Before the cross-play update if at least one player signed into PSN, the characters for player 1 and 2 were loaded from their respective separate profiles.

Now the new update only loads the characters from the 1st player's profile, for both player 1 and 2.  This effectively makes the existing character's created by the 2nd player unplayable, and they would have to create a new character from scratch to play.

So far no combinations of one or both being logged into PSN, linking or not linking a MS account, enabling cross play, etc have helped.