When group policy "Always prompt for password upon connection" is Enabled, and remote connection is performed without NLA, the target server resets the password to an empty string causing the login to fail.
Unable to connect to server via local vaulted account through built-in RDP client. Errors out with following message: "Authentication (login or challenge) has failed"
The group policy "Always prompt for password upon connection" can cause this issue, if it is enabled, and a remote connection is performed without NLA as required. With this GPO enabled the target server resets the password to an empty string.
The group policy is under: "Computer Configuration\Policies\Administrative Templates\Windows Components\Remote Desktop Services\Remote Desktop Session Host"
The Corresponding registry key is: "HKEY_LOCAL_MACHINE\SOFTWARE\Policies\Microsoft\Windows NT\Terminal Services":[dword]fPromptForPassword.
With this in place the agent incorrectly presents the "Authentication failed" message when it encounters an empty password. The default credential provider simply asks user to enter password again
Disable the above Group Policy to require the need to always prompt for password upon connection.
This is fixed in the 20.4 release. If the GPO is enabled and an empty password is received, the agent will perform like the default credential provider and prompt the user to enter the password again.