Thanks for checking that out. I did a lot of experimentation, looked in a lot of places, talked to Carvin and to Eventide as well. Your answer explains the phenomena that I have witnessed, I have seen nothing that contradicts your explanation. In fact on further evaluation I found similar issues using the diatonic with lower octaves in the loop as well. Oh well, it will stay outside the loop, life goes on.
I feel it is a nice effect provided you limit yourself to single notes and no more than simple major 4th or 5th chords. I am not sure that I can't get as good or a better sound just using the diatonic though. Neoclassical primarily on wound strings for example (so long as you don't sweep) can be nice with it. Also slow lyrical Vai-like playing primarily on unwound strings. I can set all the knobs to 12 o'clock, except for the bottom rightmost two, set to 10:30. I need to precede this with some overdrive/distortion, not boosted though. And follow it up with some echo maybe, or maybe flanging. But I would not say this effect is for everybody, certainly not for SRV! 
Thanks for you solution!
