How do you all deal with applicants using the address of a homeless shelter or halfway house when it is reported as a Substancial Address Discrepancy by one of the CB or it shows up as a red flag because it is the same address being used by other unrelated customers?

If that's where they are living, document it. The fact that the same address is being used by others can be explained -- it's a shelter.

Agreed. You just need to document why you accepted the address. The main issue is to show that you addressed the red flag and noted the reasons for clearing (or not clearing). That has been a red flag for a long time for BSA purposes (multiple people in the same address) but it doesn't mean something is wrong, just that it needs to be checked.