Reported speech WITHIN a conditional clause

Let's assume the following examples:

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[Direct Speech] James to his team: What is the problem?

[Reported Speech] James asked them what the problem was (could also be James asked them what the problem is)

Reply

[Direct Speech] Team : The algorithm fails to calibrate correctly.

[Reported Speech] They told him the algorithm failed to calibrate correctly.

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Now if we move to a conditional (hypothetical) sentence, should it be:

• If James asked them what the problem was, they would tell him the algorithm fails to calibrate correctly

Or

• If James asked them what the problem was, they would tell him the algorithm failed to calibrate correctly

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Issue

It seems that in sentence #2 we lose the "present" situation as if the related story were set in the past, which is not the case.

So I would tend to say the correct one is the first sentence. It would mean we should use the reported speech in the if clause but not in the main one (with would)?