California Department of Housing and Community Development - State Rental Assistance Program
Summary
Review report of the California State Controller, Betty T. Yee, dated August 16, 2022, on the California Department of Housing and Community Development's State Rental Assistance Program. It covers compliance and oversight from March 1, 2021 through June 30, 2021 and applications and payments from April 14, 2021 through December 31, 2021. The review found that the department's vendor approved 488 potentially fraudulent applications totaling $18.1 million from July 1, 2021 through December 31, 2021, of which $7 million for 186 applications was disbursed. Other findings include vendor control weaknesses causing overpayments and underpayments and pay files modified without the department's approval.
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CALIFORNIA DEPARTMENT OF
HOUSING AND COMMUNITY
DEVELOPMENT
Review Report
STATE RENTAL ASSISTANCE PROGRAM
Compliance and Oversight
March 1, 2021, through June 30, 2021
Applications and Payments
April 14, 2021, through December 31, 2021
BETTY T. YEE
California State Controller
August 2022
BETTY T. YEE
California State Controller
August 16, 2022
Gustavo Velasquez, Director
California Department of Housing and Community Development
2020 West El Camino Avenue
Sacramento, CA 95833
Dear Mr. Velasquez:
The State Controller’s Office conducted a review of the California Department of Housing and
Community Development’s oversight of its State Rental Assistance Program for the period of
March 1, 2021, through June 30, 2021.
If you have any questions, please contact Michael Reeves, Assistant Chief, Field Audits Branch,
Division of Audits, by telephone at (916) 323-5849, or by email at mreeves@sco.ca.gov.
Sincerely,
Original signed by
KIMBERLY TARVIN, CPA
Chief, Division of Audits
KT/ls
cc: Janell Bonilla, Acting Deputy Director, Administration and Management
California Department of Housing and Community Development
Alicia Sebastian, Acting Deputy Director, Financial Assistance–Federal Programs
California Department of Housing and Community Development
Michael D. Mock, CPA, Audit Chief, Audit and Evaluations
California Department of Housing and Community Development
California Department of Housing and Community Development State Rental Assistance Program
Contents
Review Report
Summary ............................................................................................................................ 1
Background ........................................................................................................................ 2
Review Authority ............................................................................................................... 3
Objectives, Scope, and Methodology ............................................................................... 3
Conclusion .......................................................................................................................... 5
Views of Responsible Officials .......................................................................................... 6
Restricted Use .................................................................................................................... 6
Findings and Recommendations ........................................................................................... 7
Attachment—California Department of Housing and Community Development’s
Response to Draft Review Report
California Department of Housing and Community Development State Rental Assistance Program
Review Report
Summary The California Department of Housing and Community Development
(HCD) contracted with the State Controller’s Office (SCO) to review
HCD’s oversight of the State Rental Assistance Program (SRAP) for the
period of March 1, 2021, through June 30, 2021. HCD also contracted with
SCO to review SRAP applications and payments beginning with the initial
payments dated April 14, 2021, through October 31, 2022. This report
incorporates results of the SRAP application and payment review for the
period of April 14, 2021, through December 31, 2021. HCD requested that
we conduct these reviews to identify internal control weaknesses and
process improvements to strengthen HCD’s oversight of the SRAP.
The SRAP provides rent relief to California landlords and renters who
have faced financial hardships due to the COVID-19 pandemic. The SRAP
is administered by HCD and local agencies and has provided
approximately $4.27 billion in rental assistance to vulnerable Californians.
Local agency jurisdictions were able to choose from three allocation and
administration processers, which are categorized as Options A, B, and C.
Option A jurisdictions elected to have HCD administer their share of
SRAP funds; Option B jurisdictions elected to self-administer their SRAP
funds; and Option C jurisdictions administer their direct SRAP allocations
and elected to have HCD administer their proportionate SRAP share.
The results of our review of HCD’s oversight of the SRAP, and of the
SRAP applications and payments, are as follows:
HCD’s vendor approved 488 potentially fraudulent SRAP
applications totaling $18.1 million during the period of July 1, 2021,
through December 31, 2021. A total of $7 million for 186 of the
488 applications has been disbursed. An additional $11.1 million
could also have been disbursed for the remaining 302 applications had
we not identified them as potentially fraudulent.
Approximately $109,000 of these disbursed funds is either in the
process of being voided, or has not cleared the bank.
HCD agrees with SCO that the remaining $6.9 million in disbursed
funds represents potentially fraudulent payments. HCD indicated that
once its vendor has exhausted its efforts in recapturing the remaining
$6.9 million, HCD will attempt to recover the disbursed funds by
using intercept programs (such as the Franchise Tax Board’s
Interagency Intercept Collection Program, which collects money from
state tax refunds, lottery winnings, and unclaimed property) and by
bringing cases to the California Attorney General. However, these
methods may not allow for recovery of the disbursed funds if the
recipients used fictitious information.
HCD’s vendor lacked adequate controls over the application review
process, resulting in overpayments and underpayments.
HCD’s vendor did not consistently request death match verifications
before approving applications for payment. However, our review did
not identify any improper payments as a result of not consistently
performing this procedure.
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California Department of Housing and Community Development State Rental Assistance Program
HCD’s vendor lacked adequate controls over the application review
process for Option C jurisdictions to prevent improper payments.
HCD’s vendor modified and processed pay files without HCD’s
approval of the adjustments.
HCD should continue current monitoring procedures and increase on-
site monitoring of Option B jurisdictions based on a risk assessment
to ensure compliance with executed standard agreements and federal
program guidelines.
HCD did not ensure that its vendor implemented corrective actions for
all errors and issues identified by SCO and HCD.
HCD did not establish adequate control procedures regarding landlord
and tenant documentation requirements necessary to mitigate the risk
of fraud and misuse of funds.
The federal Emergency Rental Assistance Program provides funding
Background directly to states, U.S. territories, and local governments to assist
households that are unable to pay rent due to the COVID-19 pandemic. Up
to $25 billion became available under the federal Consolidated
Appropriations Act of 2021, enacted on December 27, 2020. California
initially received approximately $2.6 billion in rental assistance funds; the
State administered $1.5 billion, and the remaining $1.1 billion was
allocated directly to local jurisdictions with populations over 200,000. As
of the date of this report, the SRAP has paid out approximately
$4.27 billion in rental assistance payments.
On January 29, 2021, Senate Bill 91 (Chapter 2, Statutes of 2021), which
amended the Budget Act of 2020 to fund the SRAP, was enacted. The
primary objective of the SRAP is to help eligible households pay rent and
utilities costs. The highest priority is given to rental arrears incurred
between April 1, 2020, and March 31, 2021; jurisdictions that have
administered payments for these rental arrears may provide assistance for
current and prospective rent. SB 91 defines prospective rent as rent due
for April 2021 and thereafter.
SB 91 appropriates $1.5 billion from the Federal Trust Fund to HCD for
purposes of implementing the SRAP. SB 91 also extends the eviction
moratorium provisions established by Assembly Bill 3088 (Chapter 37,
Statutes of 2020), until June 30, 2021. SB 91 prevents the eviction of
tenants who pay at least 25% of their owed rent.
SB 91 specifies the amount of assistance that applicants can receive and
the assistance period. For April 2020 through March 2021 (the arrears
period), assistance for either 80% of the total rent in arrears if paid directly
to landlords, or 25% of the total rent in arrears if landlords refused to
participate in the program, was available to eligible tenants. For April 2021
and after (the prospective period), assistance for 25% of the prospective
monthly rental amount—whether paid to landlords or tenants—is
available to eligible tenants.
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California Department of Housing and Community Development State Rental Assistance Program
On June 28, 2021, AB 832 (Chapter 27, Statutes of 2021) was enacted.
AB 832 increases the compensation amount to 100% for rent in arrears
and prospective rent, and allows direct payment to tenants in situations
where landlords refuse to participate in the program.
Jurisdictions were able to choose from three allocation and administration
processes, which are categorized into Options A, B, and C:
Option A jurisdictions received direct allocations of funds (direct
federal allocation) from the U.S. Department of the Treasury
(U.S. Treasury), but elected to have HCD administer these funds.
These jurisdictions also elected to have HCD administer their shares
of State Rental Assistance Funds (proportionate SRAP share).
Option B jurisdictions elected to administer their direct federal
allocations. These jurisdictions elected to receive their proportionate
SRAP shares as block grants, which they will also administer.
Option C jurisdictions elected to administer their direct federal
allocations, but elected to have HCD administer their proportionate
SRAP shares.
HCD contracted with a vendor to implement the SRAP. The vendor
processes applications with the Neighborly Software (Neighborly) system,
and distributes SRAP funds for Option A and C jurisdictions. HCD and its
vendor began distributing SRAP funds on April 14, 2021.
We conducted this review at the request of HCD, in accordance with
Review Interagency Agreement Number 20-50-021 between SCO and HCD.
Authority
In addition, Government Code (GC) section 12410 states, in part:
The Controller shall superintend the fiscal concerns of the state. The
Controller shall audit all claims against the state, and may audit the
disbursement of any state money, for correctness, legality, and for
sufficient provisions of law for payment.
