When the Covid pandemic shut down his entertainment booking agency, Sleeping Giant Music, in 2020, Freddie Harb faced financial ruin. With concerts and live events largely on hold, the San Diego businessman said, he turned to the U.S. Small Business Administration in case he needed help making payroll. Like nearly 4 million other small-business owners, he received what\u2019s called an \u201ceconomic injury disaster loan.\u201d <\/p>\n\n\n\n
But when Harb repeatedly tried to repay the loan, records show, his payments were never taken by the agency. Three years later, he learned he was in default and his business was in collections.<\/p>\n\n\n\n
\u201cI wish I never got that loan,\u201d Harb said in an interview. \u201cIt\u2019s been a total nightmare.\u201d<\/p>\n\n\n\n
Navigating the SBA\u2019s Covid disaster loan program has become similarly agonizing for several other small-business owners who, like Harb, say their loans were wrongly deemed delinquent or in default as a result of the agency\u2019s own internal accounting and processing errors.<\/p>\n\n\n\n
\u201cIt\u2019s a complete s— show,\u201d said Trevor Curran, who co-runs Aurora Consulting, a Connecticut-based firm that has helped dozens of small-business owners manage and obtain SBA loans. \u201cDysfunctional internal systems, incompetent processing, bad communications.\u201d<\/p>\n\n\n\n
Along with the added stress and wasted time trying to fix mistakes, several business owners accused of default have faced real financial consequences due to the agency\u2019s alleged blunders, including garnished or withheld Social Security checks and tax refunds, intercepted Medicaid payments, and files sent to private collectors who\u2019ve flagged delinquencies on credit reports, Curran said. <\/p>\n\n\n\n
An official for the Treasury Department, the agency charged with collecting on defaulted loans for the federal government, did not answer questions about specific collection methods but said they are used as a last resort.<\/p>\n\n\n\n
In an emailed statement, the SBA said it couldn\u2019t comment on individual loans for privacy reasons. But a spokesperson said the agency made a number of improvements to its payment system last year. It had also undertaken \u201csignificant outreach to every borrower as their loan payments begin and as loans become delinquent,\u201d the spokesperson said. To date, that has meant more than 115 million phone calls, over 16 million emails and nearly 1.7 million USPS letters, the statement added.<\/p>\n\n\n\n
Some consultants say the alleged problems at the SBA \u2014 an agency with about 2,800 full-time employees \u2014 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 \u201cwas an unprecedented program to stand up, scale, and administer during the pandemic.\u201d<\/p>\n\n\n\n
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<\/a> worth $67 billion, according to the SBA. Then, in the two years after Covid struck, the agency approved 3.9 million loans<\/a> totaling $378 billion, a spokesperson said.<\/p>\n\n\n\n The spike in new loans exposed several operational weaknesses, according to outside reviews. A 2021 Government Accountability Office report\u2002<\/a>found the SBA\u2019s communications often failed to provide key information to applicants. An October 2024 Inspector General\u2019s report<\/a> said the SBA \u201chas not had effective IT management policies and procedures for several years.\u201d<\/p>\n\n\n\n \u201cCongress has never properly funded this agency,\u201d said Curran, who said his consulting firm has assisted nearly 90 borrowers this year who\u2019ve disputed that their loans were delinquent. \u201cIt\u2019s behind at every level, including technology.\u201d The agency\u2019s spokesperson denied such problems are hampering loan processing, saying that the SBA\u2019s technology systems \u201care functioning properly.\u201d<\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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.<\/p>\n\n\n\n Still, some borrowers say they\u2019ve since spent months trying to sort out loans they say were wrongly deemed delinquent.<\/p>\n\n\n\n For Harb, it\u2019s 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\u2019t retrieved the full payment that Harb had set up more than three years earlier, records show. In the meantime, additional interest keeps piling up.