Freddie Harb did everything right. Like nearly 4 million other small business owners, he received an Economic Injury Disaster Loan to keep his business alive during COVID. When it came time to pay it back, he tried. And tried again. And again.
The SBA never took his payments.
Three years later, Harb learned he was in default. His business was in collections. In February 2024, he received a notice from the Treasury Department that he now owed a 30% penalty plus thousands in additional interest. All because the SBA couldn't process the payments he repeatedly tried to make.
He's not alone. As of December 2024, the SBA has referred almost 893,000 COVID disaster loans to Treasury for collections—nearly all of them sent this year.
- 893,000 COVID loans sent to Treasury collections
- Nearly all referred in 2024 alone
- 60,000 recalled under exemption (proving errors)
- 30% penalty added to wrongly accused borrowers
- Thousands in added interest charges
- Months of bureaucratic nightmare to fix
How Did We Get Here?
From 1953 to when the pandemic struck in 2020, the SBA made a total of about 2.2 million loans worth $67 billion. That's 67 years of lending.
Then, in the two years after COVID struck, the agency approved 3.9 million loans totaling $378 billion.
In other words, the SBA more than doubled its entire historical loan volume in 24 months. And their systems—both technical and human—couldn't handle it.
An October 2024 Inspector General's report said the SBA "has not had effective IT management policies and procedures for several years." That's bureaucrat-speak for: the computers don't work and nobody's in charge of fixing them.
The Stories Are Infuriating
Robert Mavaddat: The Man Who Couldn't Give Money Away
Robert Mavaddat tried to be proactive about repaying a $500,000 disaster loan. In September 2022, with his payments set to begin, he inquired about getting a reduced monthly payment. He followed instructions. He made several payments by mail to an SBA office in Texas.
Then he learned the Texas office had closed. Despite multiple calls, the SBA couldn't tell him which office had his loan or where to mail his payments. The SBA had simply misfiled his loan under his federal employee identification number rather than his Social Security number—a bookkeeping error that took months of frustration to discover.
The 30% Penalty Trap
When the SBA refers a loan to Treasury for collections, borrowers immediately face a 30% penalty on top of their balance. Plus additional interest. Plus collection fees. A business owner who took a $50,000 EIDL and tried to pay it back can suddenly owe $75,000 or more—through no fault of their own.
The 60,000 Recalled Loans
Here's an admission of failure buried in the data: the SBA has since recalled about 60,000 of those defaulted loans under an exemption. This cancelled the collection penalties and allowed the agency to keep servicing the loans for two years. What does that tell you? It tells you the SBA knew tens of thousands of those collections referrals were mistakes.
The SBA's Response: Everything Is Fine
When NBC News investigated this story, the SBA's spokesperson denied such problems are hampering loan processing, saying that the SBA's technology systems "are functioning properly."
Tell that to the business owners who:
- Made payments that were never recorded
- Had loans filed under wrong identification numbers
- Couldn't find out which office handled their loan
- Received default notices for loans they'd been paying
- Got sent to collections despite having documentation of payments
The systems are functioning properly. Sure they are.
The Consultant's Evidence
A consultant named Curran told investigators that his firm has assisted nearly 90 borrowers just this year who've disputed that their loans were delinquent. Ninety borrowers from one firm. How many more are out there fighting alone?
These aren't fraudsters trying to escape paying. These are legitimate business owners who took government-backed loans to survive a pandemic, tried to pay them back, and got caught in a bureaucratic meat grinder.
The Great Loan Misfiling
One of the most common problems? The SBA literally can't find loans. They file them under wrong numbers. They lose track of which office has them. They can't match payments to accounts.
Imagine running a business this way. You make a sale, the customer pays, and you can't figure out which invoice got paid because you filed everything under the wrong customer name. You'd be out of business in a month.
The SBA does this with hundreds of billions of dollars and calls it "functioning properly."
The Scale Problem
Let's be fair for a moment: the SBA's COVID response was unprecedented in scale. No federal agency had ever tried to process this many loans this fast.
But here's the thing: they had choices.
- They could have built better systems before the flood
- They could have hired more staff
- They could have implemented stronger error-checking
- They could have created better borrower communication
- They could have paused collections until systems were sorted out
Instead, they chose to push loans through as fast as possible, deal with problems later, and blame borrowers when things went wrong.
Scammers On Top of Everything
As if the SBA's own incompetence weren't enough, scammers have been targeting COVID loan borrowers. The SBA has warned that scammers impersonate lenders, collection agencies, and even the SBA itself. They send phishing calls and emails to PPP and EIDL borrowers.
So legitimate borrowers get harassed by the actual SBA for loans they're trying to pay, AND they get targeted by scammers pretending to be the SBA. It's a nightmare from every direction.
What Can You Do If This Happened to You?
If you're one of the wrongly accused:
1. Document everything. Every payment you made. Every call you placed. Every letter you sent. Timestamps, names, confirmation numbers.
2. Request your loan file. Under FOIA, you can request your complete loan file from the SBA. This may reveal where the error occurred.
3. Dispute the collections action. You have the right to dispute with Treasury. The 30% penalty may be removable if you can prove SBA error.
4. Contact your Congressional representative. Congressional inquiries can sometimes unstick bureaucratic problems that phone calls cannot.
5. Consider legal action. Some wrongly accused borrowers have successfully sued the SBA. A Seattle rideshare driver got a $62,500 settlement after the SBA confused him with someone on a terrorist watch list.
- Gather all payment records and confirmations
- Request your complete loan file via FOIA
- File formal dispute with Treasury Department
- Contact SBA OIG Hotline: (800) 767-0385
- Reach out to your Congressional representatives
- Document everything in writing (not just phone calls)
- Consult with an attorney if amounts are significant
The Real Cost
Here's what the SBA's collections nightmare costs beyond dollars:
- Credit destruction: Collections actions devastate credit scores, making it impossible to get future financing
- Mental health: The stress of fighting bureaucracy while running a business is crushing
- Time: Hours and hours on hold, writing letters, gathering documentation—time not spent building the business
- Trust: Why would anyone trust government disaster programs again?
The next time disaster strikes—and it will—small business owners will remember how the SBA treated them. They'll remember being sent to collections for trying to pay. They'll remember the 30% penalties for SBA errors. They'll remember being told the systems are "functioning properly" while their lives fell apart.
This Is Institutional Failure
Let's be clear: this isn't about a few isolated errors. This is systemic institutional failure. When you send 893,000 loans to collections in a single year, and you have to recall 60,000 of them because they were mistakes, your systems are broken.
When borrowers can't make payments because you closed the office and didn't tell anyone, that's not their failure. It's yours.
When you misfile loans under wrong identification numbers and then punish borrowers for not paying loans you lost track of, that's not their failure. It's yours.
But in the world of the SBA, it's always the small business owner's problem. They take the credit hit. They pay the penalties. They spend months fighting to fix what the SBA broke.
That's not governance. That's abuse.
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