To explore the causes for the loess collapse and the mud forest formation in the eastern bank of Dabusu Lake, the source and failure mechanisms for subsurface flow were studied. The results show that, according to the salt content of topsoil larger than that of subsoil, precipitation infiltration cannot recharge the underground water. Isotopic analysis results indicate that Dabusu Lake is mainly recharged by groundwater, and subsurface flow comes from the seepage of surrounding rivers. Leak water of rivers discharges towards Dabusu Lake through the silt layer beneath the loess layer, which is one of the reasons for the development of mud forest. The dust particles of loess above the silt layer are taken into the lake by subsurface flow, forming cavities on the bottom of the loess layer and finally resulting in collapses. Besides, the freeze-thaw action also aggravates the seepage failure. Subsurface flow, fine particle loss, and freeze-thaw action are the main reasons for loess failure, and avoiding fine particle loss, and freeze-thaw action is the key to preventing the development of loess failure.