Objectives, Scope, Our review objectives were to determine whether:
and Methodology SRAP applications and documentation complied with the federal
program requirements established by SB 91 and the federal cognizant
agency, the U.S. Treasury; and
HCD established adequate oversight of the SRAP.
The review period was March 1, 2021, through June 30, 2021. This report
also includes results of our review of SRAP applications and payments
from April 14, 2021, through December 31, 2021.
To achieve our review objectives, we completed the following:
We conducted inquiries and interviews about the SRAP payment
process with knowledgeable staff members of HCD and HCD’s
vendor to gain an understanding of the payment transaction flow and
oversight of the payment process.
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California Department of Housing and Community Development State Rental Assistance Program
We reviewed California SB 91 and the federal Consolidated
Appropriations Act of 2021.
We reviewed HCD and the vendor’s documented procedures, which
included:
o HCD’s COVID-19 Rent Relief Program Administrative Plan
(June 29, 2021);
o Sample landlord and tenant intake applications from Neighborly;
o Case Manager (CM) Reviewer Checklists and Quality
Assurance/Quality Control (QA/QC) Checklists;
o Neighborly Application to Payment Workflow;
o COVID-19 Rent Relief Case Manager Standard Operating
Procedures (March 27, 2021); and
o COVID-19 Rent Relief Quality Assurance/Quality Control
Standard Operating Procedures (April 29, 2021).
We attended SRAP meetings related to payment and vendor oversight.
For all 7,561 applications submitted by the vendor to HCD from
March 1, 2021, through June 30, 2021, we verified whether death
match verification was requested before payment.
We performed random and targeted selections of applications for
testing to determine whether approved applications complied with all
statutory requirements, and to verify that payments were accurate and
proper. We tested the following payments from these weekly pay files:
o April 26, 2021 – 102 of 142 payments ($875,512 of $1,253,447);
o May 3, 2021 – 20 of 290 payments ($129,346 of $2,452,108);
o May 10, 2021 – 86 of 457 payments ($1,098,674 of $5,605,743);
o May 17, 2021 – 120 of 716 payments ($1,754,556 of $9,678,580);
o May 24, 2021 – 106 of 811 payments ($1,342,563 of $9,823,690);
o June 1, 2021 – 88 of 573 payments ($920,714 of $5,711,824);
o June 7, 2021 – 134 of 1,088 payments ($481,156 of $3,183,377);
o June 14, 2021 – 113 of 1,970 payments ($616,222 of $11,380,582);
o June 21, 2021 – 133 of 1,803 payments ($749,893 of $11,415,970);
and
o June 28, 2021 – 134 of 2,061 payments ($645,066 of $11,674,776).
We reported to HCD the results of our testing, including any
observations and errors, for each weekly pay file reviewed.
We analyzed transactions from the pay files to identify variances
between approved payment amounts and Neighborly information.
We reviewed the responses from HCD’s vendor to issues that we
noted during our review to determine whether corrective actions had
reportedly been taken, and whether HCD verified that corrective
actions had been taken.
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California Department of Housing and Community Development State Rental Assistance Program
In accordance with the interagency agreement between SCO and
HCD, we judgmentally sampled additional applications for the period
of July 1, 2021, through December 31, 2021. During this period, we
reviewed weekly disbursement files to identify anomalies that could
be precursors to potential fraud. Because of their sensitive nature,
these issues are not discussed in this report; however, we have
discussed the issues with HCD management.
Conclusion Our review of SRAP applications and payments for the period of April 14,
2021, through December 31, 2021, found the following:
HCD’s vendor approved 488 potentially fraudulent SRAP
applications totaling $18.1 million during the period of July 1, 2021,
through December 31, 2021. A total of $7 million for 186 of the
488 applications has been disbursed. An additional $11.1 million
could also have been disbursed for the remaining 302 applications had
we not identified them as potentially fraudulent.
Approximately $109,000 of these disbursed funds is either in the
process of being voided, or has not cleared the bank.
HCD agrees with SCO that the remaining $6.9 million in disbursed
funds represents potentially fraudulent payments. HCD indicated that
once its vendor has exhausted its efforts in recapturing the remaining
$6.9 million, HCD will attempt to recover the disbursed funds by
using intercept programs (such as the Franchise Tax Board’s
Interagency Intercept Collection Program, which collects money from
state tax refunds, lottery winnings, and unclaimed property) and by
bringing cases to the California Attorney General. However, these
methods may not allow for recovery of the disbursed funds if the
recipients used fictitious information; see Finding 1.
Our review of HCD’s compliance and oversight of the SRAP program for
the period of March 1, 2021, through June 30, 2021, found the following:
HCD’s vendor lacked adequate controls over the application review
process, resulting in overpayments and underpayments; see Finding 2.
HCD’s vendor did not consistently request death match verifications
before approving applications for payment. However, our review did
not identify any improper payments as a result of not consistently
performing this procedure; see Finding 3.
HCD’s vendor lacked adequate controls over the application review
process for Option C jurisdictions to prevent improper payments; see
Finding 4.
HCD’s vendor modified and processed pay files without HCD’s
approval of the adjustments; see Finding 5.
HCD should continue current monitoring procedures and increase on-
site monitoring of Option B jurisdictions based on a risk assessment
to ensure compliance with executed standard agreements and federal
program guidelines; see Finding 6.
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California Department of Housing and Community Development State Rental Assistance Program
HCD did not ensure that its vendor implemented corrective actions for
all errors and issues identified by SCO and HCD; see Finding 7.
HCD did not establish adequate control procedures regarding landlord
and tenant documentation requirements necessary to mitigate the risk
of fraud and misuse of funds; see Finding 8.
Views of We issued a draft review report on June 13, 2022. HCD representatives
responded by letter dated July 15, 2022, partially agreeing with
Responsible Findings 1, 2, and 8; and disagreeing with Findings 3 through 7. HCD also
Officials indicated that it will implement our recommendations where appropriate,
and has taken some actions, which we did not validate, to address the noted
deficiencies. This final review report includes HCD’s response as
an attachment.
Restricted Use This report is solely for the information and use of HCD and SCO; it is not
intended to be and should not be used by anyone other than these specified
parties. This restriction is not intended to limit distribution of this review
report, which is a matter of public record and is available on the SCO
website at www.sco.ca.gov.
Original signed by
KIMBERLY TARVIN, CPA
Chief, Division of Audits
August 16, 2022
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California Department of Housing and Community Development State Rental Assistance Program
Findings and Recommendations
FINDING 1— We identified 488 potentially fraudulent applications totaling
Potential fraud approximately $18.1 million during our review of SRAP applications that
were target selected during the period of July 1, 2021, through
identified
December 31, 2021. HCD’s vendor disbursed approximately $7 million
for 186 of the 488 applications between May 28, 2021, and December 31,
2021. An additional $11.1 million could also have been disbursed for the
remaining 302 applications had we not identified them as potentially
fraudulent.
Approximately $109,000 of these disbursed funds is either in the process
of being voided, or has not cleared the bank.
HCD agrees with SCO that the remaining $6.9 million in disbursed funds
represents potentially fraudulent payments. HCD indicated that once its
vendor has exhausted its efforts in recapturing the remaining $6.9 million,
HCD will attempt to recover the disbursed funds by using intercept
programs (such as the Franchise Tax Board’s Interagency Intercept
Collection Program, which collects money from state tax refunds, lottery
winnings, and unclaimed property) and by bringing cases to the California
Attorney General. However, these methods may not allow for recovery of
the disbursed funds if the recipients used fictitious information.
As of December 31, 2021, a total of approximately $1.5 billion in SRAP
funds had been disbursed. If the vendor application review process is not
enhanced, HCD will continue to be at risk of making improper payments
to applicants who submitted potentially fraudulent applications. HCD’s
vendor can strengthen its application and supporting documentation
review processes as follows:
Duplicate landlord and case IDs
The vendor’s CM checklist includes a procedure to check for name and
address duplications within Neighborly to prevent processing and payment
of duplicate applications and duplicate landlord case IDs. However, this
procedure was not adequately performed. Our application review found
indications of potential fraud. For example, we identified a significant
number of tenant applications associated with the same apartment
complex that were also associated with multiple landlord IDs.
Additionally, some of the payments to the multiple landlord case IDs were
paid via check and others were paid via Automated Clearing House.
Potentially fraudulent supporting documentation
Based on our review of the documentation retained in the vendor’s files at
the time that applications were approved, the vendor did not identify
supporting documentation that appeared to be illegitimate, altered, or
inconsistent with legitimate forms of identification. Although some
potentially fraudulent documents would have been identified as such only
upon more careful inspection, in some cases there were clear and visible
signs that documents had been altered—which HCD’s vendor should have
identified upon proper inspection. Some of the potentially fraudulent
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California Department of Housing and Community Development State Rental Assistance Program
transactions might have been identified if program documentation
requirements had been more stringent, if applicants had been required to
produce additional supporting documentation, or if additional third party
verifications had been performed by HCD or its vendor, as recommended
in Finding 8.