<\/p>\n\n\n\n In an Oct. 15 email, the SBA acknowledged Harb\u2019s 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. <\/p>\n\n\n\n \u201cIt shouldn\u2019t be this hard to pay back a loan,\u201d Harb said. <\/p>\n\n\n\n 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\u2019t tell him which office had his loan or where to mail his payments.<\/p>\n\n\n\n Then, in December 2023, Mavaddat received what he described as an alarming letter from the SBA saying his loan was past due by more than $31,000, records show. When he called to dispute it, he said, an agent told him it had no record of past payments and that his loan had been sent to the Treasury for collections. While trying to resolve the matter, Mavaddat got more letters \u2014 from the Treasury and a private collections firm \u2014 that appeared to demand payments totaling nearly $1.5 million, records show. <\/p>\n\n\n\n Although Mavaddat took out only one loan, the letters indicated that he owed more than $734,000, including interest and penalties, on each of two salons. Mavaddat finally drove to a local SBA office, where a representative told him he should consider declaring bankruptcy, he said.<\/p>\n\n\n\n \u201cIt was like hell,\u201d said Mavaddat, 66, who immigrated from Iran and has since spent decades building his salons into business successes. \u201cI was scared that I was going to lose everything.\u201d <\/p>\n\n\n\n As it turned out, the SBA had simply misfiled Mavaddat\u2019s loan under his federal employee identification number rather than his Social Security number \u2014 a bookkeeping error discovered after months of frustration, and only after Mavaddat hired Curran, he said. The consultant helped get his loan moved back to the SBA, where he\u2019s now caught up and making regular payments.<\/p>\n\n\n\n Exactly how many of the loans sent to collections this year resulted from errors isn\u2019t known, consultants say. \u201cIt\u2019s all anecdotal,\u201d said Curran. \u201cBut the stories I\u2019ve heard are mind-blowing.\u201d <\/p>\n\n\n\n Jason Milleisen, a consultant who works with disaster loan borrowers, said some of his clients have also complained about mistakes and misinformation when dealing with the SBA. <\/p>\n\n\n\n Milleisen added that, in his experience, the SBA is unwilling to forgive disaster loans, unlike it does with loans for general financial assistance. \u201cIt seems like the people who are the least at fault for their situation due to a disaster should be given some consideration,\u201d he said.<\/p>\n\n\n\n Alejandro Contreras, an SBA director overseeing disaster loan program policies, said in a YouTube interview<\/a> earlier this year that the SBA doesn\u2019t \u201chave the authority to forgive disaster loans.\u201d<\/p>\n\n\n\n \u201cWhat we can do is try to be as flexible as possible to borrowers to give them some relief,\u201d he said, noting that the agency has expanded its hardship accommodation program to reduce payments for some disaster loans. As of December, more than 430,000 borrowers are enrolled in the program.<\/p>\n\n\n\n But some business owners say they\u2019ve also found the hardship program rife with problems.<\/p>\n\n\n\n Scott Kobryn, a Boone, North Carolina, resident whose business, SteakAger, manufactures equipment for dry-aging beef, said he\u2019s made regular $2,505 monthly payments on his $500,000 Covid disaster loan. <\/p>\n\n\n\n But with his revenues continuing to flag last year, Kobryn asked for reduced loan payments. In April, the SBA approved his hardship request, dropping his payments to $251, records show. Kobryn said he made the new payments each month.<\/p>\n\n\n\n But in October, he noticed that his online account showed his loan several months past due. His and Curran\u2019s efforts to resolve the issue have since gone nowhere, he said.<\/p>\n\n\n\n \u201cIf I\u2019m dealing with my bank, these problems don\u2019t exist,\u201d Kobryn said. \u201cLosing payments, banks don\u2019t do that. I don\u2019t know if it\u2019s rank ineptitude, but it isn\u2019t normal business.\u201d<\/p>\n\n\n\n In the meantime, Kobryn is now dealing with fallout from another disaster. Hurricane Helene flooded his warehouse and damaged property, he said. Such losses typically would qualify his firm for a traditional economic injury disaster loan. But last month, the SBA announced it had\u2002exhausted all funding<\/a> for the program amid increased demand.<\/p>\n\n\n\n The agency couldn\u2019t definitively say this week when funding might be restored, saying only that it\u2019s \u201cworking closely with Congress to secure the resources needed to restore funding to this program as quickly as possible.\u201d<\/p>\n\n\n\n