Ohh... hmmm
You probably want the "Disable vBulletin Users" turned on. That should (might) make it prefer the LDAP users.
What you are describing with the passwords not changing is that the user update isn't working correctly. This puzzles me because it's relatively simple code, and it's working for some people.
What kind of LDAP server are you reading from? Do you have access to the query logs to ensure that the user is validating and querying their entry correctly?
H.
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