Title 2, Code of Federal Regulations (2 CFR), part 200.303 states:
The non-Federal entity must:
(a) Establish and maintain effective internal control over the Federal
award that provides reasonable assurance that the non-Federal entity
is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.
These internal controls should be in compliance with guidance in
“Standards for Internal Control in the Federal Government” issued
by the Comptroller General of the United States or the “Internal
Control Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). . . .
(c) Evaluate and monitor the non-Federal entity’s compliance with
statutes, regulations, and the terms and conditions of Federal
awards.
(d) Take prompt action when instances of noncompliance are identified
including noncompliance identified in audit findings . . . .
Recommendation
We recommend that HCD:
Ensure that its vendor verifies that there are no duplicate landlord case
IDs or tenant case IDs for the same address before processing
applications;
Consolidate landlord case IDs for legitimate applications to ensure
that payment is made to the appropriate landlord;
Instruct its vendor to provide additional fraud training to staff.
Specifically, provide training on how to recognize potentially
fraudulent and altered documents;
Require landlord applications to provide proof of ownership
documentation such as a property tax bill, homeowner’s insurance bill,
or deed of trust;
Verify at least one of the documents provided by the tenant or landlord
for questionable applications and applications that request large dollar
amounts of assistance. Specifically, HCD should use third-party
verification to verify the legitimacy of questionable forms of ID,
utility bills, and tax forms; and to verify the legitimacy of property
ownership documentation; and
Investigate the potentially fraudulent applications identified by SCO;
deny the fraudulent applications confirmed; and recover funds that
were paid to fraudulent applicants.
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California Department of Housing and Community Development State Rental Assistance Program
HCD’s Response
HCD partially agrees with this finding for the initial cases identified;
however, as noted above, HCD implemented many process
improvements since the initial SCO review was conducted. HCD will
continue to identify, where applicable, recommendations that can be
taken into consideration with the limited time left in the program as well
as in future emergency housing initiatives.
Specific findings of the review are addressed below:
Duplicate landlord and case IDs
The Program is focused on preventing multiple/duplicate tenant
applications per property (address and unit) that could result in duplicate
benefits being paid. Within this focus and the daily operation, it is
common for a large landlord to have multiple applications because larger
landlords may have multiple properties and multiple management
companies. Benefits are approved and awarded based on a qualified
tenant, not a qualified landlord.
The program does track instances of multiple landlord applications as the
review notes, but this condition alone is not an issue since awards are
based solely on tenant eligibility. Only combined with other factors do
instances of multiple landlord applications then begin to indicate
potential fraud.
Potentially fraudulent supporting documentation
For the period between 7/1/2021 thru 12/31/2021, ERAP1 approved
201,000 tenant applications. The identified 488 “potentially” fraudulent
applications translate to 0.2% of all approved ERAP applications
processed during this period. With over $1.5 billion disbursed, the
$7 million in funds disbursed to potentially fraudulent applications
represents 0.4% of all funds disbursed during the same period. The
Program has worked closely with SCO and other state and federal
partners to minimize the incidence as well as undertaking efforts to
recapture any funding that has been disbursed.
Documentation requirements and staff training have continued to evolve
throughout the duration of the program. As strongly recommended
through program guidance provided by the U.S. Treasury, the program
provides various alternative documentation options for applicants to
submit, depending on their circumstances. Documentation submitted,
will therefore vary. HCD and its vendor have continuously sought to
ensure staff are equipped to identify potentially fraudulent
documentation. This is, in part, the reason HCD contracted with the SCO
to help provide additional third-party verification. The strong
partnerships between SCO and HCD, as well as HCD and the third-party
vendor, allowed program staff to continue focusing on disbursing funds
while broader programmatic improvements were initiated.
1
The Emergency Rental Assistance Program (ERAP) is also referred to as the State Rental Assistance Program
(SRAP).
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California Department of Housing and Community Development State Rental Assistance Program
Recommendations
In regard to the multiple recommendations, we have a few comments,
while acknowledging we do not disagree and will proactively implement
them where appropriate. Our comments are as follows:
As previously noted, HCD has seen instances where large landlords
(or property management companies with multiple agents) manage
multiple properties, therefore creating multiple landlord files. As
stated in the previous response, multiple landlord case files are not
unusual. The Program focus is on duplicate tenant case files and
preventing multiple tenant applications for the same property.
The vendor provides fraud training to all case managers in their
employee orientation. There are also stand-down presentations for
fraud as well as recorded fraud trainings. Additionally, the vendor
has a dedicated and seasoned team of resources in place to undertake
fraud review. HCD can provide a sample of the specific onboarding
fraud training, presentations as well as the recorded training module.
It is also important to note that the vendor has extensive experience
in delivering large programs and projects nationally and is
accustomed to working with federal funds. The vendor’s core
service is accounting and has served as the prime contractor for
disaster recovery and direct service programs.
In response to earlier SCO recommendations, HCD implemented
internal control reviews, whereby HCD Internal Control Auditors,
select and review approved applications prior to payment
disbursement. Performed weekly, applications are reviewed for
documentation completeness, eligibility, assistance amount
approved, and checked for landlord property ownership where
applicable. HCD Internal Control Auditors also conducted data
analysis on specific application and assistance attribute to locate
potentially fraudulent cases for additional review.
In September 2021, the vendor implemented a policy to address high
dollar rents. This policy limits the monthly rent assistance available
on any given property to not exceed a certain percentage above
HUD’s Fair Market Rent (FMR).
In December 2021, the vendor instituted the requirement that
participating landlords must provide third-party documentation
supporting proof of property ownership. In February 2022 the
vendor incorporated a business subscription with the ability to verify
public records, thereby providing the vendor and their fraud unit the
ability to research various public records.
HCD has reviewed the potential fraudulent applications identified
by SCO, and those suspected applications have been denied and a
recapture has been initiated. HCD is developing a procedure
working with the California State Franchise Tax Board to intercept
funds not recaptured/repaid by a fraudulent applicant as well as
partnering with law enforcement.
SCO Comment
Our finding and recommendation remain unchanged. SCO recognizes that
HCD implemented corrective actions after our review period ending June
30, 2021, and commends HCD’s commitment to reducing fraud and errors
in payment files. We also recognize that HCD has taken actions to recover
potentially fraudulent payments.
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California Department of Housing and Community Development State Rental Assistance Program
For clarification, we identified the majority of potential fraud based on
irregular personal identification documentation contained within the
applicant files, and not related to multiple landlord applications. Tracking
and associating applications with the same landlord would assist HCD in
identifying fraud, especially when a landlord initiates an application on
behalf of multiple tenants or when irregularities are identified with a
particular landlord.
HCD stated that the 488 potentially fraudulent applications identified in
our limited review represent 0.2% of the 201,000 approved SRAP
applications during the period of July 1, 2021, through December 31,
2021. Our review included only a small sample of the 201,000 applications
processed during that period, and we did not estimate the actual percentage
of potentially fraudulent transactions within the 201,000 applications
processed.
FINDING 2— HCD’s vendor did not consistently or effectively perform the required
Verification application and payment review procedures, resulting in overpayments of
procedures not $287,416 and underpayments of $97,823. The internal control procedures
were developed for CM and QA/QC staff to ensure that payments to
consistently or program recipients are accurate and comply with program requirements.
effectively If HCD’s vendor does not consistently and effectively perform the
performed resulting required internal control procedures, HCD is at risk of approving
in overpayments and additional improper payments.
underpayments
HCD’s vendor processed 9,911 transactions totaling $72,180,097 for
payment between April 26, 2021, and June 28, 2021. We randomly
selected and tested 1,007 (or 10.2%) of 9,911 transactions from 10 pay
files totaling $8,555,647 (or 11.9% of the total $72,180,097). Of the
1,007 randomly selected transactions, 165 were overpayments, totaling
approximately $287,416, and 144 were underpayments, totaling
approximately $97,823.
The overpayments and underpayments occurred because the vendor’s
CMs and QA/QC staff did not perform all of the internal control
procedures included in the checklists, or completed the procedures
inaccurately. We tested 1,007 transactions, and noted that 967 CM
checklists and 992 QA/QC checklists were incomplete; we also noted that
309 transactions were inaccurately calculated by the vendor’s CMs and
subsequently approved by QA/QC staff. The overpayments and
underpayments could have been prevented if all of the internal control
procedures in the checklists had been performed as designed (see the table
below). A completed checklist indicates that all internal control
procedures were performed before applications were approved for
payment. Checklists in Neighborly were revised during the review period,
which may have resulted in some incomplete checklists. However, without
documentation to support that all control procedures were completed, the
vendor cannot demonstrate that internal control procedures
were performed.
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California Department of Housing and Community Development State Rental Assistance Program
The table below summarizes the number of uncompleted or inaccurately
performed procedures, resulting in an overpayment or underpayment.
