The agreement that MUST be abided by is the plan document.. if is states you are only allowed 2 loans.. you are only allowed 2 loans. If issued in error.. yes.. you must repay the funds or pay the tax and penalty on the amount that will now be considered a WITHDRAWAL, not a loan.
Yes their error.. but these are ERISA regulations, and the plan document must be adhered to.... THey can amend the plan document to allow 3 loans... but that will cost them $... so probably won't happen. They would assume you also know the rules, and would not have allowed the error to process...
Sucks, but yes, if issued in error... it cannot continue as originally agreed.

I looked online under my account and it showed that I only had one outstanding loan so I structured the loan and it took a couple days before they approved it so I was not aware that I did not do anything wrong.

My company switched investment companies a couple years ago and I did not know about the new policy.

So they can amend "their plan" if need be?

The other problem is that I have weekly deductions taken from my paycheck however they are not allocating them correctly and I have received a couple of default letters. How do I address this issue as well?

They can amend the plan.. but they have to amend the document.... (it does cost them money to do so)
If they are not allocating you have a couple options... speak to the plan administrator... how often are they sending contributions and payments?
Technically they have until the 15th business day of the month following the deduction.. if this is happening you should not receive default letters.. (we don't default without 2 full quarters w/ no payment ) so it is not YOUR fault but the employers.. hopefully the administrator can go to the company to see what the issue is.. (they should be anyway)
Unless they amend the plan, you would have to defaul on that loan... if any participant is not in compliance.. they plan is in danger of not being a "qualified" plan...

They can do anything if it's in the loan contract but this doesn't sound right. You need to contact an attorney familiar with this and see what your options are. I always thought you could get more than one loan unless told otherwise.