market’’ serves the purpose of
the waiver so long as the housing outcome is achieved. The process of
securing a rental unit can take a significant amount of time for an
unhoused individual (e g., gathering documentation, conducting
inspections) and using a landlord incentive to hold a unit available until a
program participant is ready could be considered a reasonable cost for that
individual’s circumstances. HUD agrees that in instances in which an
individual was not placed in housing would be considered
ineligible cost based on the intent of the waiver. At the same time, while
considering the highly competitive local California housing markets, HUD
would proffer that if the unit was found by recipient not to be occupied by
Office of Audit and Evaluation | Office of Inspector General Page | 26
an ESG eligible person and if owner agrees to include it in the portfolio of
other assisted housing providers (i.e.. public housing authorities.
Continuum of Care (CoC) entities, etc ), targeting low and very low-
income persons, for one year, that outlay would be forgiven, consistent
with McKinney-Vento disposition instructions.
d. Finally. OIG determined that “.. HCD, Subrecipient 1, Sub-subrecipient A-l, and
Sub-sub-subrecipient A-l-a all believed that they were in line with the flexibility
allowed under ESG CARES Act for landlord incentives. However, they
misinterpreted the landlord incentives requirements.”
i. HUD notes that the activity in question is based on HCD and its
subrecipient’s interpretation of the notice's waiver of the limitation on
eligible activities under 24 CFR Section 576.105 and its alternative
requirements. Typically, HUD issues findings based on a grantee’s non-
compliance with regulatory or statutory requirements. In this
case, repayment is being recommended based on an interpretation of an
alternative requirement. HUD's perspective is that it must be
judicious when issuing findings based on alternative requirements to
ensure that it has the proper interpretation of the alternative requirement
and the authority to issue those findings. This is another reason HUD’s
perspective is that recipient and subrecipient must review the eligibility of
the activity on a case-by-case basis and consider actual housing outcome
of the outlay rather than issuing a blanket repayment.
Based on the points above. HUD recommends that OIG update Recommendation LA in a
manner consistent with Recommendations 1B, 1D, 1E, which is to review supporting
documentation to determine eligibility of the questioned costs and its corresponding repayment
based on that review. HUD appreciates the opportunity to provide feedback on the draft report. If
you have any questions, please contact Nicholas Nordahl, Senior Community Planning and
Development Representative, at nicholas.d.nordahl@hud.gov or at 415-489-6762
Cc:
Norm Suchar DNS
Rebecca Blanco 9AD
Office of Audit and Evaluation | Office of Inspector General Page | 27
Appendix C – Schedule of Improper Payments by Subrecipient
Due to personal identifiable information, we directly provided to HCD Appendix C – Schedule of Improper
Payments by subrecipient, broken out by landlord incentives (holding fees, signing bonuses, security
deposits), risk mitigation funds, and the food services consulting contractor expenses.
Improper
Subrecipient 1 Subrecipient 2 Subrecipient 3
Payment Issue
Ineligible Unsupported Unsupported Unsupported
Landlord incentive
$964,952
holding fees
Risk mitigation funds $6,549 $185,731
Landlord incentive
signing bonus or $58,878
security deposits
Food services
$96,561
consulting contractor
Totals $971,501 $185,731 $58,878 $96,561
Office of Audit and Evaluation | Office of Inspector General Page | 28
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