Number of Times
Procedure Failed,
Resulting in
Internal Control Procedure Erroneous
in Checklists Payment
Verify that lease and rent amounts are eligible and accurate 199
Verify that utilities are eligible per rental agreement 34
Verify that late fees were not included 46
Verify that there is no duplication of benefits
(for Option C jurisdictions: Also verify eligibility 24
for arrears period assistance under state program)
Verify that late fees were not included, and
verify all income documentation provided 1
(two controls failed )
Verify that late fees were not included, and
verify that utilities are eligible per rental agreement 3
(two controls failed )
Verify that lease and rent amounts are eligible, and
verify all income documentation provided 2
(two controls failed )
Overpayments and underpayments occurred because CMs:
Used incorrect ending balances on rent ledgers to calculate assistance;
Included late fees in rental assistance amounts;
Did not approve utility amounts billed by landlords;
Approved assistance for prospective rent when it was not requested;
Included rental debt prior to April 1, 2020, in calculations;
Did not verify that Option C applicants had applied through the correct
program; and
Did not determine whether prior assistance had been received and was
reflected on rent ledgers.
GC sections 13400 through 13407 require state agencies to establish and
maintain systems of internal control, as fraud and errors are more likely to
occur from a lack of effective systems of internal control when active
monitoring measures are not maintained to ensure that controls are
functioning properly.
In addition, 2 CFR part 200.303 states:
The non-Federal entity must:
(a) Establish and maintain effective internal control over the Federal
award that provides reasonable assurance that the non-Federal entity
is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.
These internal controls should be in compliance with guidance in
“Standards for Internal Control in the Federal Government” issued
by the Comptroller General of the United States or the “Internal
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California Department of Housing and Community Development State Rental Assistance Program
Control Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). . . .
(c) Evaluate and monitor the non-Federal entity’s compliance with
statutes, regulations, and the terms and conditions of Federal
awards.
(d) Take prompt action when instances of noncompliance are identified
including noncompliance identified in audit findings. . . .
Recommendation
We recommend that HCD:
Ensure that the vendor’s CMs and QA/QC staff properly complete
checklists before approving applications for payment;
Recover overpayments made to applicants, and properly compensate
applicants that were underpaid; and
Attend vendor training sessions for CMs and/or QA/QC staff to ensure
that such training is in accordance with HCD guidance.
HCD’s Response
It is important to note that HCD was in the process, and has since
finalized, the recommended improvements provided at the time of
SCO’s review.
However, portions of the findings stated in the SCO review require
clarification:
The basis for this finding stems from the requirement provided in
Senate Bill (SB) 91, effective January 29, 2021, originally limiting
the program to provide partial compensation for both direct to
landlord and direct to tenant payments. This statutory requirement
was subsequently amended following the passage of Assembly Bill
(AB) 832, effective June 28, 2021, authorizing the program to
provide compensation for 100 percent of rent owed to be paid.
Following the enactment of AB 832, the vendor was able to go back
and pay the remaining balance of unpaid rent (top-off) attributed to
the previous partial compensation requirements the program was
required to follow under state law. Any overpayments from the early
months were taken into consideration in the top-off payment by
discounting the top-off disbursement. HCD can provide the total
count of applications and amounts paid through this process.
This is a datapoint specific to the first three months of the program.
As such, the total number of cases reviewed represents less than
3% of volume to date.
SCO Comment
Our finding and recommendation remain unchanged. We appreciate
HCD’s commitment to implementing our recommendations and recognize
that HCD and its vendor may have implemented improvements to these
processes after June 30, 2021.
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California Department of Housing and Community Development State Rental Assistance Program
For clarity, the basis of this finding does not stem from the enactment of
AB 832. This finding is based on our review of a sample of
1,007 transactions whereby we determined that, for the majority of
transactions reviewed, verification procedures and review checklists were
either not performed, partially performed, or performed inaccurately. The
enactment of AB 832, chaptered on June 28, 2021 (two days before the
end of our review period), did not change the application verification
procedures or the internal controls that should have been performed and
documented by HCD’s vendor, except for HCD’s requirement of
calculating the percentage of payment. We believe that the underpayments
and overpayments processed during the review period would have been
reduced had HCD’s vendor performed the required verification procedures
and internal control processes.
FINDING 3— HCD’s vendor did not consistently perform the internal control procedure
Death match of requesting a death match verification for each application before
approving for payment. In the pay files for April 19, 2021, through
verification not
June 28, 2021, we identified 1,836 (or 24%) of 7,561 applications
consistently requested approved for payment by HCD for which the vendor did not request death
before payment match verifications prior to approval. The purpose of this internal control
approved procedure is to screen out potentially fraudulent applications for further
review prior to eligibility determination. If these internal control
deficiencies are not mitigated, HCD is at risk of making payments to
individuals who submitted fraudulent applications.
The internal control procedure established at the beginning of the SRAP
requires the vendor to submit a list of applicant names and birth dates to
SCO to be verified in a database comprising the names and birth dates of
deceased individuals prior to issuing payment. In addition, the vendor’s
QA/QC checklist includes a procedure to verify the applicant information
against the results of the death match verification prior to payment. Prior
to June 1, 2021, SCO was provided with 1,895 applicant names for death
match verification. SCO received an additional 91,338 applicant names on
June 1, 2021.
During the review period, we informed HCD of death match verifications
not being requested prior to approval for payment. In response, on July 12,
2021, HCD revised the procedure requiring the vendor to submit a list of
applications for the death match verification every Friday. As of the date
of this report, HCD has fully implemented this procedure. However, we
continue to find applications that were approved for payment without
death match verifications having been requested prior to approval.
HCD’s COVID-19 Rent Relief Program Administrative Plan, section 16.3,
“Audit of RAP Payments,” states:
. . . HCD also establish[ed] the following data repositories for case
management to screen out potentially fraudulent applications for further
review prior to eligibility determination. These repositories are. . .
2. State Controller’s Office Death File: Matching applicant
information (name and DOB) to individuals reported to be deceased
to detect potentially fraudulent applications. . . .
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California Department of Housing and Community Development State Rental Assistance Program
During our review of applications and supporting documentation, we
found that the vendor’s controls did not operate effectively. We noted
instances in which QA/QC checklists indicated that applicant information
had been verified against death records when this could not have occurred,
as no death match verification had been requested. Furthermore, we noted
instances in which applications were processed for payment although the
related checklists indicated that death match verification had not been
performed.
We did not identify any applicant names that matched death records during
our review. However, if applicant names are not matched to death records
for every application, HCD is at risk of making payments to individuals
who submitted fraudulent applications.
GC sections 13400 through 13407 require state agencies to establish and
maintain systems of internal control, as fraud and errors are more likely to
occur from a lack of effective systems of internal control when active
monitoring measures are not maintained to ensure that controls are
functioning properly.
In addition, 2 CFR part 200.303 states:
The non-Federal entity must:
(a) Establish and maintain effective internal control over the Federal
award that provides reasonable assurance that the non-Federal entity
is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.
These internal controls should be in compliance with guidance in
“Standards for Internal Control in the Federal Government” issued
by the Comptroller General of the United States or the “Internal
Control Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). . . .
(c) Evaluate and monitor the non-Federal entity’s compliance with
statutes, regulations, and the terms and conditions of Federal
awards.
(d) Take prompt action when instances of noncompliance are identified
including noncompliance identified in audit findings. . . .
Recommendation
We recommend that HCD establish internal control policies and
procedures to monitor and confirm that its vendor compares all SRAP
applications to death records before issuing payment.
HCD’s Response
HCD disagrees with this finding, as the SCO review did not identify any
payment disbursed to an application submitted by a deceased person.
Since program inception, the program has had a death match verification
process and internal controls in place. This process is utilized in the
review of all files before payment is issued. The vendor performs
procedures developed by HCD in collaboration with SCO, including
requiring the case manager to verify applicant identification against
death roll records obtained by a third-party vendor.
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California Department of Housing and Community Development State Rental Assistance Program
SCO Comment
Our finding and recommendation remain unchanged. We agree that HCD
established procedures for death match verification at the program’s
inception. However, our review identified instances in which death match
procedures were not performed for all applications before they were
approved for payment.
FINDING 4— HCD’s vendor lacked adequate internal controls over the application
Inadequate review process for Option C jurisdictions. Specifically, the vendor did not
controls over have procedures in place to prevent duplicate Option C applications from
being processed, to prevent duplication of benefits, or to prevent other
Option C
errors resulting in improper payments. We identified $58,055 in improper
jurisdictions payments that were approved and disbursed by the vendor. We also
identified an additional $148,168 in pending improper payments that the
vendor would have made had we not identified them during our pre-
payment audits. The payments were improper because they should have
been paid by the Option C jurisdiction rather than by HCD. In addition,
two Option C jurisdictions refused to share data with the State, making it
impossible to prevent duplication of SRAP benefits within those
jurisdictions, which placed HCD at risk of making payments to applicants
who had already received assistance from the local jurisdiction.
An Option C jurisdiction is a city or county that elected to self-administer
its direct federal allocation of rental assistance funds through its own local
program, but elected to have the State administer its proportionate SRAP
share. Each Option C jurisdiction was required to develop and execute a
partnership agreement with the State to safeguard SRAP funds from
duplication of benefit, fraud, and abuse. HCD provided SCO auditors with
access to the vendor’s database, which includes data about assistance that
individuals have already received. To prevent duplication of benefits, CMs
are to refer to this database when processing applications for Option C
jurisdictions.
