OK. I got it figured out. The problem was with pam. This new gdm has a few different files in the /etc/pam.d directory (gdm, gdm-password, gdm-fingerprint, gdm-autologin) and each file uses different pam files.
gdm was including system-auth while gdm-password was including password-auth.
So, any changes I made in system-auth, I also had to make in password-auth. It would be nice if the documentation was a little clearer in regards to pam and gdm.