What was the loophole?

I did a quick search of newspaper archives for articles from Harding's presidency that might indicate awareness of this hypocrisy and didn't find any results. That could just be because I didn't look for long enough, and in any case, absence of evidence is not evidence of absence, so it's hard to draw conclusions from that about whether or not there was widespread, public outcry.

That said, the were definitely people who thought it hypocritical that the capital and the Capitol were awash with alcohol. Peter Andreas, on page 233 of his book Smuggler Nation: How Illicit Trade Made America, quotes Mabel Walker Willebrandt, who was Assistant Attorney General under Harding, as saying in 1929, 'I think that probably nothing has done more to disgust and alienate honest men and women who originally strongly favored the prohibition amendment and its strict enforcement than the hypocrisy of the wet-drinking, dry-voting congressmen'.