City and County of San Francisco
The partnership agreement between the State and the City and County of
San Francisco gave the State responsibility for providing rental assistance
between April 2020 and March 2021 (the arrears period), and the city and
county responsibility for providing rental assistance for April 2021 and
after (the prospective period).
In the June 7, 2021 weekly pay file, we identified 29 improper payments
to applicants in the City and County of San Francisco, totaling $58,055.
HCD’s vendor improperly approved payments for the prospective period
(April 2021 through June 2021). We also identified an additional
108 transactions for the same period, totaling $148,168, in the June 14,
2021 pay file. Because we informed HCD of the error before payment was
initiated, the 108 transactions were removed from the pay file. Neither the
vendor nor HCD had a process in place to ensure that CMs did not approve
prospective period rent payments for applicants in the City and County of
San Francisco. We did not include these errors in the amount quantified in
Finding 2.
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California Department of Housing and Community Development State Rental Assistance Program
Santa Clara County and City of San Jose
HCD representatives stated that two Option C jurisdictions—Santa Clara
County and the city of San Jose—refused to share data with the State.
Without access to a jurisdiction’s information about assistance provided
to applicants, HCD could not ensure that duplication of benefits did not
occur.
Per the partnership agreements with these local jurisdictions, the State
would process applications submitted through the state program from the
beginning of the program until April 30, 2021. After that date, the State
would assist only low-income residents, or households with income
greater than 30% of the area median income. The local jurisdictions would
assist extremely low-income residents, or households with incomes at or
below 30% of the area median income. However, HCD’s vendor
improperly processed applications for extremely low-income residents
who should have been redirected to the local program. Pursuant to the
agreements, the State was to process applications only for low-income
residents. Furthermore, because these two jurisdictions refused to share
program data, HCD and, consequently, SCO could not determine whether
duplication of benefits occurred.
After the review period, all Option C jurisdictions were asked to choose
Option A or Option B. There are currently no Option C jurisdictions in
California. Therefore, these errors should not recur, unless Option C
jurisdictions are reinstated and internal controls are not improved.
Health and Safety Code section 50897.3(b)(2)(B) states:
(i) To minimize legal liability and potential noncompliance with federal
law, specifically those violations described in Section 501(k)(3)(B) of
Subtitle A of Title V of Division N of the federal Consolidated
Appropriations Act, 2021 (Public Law 116-260), the department, or, if
applicable, the program implementer, shall request that grantees
described in this paragraph enter into a data sharing agreement for the
purpose of preventing unlawful duplication of rental assistance to
eligible households.
(ii) Notwithstanding any other law, a grantee that enters into a data
sharing agreement required by this subparagraph may disclose
personally identifying information of rental assistance applicants to the
department or the program implementer for the purposes described in
this subparagraph.
(iii) A grantee described by clause (ii) shall provide all applicable data,
as determined by the department, before the department or program
implementer begins administering funds within the grantee’s
jurisdiction.
GC sections 13400 through 13407 require state agencies to establish and
maintain systems of internal control, as fraud and errors are more likely to
occur from a lack of effective systems of internal control when active
monitoring measures are not maintained to ensure that controls are
functioning properly.
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California Department of Housing and Community Development State Rental Assistance Program
In addition, 2 CFR part 200.303 states:
The non-Federal entity must:
(a) Establish and maintain effective internal control over the Federal
award that provides reasonable assurance that the non-Federal entity
is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.
These internal controls should be in compliance with guidance in
“Standards for Internal Control in the Federal Government” issued
by the Comptroller General of the United States or the “Internal
Control Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). . . .
(c) Evaluate and monitor the non-Federal entity’s compliance with
statutes, regulations, and the terms and conditions of Federal
awards.
(d) Take prompt action when instances of noncompliance are identified
including noncompliance identified in audit findings. . . .
Recommendation
We recommend that HCD:
Recover improper payments; and
Establish adequate internal control policies and procedures to ensure
that the vendor’s CMs process applications in accordance with
partnership agreements if Option C is chosen by local jurisdictions at
a future date.
HCD’s Response
HCD disagrees with this finding simply based upon the timing of the
program operations as it relates to local jurisdictions. As provided under
state law SB 91 (Chapter 2, Statutes of 2021), HCD did not have direct
regulatory authority over the operations of Option C jurisdictions, or
simply put, cities and/or counties that opted to administer their own local
emergency rental assistance programs. The SCO raises concern that
HCD’s vendor, HORNE, lacked proper controls over Option C
jurisdictions. Operating as independent jurisdictions, the state and its
vendors had no authority to provide oversight related to the Option C
jurisdictions, whereby their use of federal funds, and corresponding
oversight, was managed through the U.S. Treasury. HCD respectfully
requests this finding be removed from the report as the state, and by
extension, its vendor, had no authority over Option C jurisdictions and
their payments.
Additionally, this finding does not consider the timing and
implementation of Assembly Bill 832 (2021). With the passage of
AB 832, effective June 28, 2021, state law required previous Option C
jurisdictions to consolidate their operations as a condition of receiving
state block grant funds. The enactment of AB 832, and subsequent
statutory changes governing the operation of Option C jurisdictions,
directly overlaps and conflicts with the time period of the report review.
Further, through the execution of amendment #1 with the ERAP fund
disbursement vendor, the project set up an additional control through the
“Option C Data Lookup Portal” for Option C jurisdictions to inquire
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California Department of Housing and Community Development State Rental Assistance Program
about cases under local program review against state ERAP for the
purpose of de-duplication. The City of San Jose, County of Santa Clara,
and City/County of San Francisco were all users of this process.
The establishment of the data portal presented the local programs with
the appropriate mechanism to ensure local efforts were not duplicative
with the state-administered assistance. SB 91 also provided several
statutory requirements to address the potential duplication of efforts of
Option C localities running local rental assistance programs concurrent
with the state, specifically as it related to the increased risk of duplication
of benefits. These controls were operationalized by HCD by requiring
Option C localities enter into data sharing agreements and utilize the data
portal for the purpose of preventing unlawful duplication of rental
assistance to eligible households. SB 91 also included a provision that
indemnified the state, HCD, and the program implementer acting on
behalf of the department, from liability in the Option C localities’
administration of assistance.
SCO Comment
Our finding and recommendation remain unchanged. This finding is not
related to the timing of program operations or a lack of controls over
Option C jurisdictions. We identified payments approved by HCD’s
vendor to applicants who reside in Option C jurisdictions, and the
approved payments did not follow the partnership agreement between
HCD and the Option C jurisdictions. We believe that the vendor’s internal
controls should be strengthened to help ensure that payments consistently
adhere to the partnership agreements.
FINDING 5— HCD’s vendor submitted weekly pay files to HCD for approval for
Pay files subject to payment and issuance of funds to be disbursed. However, the vendor
change and added or subtracted payments to be paid after submitting the weekly pay
file to HCD for approval. Furthermore, amounts recorded in the weekly
unreliable pay files did not reconcile to approved disbursement amounts in the
Neighborly application. As a result, we could not rely on the provided pay
files to determine the actual amount disbursed for each applicant or the
number of applicants to be paid. If these deficiencies are not mitigated,
payments may be made that differ from what HCD approves.
Unapproved pay file modifications
HCD’s vendor submits a weekly pay file to HCD for review and approval.
However, subsequent to submitting the pay file, the vendor was able to
add and subtract payments to the list of funds to be disbursed. In addition,
the vendor was able to modify the amounts to be disbursed to the
applicants listed in the pay file. According to HCD and its vendor, pay
files should represent applications that have been fully reviewed and
cleared for payment by the vendor. However, when we communicated
errors or miscalculations related to the applications that we reviewed,
oftentimes the vendor stated that either the applications had been withheld
for further review, or that approved payment amounts had been modified
subsequent to submission of pay files to HCD.
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California Department of Housing and Community Development State Rental Assistance Program
Disbursements not reconciled to approved payments
HCD receives a pay file from its vendor each week for review and
approval. HCD then transfers funds to the vendor for the total amount of
all transactions contained in the pay file that the vendor submitted for
approval. HCD does not reconcile the individual amounts paid (as shown
on bank statements) to the tenant case IDs and individual amounts
approved for payment in the weekly pay files. Instead, HCD reconciles
only the total dollar amounts; specifically, HCD reconciles the total
amount transferred to the vendor to the total dollar amount reported on the
monthly bank statements.
Duplicate payment identification
HCD’s vendor submits a pay file each week for review and approval by
HCD. The pay file should represent the number of applications that have
been reviewed and approved by the vendor’s CMs and QA/QC staff, and
should reconcile to data from the Neighborly application. We analyzed the
transactions in the weekly pay files submitted for approval during the
review period, and identified 326 transactions, totaling $2,560,378, that
were duplicate payments. We identified 163 applicants who, according to
the pay files submitted, may have been paid more than once for the same
rental periods and/or dollar amounts.
In 144 transactions, 72 applications had different invoice numbers. In the
other 182 transactions, 91 applications had duplicate invoice numbers.
