Large companies that received money from the small business loan program are not to blame, according to former TARP watchdog Neil Barofsky.
"You have to go back to the design of the program itself," Barofsky told CNBC on Thursday.
"I mean, Congress went out of its way to carve out businesses that have more than 500 employees but are restaurants, chain restaurants," he said on "Closing Bell." "They wanted the money to go to chain restaurants."
The Paycheck Protection Program, created in March as part of the government's $2 trillion aid package, was intended to help small businesses with fewer than 500 employees weather the economic shock from the coronavirus crisis.
But large restaurants and hotel chains received an exemption for locations with less than 500 employees.
"They participated because they qualified and then there's this tremendous political backlash," Barofsky said, specifically referencing Shake Shack as an example.
"This was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity," Mnuchin told CNBC earlier this week.
The SBA also issued guidance last week that rendered it less likely publicly traded companies can tap into the next round of PPP funding. The initial $349 billion was used up, but Congress has since approved an extra $310 billion.
Banks are just following a "general business sense, where you take care of your bigger and best customers first," argued Barofsky.
"If the government wants banks to carry out its policy, it has to counter those incentives or provide its own incentives if it wants a truly level playing field, otherwise it's not going to happen," he said.
"And that's not the banks' fault," he added. "Ultimately, that's the government's fault."