Small-business owners say they were mistakenly accused of defaulting on federal Covid loans

Some consultants say the alleged problems at the SBA — an agency with about 2,800 full-time employees — stem from the record surge in its workload after Congress expanded the disaster loan program in response to the Covid pandemic. The agency acknowledged the Covid disaster loan program “was an unprecedented program to stand up, scale, and administer during the pandemic.”

The economic injury disaster loan program traditionally helped businesses hurt by hurricanes, earthquakes and other localized disasters. From 1953, the year the SBA was created, to when the pandemic struck in 2020, the agency made a total of about 2.2 million loans worth $67 billion, according to the SBA. Then, in the two years after Covid struck, the agency approved 3.9 million loans totaling $378 billion, a spokesperson said.

The spike in new loans exposed several operational weaknesses, according to outside reviews. A 2021 General Accountability Office report found the SBA’s communications often failed to provide key information to applicants. An October 2024 Inspector General’s report said the SBA “has not had effective IT management policies and procedures for several years.”

“Congress has never properly funded this agency,” said Curran, who said his consulting firm has assisted nearly 90 borrowers this year who’ve disputed that their loans were delinquent. “It’s behind at every level, including technology.” The agency’s spokesperson denied such problems are hampering loan processing, saying that the SBA’s technology systems “are functioning properly.”

As most Covid disaster loans have come due, following initial deferment periods, the agency has reported an unusually high default rate that business owners and consultants interviewed believe is inflated by mistakes. 

As of this month, the SBA has referred almost 893,000 Covid disaster loans to Treasury for collections, with nearly all of them sent this year. Such referrals to the Treasury are required once a loan is 120 days past due, the agency said. The SBA has since recalled about 60,000 of those defaulted loans under an exemption, which canceled collection penalties and allowed the agency to keep servicing the loans for two years.

Still, some borrowers say they’ve since spent months trying to sort out loans they say were wrongly deemed delinquent.

For Harb, it’s taken more than three years. In February, he said, he received a notice from the Treasury Department that his loan was in collections and he now owed a 30% penalty plus thousands in additional interest. Harb hired Curran to get the loan out of collections and sent back to the SBA, but the agency still hasn’t retrieved the full payment that Harb had set up more than three years earlier, records show. In the meantime, additional interest keeps piling up.

In an Oct. 15 email, the SBA acknowledged Harb’s attempts at payment, and instructed him to contact his bank for more information. Harb said his bank told him the SBA has never made an electronic request to withdraw the funds. His bank records show the account had more than enough money for the payment. 

“It shouldn’t be this hard to pay back a loan,” Harb said. 

California resident Robert Mavaddat said he tried to be proactive about repaying a $500,000 disaster loan that helped keep his three Fantastic Sams hair salons afloat during the pandemic. In September 2022, with his payments set to begin, he inquired about getting a reduced monthly payment for hardship reasons. But after following instructions and making several payments by mail to an SBA office in Texas, he learned the Texas office had closed. Despite multiple calls, he said, the SBA couldn’t tell him which office had his loan or where to mail his payments.