Representatives for HCD’s vendor indicated that the payment system will
not process duplicate invoice numbers; however, we found payment
transactions for the same specific period of time in several pending pay
files. In some cases, these pay files waiting for approval had the same
invoice number, and in other cases the invoice numbers were different. We
cannot determine whether payments were made multiple times or if
approved payments were not made promptly, then were included in a
subsequent pay file, approved for payment a second time, and finally paid.
As previously mentioned, HCD and its vendor have the ability to verify
that duplicate payments have not been made. However, HCD and its
vendor do not reconcile disbursements to payments previously approved
in the weekly pay file at the individual transaction level. Therefore, we
could not determine whether these transactions were for duplicate
payments or were receipt of transactions that appeared in multiple
pay files.
Following are examples of pay file variances that we identified.
Example 1
In the June 14, 2021 pay file, we identified a $1,600 transaction for one
applicant that was listed twice, and a $4,160 transaction for another
applicant that was listed twice. We inquired with HCD regarding these
transactions. HCD indicated that the vendor had identified these duplicate
amounts before payment was processed. However, after reviewing the two
applications in Neighborly, we found that one of the erroneous payments
had not been corrected. A $1,600 payment was disbursed twice, resulting
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California Department of Housing and Community Development State Rental Assistance Program
in an overpayment. HCD representatives indicated that HCD would work
with its vendor to establish processes and procedures to ensure that coding
errors are eliminated prior to pay file generation. As of the date of this
report, we have not received from HCD a description of any such
procedure or process.
Example 2
Two payments of $18,560, both for the same applicant, appeared in the
June 21, 2021 pay file. In Neighborly, the budgeted items totaled $29,800.
However, the total amount disbursed was $46,710, representing an
overpayment of $16,910. Instead of keying the correct prospective rent
amount of $1,650 ($6,600 × 25%), vendor staff members keyed the rental
arrears amount of $18,560 twice.
Example 3
A payment of $16,476 for an applicant appeared in the May 3, 2021 and
June 1, 2021 pay files. Although we noted that the disbursement
information in Neighborly displayed only one of the amounts, the
application’s audit log indicated that a duplicate payment had been made,
and the transaction information in Neighborly had been deleted. Without
the actual disbursement information, we cannot verify that no duplicate
payments occurred.
GC sections 13400 through 13407 require state agencies to establish and
maintain systems of internal control, as fraud and errors are more likely to
occur from a lack of effective systems of internal control when active
monitoring measures are not maintained to ensure that controls are
functioning properly.
In addition, 2 CFR part 200.303 states:
The non-Federal entity must:
(a) Establish and maintain effective internal control over the Federal
award that provides reasonable assurance that the non-Federal entity
is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.
These internal controls should be in compliance with guidance in
“Standards for Internal Control in the Federal Government” issued
by the Comptroller General of the United States or the “Internal
Control Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). . . .
(c) Evaluate and monitor the non-Federal entity’s compliance with
statutes, regulations, and the terms and conditions of Federal
awards.
(d) Take prompt action when instances of noncompliance are identified
including noncompliance identified in audit findings. . . .
Recommendation
We recommend that HCD implement adequate internal control policies
and procedures, such as a reconciliation process, to ensure that all amounts
disbursed were included in the approved pay files.
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California Department of Housing and Community Development State Rental Assistance Program
HCD’s Response
HCD disagrees with this finding. Since program inception, there was a
clear understanding that pay files would shift as various reviews by
Bill.com, HCD, HORNE, and SCO identified irregularities. The SCO
statement that “HCD’s vendor modified and processed pay files without
HCD’s approval of the adjustments” does not reflect the true nature of
the expected changes to pay files that occur on a weekly basis.
The payment file submitted to HCD each Monday, is, and has always
been, a tentative file that is meant to be corrected/adjusted based on SCO
and HCD review inputs. During the weekly review period (Monday –
Thursday), files identified by SCO (when SCO was involved in pre-
payment review) and by HCD (by both HCD Internal Control Auditors
and program) to be potentially fraudulent or irregular are pulled from the
payment file and forwarded to vendor for additional review. Files with
discrepancies on approved amounts are logged and shared with vendor
so corrective actions can be taken. This process results in a dynamic
payment file where files presented on Monday may be
modified/removed by Thursday. This process was reviewed and
discussed with the SCO as the program established the pre-payment
review process in April 2021.
The process established by HCD in coordination with SCO and the
vendor was determined to be a best practice for ERAP programs. This
information has been shared with other states and local jurisdictions for
implementation.
SCO Comment
Our finding and recommendation remain unchanged. During the review
period, it was our understanding that the pay file comprised applications
that the vendor had reviewed, approved, and submitted to HCD for
approval for payment. In April 2021, SCO understood that actual
payments might be adjusted based on reviews by HCD and SCO.
However, the dynamic nature of the payment file results in a potential risk
of duplicate payments as described above, especially as the individual
amounts paid were not reconciled to the approved payments.
HCD did not provide comments on the three examples of pay file
variances presented in the finding.
FINDING 6— In addition to current monitoring procedures, HCD should conduct
Additional oversight of additional on-site monitoring of Option B jurisdictions based on a risk
Option B jurisdictions assessment to ensure compliance with executed standard agreements and
federal program guidelines.
recommended
Option B jurisdictions receive their proportionate SRAP shares through
block grants. To receive this funding, local jurisdictions must execute
standard agreements with HCD. Each jurisdiction must submit a work plan
in accordance with SRAP guidelines before the standard agreements are
executed. Option B jurisdictions receive, approve, and pay tenant and
landlord SRAP assistance according to standard agreements. During our
initial survey of the program, HCD indicated that it planned to ensure
proper oversight and monitoring of Option B jurisdictions by periodically
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California Department of Housing and Community Development State Rental Assistance Program
reviewing approved tenant and landlord applications to ensure that
Option B jurisdictions were in compliance with work plans and program
requirements. We inquired with HCD regarding this oversight procedure
during our review. HCD representatives stated that it did not plan to review
applications from individual jurisdictions, and that it was the local
jurisdiction’s responsibility to follow work plans submitted to HCD.
Without the necessary oversight, HCD cannot provide assurance that
Option B jurisdictions are expending their proportionate SRAP shares in
accordance with executed standard agreements between the jurisdiction
and HCD, and that Option B jurisdictions are complying with federal
program requirements.
2 CFR part 200.332, subparagraph (b) requires all pass-through entities to:
Evaluate each subrecipient’s risk of noncompliance with Federal
statutes, regulations, and the terms and conditions of the subaward for
purposes of determining the appropriate subrecipient monitoring
described in paragraphs (d) and (e) of this section, which may include
consideration of such factors as:
(1) The subrecipient’s prior experience with the same or similar
subawards;
(2) The results of previous audits including whether or not the
subrecipient receives a Single Audit in accordance with Subpart F
of this part, and the extent to which the same or similar subaward
has been audited as a major program;
(3) Whether the subrecipient has new personnel or new or substantially
changed systems; and
(4) The extent and results of Federal awarding agency monitoring (e.g.,
if the subrecipient also receives Federal awards directly from a
Federal awarding agency).
2 CFR part 200.332, subparagraph (d) further requires all pass-through
entities to:
Monitor the activities of the subrecipient as necessary to ensure that the
subaward is used for authorized purposes, in compliance with Federal
statutes, regulations, and the terms and conditions of the subaward; and
that subaward performance goals are achieved. Pass-through entity
monitoring of the subrecipient must include:
(1) Reviewing financial and performance reports required by the pass-
through entity.
(2) Following-up and ensuring that the subrecipient takes timely and
appropriate action on all deficiencies pertaining to the Federal award
provided to the subrecipient from the pass-through entity detected
through audits, on-site reviews, and written confirmation from the
subrecipient, highlighting the status of actions planned or taken to
address Single Audit findings related to the particular subaward.
(3) Issuing a management decision for applicable audit findings
pertaining only to the Federal award provided to the subrecipient
from the pass-through entity as required by § 200.521.
(4) The pass-through entity is responsible for resolving audit findings
specifically related to the subaward and not responsible for
resolving crosscutting findings. If a subrecipient has a current Single
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California Department of Housing and Community Development State Rental Assistance Program
Audit report posted in the Federal Audit Clearinghouse and has not
otherwise been excluded from receipt of Federal funding (e.g., has
been debarred or suspended), the pass-through entity may rely on
the subrecipient’s cognizant audit agency or cognizant oversight
agency to perform audit follow-up and make management decisions
related to cross-cutting findings in accordance with section
§ 200.513(a)(3)(vii). Such reliance does not eliminate the
responsibility of the pass-through entity to issue subawards that
conform to agency and award-specific requirements, to manage risk
through ongoing subaward monitoring, and to monitor the status of
the findings that are specifically related to the subaward.
Recommendation
We recommend that HCD continue current monitoring procedures and
increase on-site monitoring of Option B jurisdictions based on a risk
assessment to ensure that funds are being administered in accordance with
executed standard agreements and federal program guidelines. Monitoring
and oversight controls should include a review process for the Option B
jurisdictions’ applications.
