You don't have covers displayed if you never downloaded them. there's a download menu in the loader (1 or 2 on the wiimote).
But you said the List mode didn't even load at all? it stays on a blank/empty window with no games?
Ah, I thought you said your drive was WBFS. now you say it's FAT32.
and you say you run "as" .game
I think you mean your games are "inside the folder" named "wbfs" and "games" ?
because gamecube work as ".iso" not as ".game"
thanks for the revision number and the code dump screenshot.
you can't update from 1260 inside the loader, but it doesn't mean there are no new revision.
latest official revision is 1272, you can find it in my signature, or on sourceforge.
but you don't need to update, it should work with 1260 as I don't remember that version having a listing problem.
Keep your drive as FAT32. do not change it.
Maybe the game list or cache is bugged, you could try to reset the cache.
You can delete a specific file on your SD card, but maybe, if you don't even have any covers for the games, it's easier to simply delete the entire usbloader_gx folder and reinstall it again using r1272.
it'll reset all your settings, game cache list, etc.
If your drive is in FAT32, please verify your folders INSIDE the wbfs and inside the games folder.
be sure they are properly counted, named, etc.
try using wiibackupmanager to confirm the game list.
I'm curious to see your hdd structure, you might have issues on your hdd.
in the meantime, I'll check your dump to see if I find something, but as it's not the last revision it's maybe already fixed
Edit:
it seems to be a memory management issue with decoding the animated banners.
Probably because the loader reports more games to list than the actual real game number, so it tries to load banners past that number, finding nothing.
There's no failsafe to check whether the banner number matches the game number, the loader expects the proper number to be loaded. your bug triggers another bugs.