Although you're correct that there was a drafting process for MSCHAPv2, the actual protocol it describes had already shipped in Windows. As a result "But this is a bad idea" would not have been a useful contribution to the drafting process, the zero draft describes the exact same protocol, just with different words.
Edited to add:
The drafting process wasn't worthless, it fixed typographical errors, unclear descriptions, and so on. For example the zero draft insists Windows usernames are "Unicode" (UCS-2) but actually they're just ASCII, the examples show ASCII encoded hexadecimal but the text in the zero draft specifically calls it Unicode. And originally the document repeatedly says something is a 16-bit value in the text while showing a 24-bit value in structures, the final RFC has corrected this to split out an 8-bit "reserved" all zero field in the structure when this happens. In at least one place the RFC seems to "extend" the protocol compared to the zero draft, but again this isn't a response to Working Group feedback, it's documenting a patch Microsoft shipped in later Windows versions after the zero draft.
I don't know how much a WG chair could have usefully interfered here. As I say it's documenting something that already existed, so "fixing" it to document a more secure protocol nobody was using wouldn't help. The IETF's role here was to help people interoperate with Microsoft's solution, your non-Windows OS that can sign-in to a corporate WiFi system with Windows domain servers is enabled by this documentation.