HCD’s Response
HCD disagrees with this finding. HCD conducted pre-emptive reviews
of Option B jurisdictions prior to preparing any standard agreements for
block grant subawards to help ensure the subrecipients would be able,
willing, and prepared to comply with the subaward terms, including
federal and state law and guidance.
Specifically, HCD received and reviewed each subrecipient’s adoption
of an authorizing resolution approved by the local governing body. In
addition, HCD reviewed each subrecipient’s proposed ERA Program
Guidelines for conformity with current federal and state guidance. Prior
to HCD issuing the standard agreements for state block grant subawards,
each subrecipient was required to document their specific program
operating criteria in a manner that conformed to applicable federal and
state law. Following the reviews of local program guidelines and HCD’s
concurrence that they materially conformed with the requirements, the
guidelines were incorporated as contractual commitments in the
respective standard agreement for each subrecipient.
Only one subrecipient of an ERA1 block grant award (City of Stockton)
used the awarded funds during the review period covered by the draft
SCO report. HCD monitored this subrecipient’s performance and use of
funds for allowable purposes on a weekly basis using reports provided
by the subrecipient. HCD requested and received weekly data detailing
the subrecipient’s performance in the following criteria:
a. Weekly and cumulative obligations of state block grant funds for the
payment of costs for eligible households use
b. Weekly and cumulative expenditures of state block grant funds for
the payment of costs for eligible households use
c. Weekly and cumulative obligations of federal direct award funds for
the payment of costs for eligible households use
d. Weekly and cumulative expenditures of federal direct award funds
for the payment of costs for eligible households use
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California Department of Housing and Community Development State Rental Assistance Program
e. Weekly and cumulative Tenant-initiated applications received
f. Weekly and cumulative Tenant-initiated applications processed
g. Weekly and cumulative Tenant-initiated applications approved
h. Weekly and cumulative Landlord-initiated applications received
i. Weekly and cumulative Landlord-initiated applications processed
j. Weekly and cumulative Landlord-initiated applications approved
In our view, the activities HCD undertook conform to the standards
described in 2 CFR Part 200.332 – ‘Requirements for pass-through
entities.’ The applicable section states:
All pass-through entities must:
(d) Monitor the activities of the subrecipient as necessary to
ensure that the subaward is used for authorized purposes,
in compliance with Federal statutes, regulations, and the
terms and conditions of the subaward; and that subaward
performance goals are achieved. Pass-through entity
monitoring of the subrecipient must include:
(1) Reviewing financial and performance reports required
by the pass-through entity.
(2) Following-up and ensuring that the subrecipient takes
timely and appropriate action on all deficiencies
pertaining to the Federal award provided to the
subrecipient from the pass-through entity detected
through audits, on-site reviews, and written
confirmation from the subrecipient, highlighting the
status of actions planned or taken to address Single
Audit findings related to the particular subaward.
HCD’s pre-review of local program guidelines met the initial monitoring
conditions specified in 2 CFR 200.332(d), and HCD’s weekly reviews
of program performance metrics were adequate and appropriate levels of
monitoring to meet the condition specified in 2 CFR 200.332(d)(1) for
the initial months of the subrecipient’s use of the subaward funds. Other
aspects of subrecipient monitoring described in 2 CFR 200.332(d)(2)
will only be feasible after subrecipients have received results from
external reviews, audits, and examinations of their programs beyond the
responsibility of HCD as a pass-through entity. HCD agrees it is
reasonable that additional monitoring criteria, procedures, and
examinations are appropriate to maintain ongoing confirmation that
subrecipients are continuing to perform in compliance with Federal
statutes, regulations, and the terms and conditions of the subaward; and
that subaward performance goals are achieved.
Furthermore, HCD has maintained consistent communication and
oversight of Option B programs after executing each standard agreement
for state subawards. As most Option B jurisdictions prioritized utilizing
their direct federal funds before expending state block grants, only now,
one year into the program, has a significant amount of ERA 1 block
grants been expended. As such, additional monitoring is set to
commence and HCD has been undergoing a procurement for a qualified
firm to provide detailed monitoring of block grant payments by Option B
subaward recipients. Any misuse of funds is subject to recapture or
repayment under the terms of the Option B standard agreements and
state law.
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California Department of Housing and Community Development State Rental Assistance Program
SCO Comment
HCD indicated that it is now in the process of implementing this
recommendation by procuring the services of a vendor to provide detailed
monitoring of block grant payments made by Option B subaward
recipients, and provided additional information regarding other
monitoring processes previously implemented. Therefore, we adjusted this
finding to remove language stating that HCD is not in compliance with 2
CFR part 200.329, and instead indicated that in addition to current
monitoring procedures, HCD should conduct additional on-site
monitoring of Option B jurisdictions based on a risk assessment to ensure
compliance with executed standard agreements and federal program
guidelines. 2 CFR part 200.332, subparagraph (b) requires HCD, as pass-
through entity, to perform risk assessments to tailor its sub-recipient
monitoring activities. The results of this risk assessment should drive the
extent and magnitude of the monitoring activities performed by a pass-
through entity on its sub-recipients. The SRAP is a higher risk program
because it required Option B jurisdictions to make a high volume of
payments to the public in a relatively short time; the SRAP is also fairly
complex and the emergency nature of the program did not provide Option
B jurisdiction a significant amount of time to prepare for program
implementation.
FINDING 7— HCD did not ensure that its vendor implemented corrective actions for all
Corrective actions errors and issues identified by SCO and HCD. SCO notified HCD of errors
not verified and issues in various pay files, but HCD did not ensure that its vendor
addressed all of the errors identified. Moreover, HCD did not verify
corrective actions for all of the errors the vendor addressed. If errors are
not addressed and corrected, HCD is at risk of making improper payments
and failing to eliminate internal control weaknesses.
HCD’s vendor not responding to all SCO comments
HCD contracted with SCO to conduct post-payment audits of approved
applications to ensure compliance with program requirements. During the
review period, SCO submitted the testing results for each pay file to HCD
for review by HCD and its vendor. The testing results were uploaded onto
HCD’s SharePoint with a column for the vendor’s comments. As of
August 3, 2021, the vendor provided comments that demonstrated
corrective actions only for pay files dated prior to May 17, 2021. In
addition, the vendor did not comment on all issues noted by SCO in those
pay files, which indicates that these items had not been addressed.
HCD not ensuring vendor corrective actions
HCD did not respond to all issues identified, such as those resulting in
monetary errors. Although HCD confirmed that some errors had been
corrected, it noted other errors that had not been corrected. In addition,
HCD provided no assurance that corrections would be made. Furthermore,
some HCD comments indicated that the vendor’s calculations were
incorrect, but no action was taken to correct the miscalculations.
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California Department of Housing and Community Development State Rental Assistance Program
As of July 9, 2021, HCD had not provided documentation in response to
our inquiries that support its performance of oversight activities to ensure
that its vendor responded to all issues noted by SCO. On July 15, 2021,
HCD indicated that it was maintaining a log of all issues reported by SCO
and HCD, which it would review to ensure that the vendor implemented
corrective actions.
HCD also reviewed applications to test its vendor’s processing of
applications. HCD representatives stated that its vendor will track and
adjust future payments to correct any errors that HCD identifies. However,
HCD representatives did not indicate that HCD would ensure that the
vendor implements these corrections.
GC sections 13400 through 13407 require state agencies to establish and
maintain a system of internal control, as fraud and errors are more likely
to occur from a lack of effective systems of internal control when active
monitoring measures are not maintained to ensure that controls are
functioning properly.
In addition, 2 CFR part 200.303 states:
The non-Federal entity must:
(a) Establish and maintain effective internal control over the Federal
award that provides reasonable assurance that the non-Federal entity
is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.
These internal controls should be in compliance with guidance in
“Standards for Internal Control in the Federal Government” issued
by the Comptroller General of the United States or the “Internal
Control Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). . . .
(c) Evaluate and monitor the non-Federal entity’s compliance with
statutes, regulations, and the terms and conditions of Federal
awards.
(d) Take prompt action when instances of noncompliance are identified
including noncompliance identified in audit findings. . . .
Recommendation
We recommend that HCD:
Require its vendor to implement corrective actions to address all errors
identified by SCO and HCD in a timely manner;
Conduct monitoring procedures to verify that the vendor implements
corrective actions in a timely manner for all errors identified by HCD
and SCO; and
Verify that the vendor adequately adjusts payments in response to
application errors identified.
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California Department of Housing and Community Development State Rental Assistance Program
HCD’s Response
HCD disagrees with this finding. As of the date of the draft SCO report,
HCD has followed up on and resolved all the payment discrepancies
identified by the SCO. However, due to the timing of this review, the
resolved findings were not reviewed by SCO.
SCO Comment
Our finding and recommendation remain unchanged. As stated in this
report, the finding referred to the period from the beginning of the program
through June 30, 2021. During the review period, HCD did not ensure that
corrective actions were implemented for all issues that we identified and
communicated. Additionally, the finding states that on July 15, 2021, HCD
indicated that it was maintaining a log of all issues reported by SCO and
HCD, which it would review to ensure that the vendor implemented
corrective actions. We appreciate that HCD indicated in its response that
it has followed up on and resolved all of the payment discrepancies
identified by SCO.
FINDING 8— HCD did not establish adequate control procedures regarding landlord and
Inadequate control tenant documentation requirements necessary to mitigate the risk of fraud
procedures and and misuse of funds. Specifically, HCD did not require documentation to
substantiate landlords’ property ownership and to ensure that tenants were
documentation eligible for the rental assistance amounts requested. HCD did not establish
requirements to policies and procedures for the vendor to limit tenant assistance to three
mitigate risk of months of rent owed when tenants were unable to provide landlord contact
fraud information or adequate proof of outstanding rental obligations.
Furthermore, HCD did not establish policies and procedures to ensure that
its vendor retains tenant records and effectively evaluates whether tenants
are eligible to receive rental assistance in excess of three months.
Landlord applications
At the initiation of the program, landlords were required to substantiate
property ownership with one of the following documents: recorded
property deed, property tax form, or proof of homeowner’s insurance.
Documents that originate from a third party may be more reliable and can
be verified with the third party. However, as of April 28, 2021, HCD no
longer requires landlords to provide such verification of ownership.
Instead, HCD requires only a completed Form W-9 (Request for Taxpayer
Identification Number and Certification), lease agreement, and rent ledger,
none of which are produced by a third party.
The change in required documentation was intended to reduce application
processing times. However, HCD’s reliance on self-reported information
increases the risk of fraud and misuse of funds. The Form W-9, lease
agreements, and rent ledgers are all completed or created by the
individuals applying for SRAP funds. If HCD does not require supporting
documentation from government or other third-party sources to verify
ownership, the SRAP is vulnerable to a higher risk of fraud.
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California Department of Housing and Community Development State Rental Assistance Program
Tenant applications
HCD lacked documentation requirements and outreach effort procedures
to ensure that tenants were eligible for the rental assistance amounts
requested. Additionally, payments were issued directly to tenants without
third-party verification. Furthermore, the vendor’s Landlord Outreach
Team did not obtain contact information from landlords; instead, it relied
on phone numbers and email addresses provided by tenant applicants. If a
landlord did not respond to a tenant’s rental assistance application within
the allowed timeframe, then payment was issued to the tenant. Without
verification of landlord contact information, tenant applicants may receive
improper payments by providing falsified landlord contact information.
In addition, until December 2021, when HCD changed program
requirements, the application requirements did not demand adequate proof
of rental obligations from tenants. The application requires a tenant to
provide only a lease agreement or month-to-month rental agreement as
evidence of rent owed. Although these documents may establish where the
applicant resides and the rental payment amount, they do not provide
evidence of the amount of rental obligation. Therefore, SRAP funds could
have been paid directly to a tenant without proof of rental obligation or
any contact with a landlord.
In order to provide relief to tenants whose landlords have been
unresponsive or unavailable the U.S. Treasury’s guidelines for the
Emergency Rental Assistance Program permit the grantee (HCD) to issue
up to three months of rental assistance with only a written attestation of
rental obligation. However, after providing assistance for three months,
grantees must obtain evidence of rent owed before providing further
assistance to applicants. During the review period, HCD did not establish
policies and procedures that require its vendor to keep records of which
applicants received assistance based on written attestations to ensure that
these applicants do not receive further assistance until they provide proof
of rent owed.
The response to question number 5 of the U.S. Treasury’s “Emergency
Rental Assistance Program” FAQ states, in part:
If an applicant is able to provide satisfactory evidence of residence but
is unable to present adequate documentation of the amount of the rental
obligation, grantees may accept a written attestation from the applicant
to support the payment of assistance up to a monthly maximum of 100%
of the greater of the Fair Market Rent or the Small Area Fair Market Rent
for the area in which the applicant resides. . . .The assistance described
in this paragraph may only be provided for three months at a time, and a
grantee must obtain evidence of rent owed consistent with the above after
three months in order to provide further assistance to such a household;
Treasury expects that in most cases the household would be able to
provide documentation of the amount of the rental obligation in any
applications for further assistance.
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California Department of Housing and Community Development State Rental Assistance Program
2 CFR part 200.303 states:
The non-Federal entity must:
(a) Establish and maintain effective internal control over the Federal
award that provides reasonable assurance that the non-Federal entity
is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.
These internal controls should be in compliance with guidance in
“Standards for Internal Control in the Federal Government” issued
by the Comptroller General of the United States or the “Internal
Control Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). . . .
(c) Evaluate and monitor the non-Federal entity’s compliance with
statutes, regulations, and the terms and conditions of Federal
awards.
(d) Take prompt action when instances of noncompliance are identified
including noncompliance identified in audit findings. . . .
Recommendation
We recommend that HCD:
Reinstate the requirement for landlord applications to include
verifiable third-party documentation that substantiates property
ownership;
On tenant applications, require landlords to confirm their choice to opt
out of the program when applicable;
Require verification from landlords of their tenants’ rental obligations,
consistent with U.S. Treasury guidelines;
Monitor HCD’s vendor to ensure that, if a tenant provides only an
attestation form and does not provide the supporting documentation
required by the program, tenant payments are limited to three months
of rent owed; and
Recover overpayments beyond three months of rent to applicants who
provided only attestation forms and did not provide the supporting
documentation required by the program.
HCD’s Response
HCD partially agrees with this finding and will continue to implement
recommendations wherever possible. As previously noted,
improvements have been made since the scope period of the SCO
review, and the presentation of the draft review. HCD would like to
provide clarification regarding some findings in this review as follows:
Reinstate the requirement for landlord applications to include
verifiable third-party documentation that substantiates property
ownership.
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California Department of Housing and Community Development State Rental Assistance Program
HCD Process Implemented
Landlord proof of ownership was implemented as a process change
in December 2021 followed by the vendor’s incorporation of third-
party verification tool in February 2022. At this point, the state
program had deployed X40% of total resources to expended to date.
On tenant applications, require landlords to confirm their choice to
opt out of the program when applicable.
HCD Process Implemented
As part of the case management process, the vendor implemented
changes that require the case managers attempt to verify landlord
participation by making at least three (3) attempts to contact the
listed landlord over a 5-business day period. Failure of the landlord
to provide an application and required documentation in that time
frame will result in the landlord opting out.
Require verification from landlords of their tenants’ rental
obligations, consistent with U.S. Treasury guidelines.
HCD Response
For participating landlords, case management team does request a
copy of current ledger to verify tenant’s rental obligations. HCD
considers the process of verification of the tenant’s request by the
landlord, consistent with U.S. Treasury guidelines.
Monitor HCD’s vendor to ensure that, if a tenant provides only an
attestation form and does not provide the supporting documentation
required by the program, tenant payments are limited to three
months of rent owed.
HCD Response
This recommendation is not in alignment with the mandate set forth
in AB 832 to compensate 100% of the eligible household’s unpaid
rental debt accumulated on or after April 1, 2020. There is not a
limitation of 3 months of rent owed.
In addition, it is not in alignment with the U.S. Treasury guidelines
as it pertains to attestations.
Recover overpayments beyond three months of rent to applicants
who provided only attestation forms and did not provide the
supporting documentation required by the program.
HCD Response
SCO’s statement “The HCD did not establish adequate control
procedures regarding landlord and tenant documentation
requirements necessary to mitigate the risk of fraud and misuse of
funds” is inconsistent with U.S. Treasury guidance that clearly
allows for HCD to rely on attestations, which the program initially
did. Concurrently, program staff created a risk profile and
subsequently utilized the risk profile to adjust requirements. The
program does require additional documentation based on
adjustments that were implemented; this finding does not take into
account the continuous improvements and misstates actions done in
conjunction with the SCO.
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California Department of Housing and Community Development State Rental Assistance Program
In addition to the above, HCD internally pulls target samples and
reviews 80-100 applications from the pre-payment file for additional
review specifically looking for cases and patterns of fraudulent
activity that cannot be easily identified through the vendors process
and procedures. HCD internally tracks all files escalated to the
vendor for additional review and follows up on the results of those
reviews and outcomes.
SCO Comment
Our finding and recommendation remain unchanged. Our finding reflects
the internal controls and program requirements as of June, 30, 2021. SCO
recognizes that HCD has since implemented internal controls and adjusted
program requirements to strengthen program controls.
As stated in the finding, the U.S. Treasury’s FAQ indicates that payment
of assistance for written attestations of rent owed may be provided only
for three months at a time until further evidence is obtained for additional
assistance. If the tenant is not able to provide additional supporting
documentation, only then should the payment be limited to three months
of rent owed. During our review of payments, we identified instances in
which payments were made beyond the three-month limit, although the
application file contained no documentation other than the self-attestation
form to substantiate the amount of rent owed. It should be noted that this
rule does not conflict with AB 832 because it does not prevent tenants
from receiving 100% of eligible rent owed once proper documentation has
been received.
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California Department of Housing and Community Development State Rental Assistance Program
Attachment—
California Department of Housing and Community
Development’s Response to Draft Review Report
State Controller’s Office
Division of Audits
Post Office Box 942850
Sacramento, CA 94250
http://www.sco.ca.gov
S21-HCD-9000
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