I did some more investigating into this issue. From what I can tell the saslauthd client never sends the rhost to the saslauthd process and it isn't supported in the client/server protocol. So this is somewhat of a problem because of the design of the protocol and maintaining backwards compatibility with existing clients.
Yes that is the correct issue occurring effectively pam never sees the rhost data from sendmail which can be seen in the auth log.
Jan 25 16:56:12 uvt-yakkety saslauthd[3020]: pam_unix( smtp:auth) : authentication failure; logname= uid=0 euid=0 tty= ruser= rhost= user=powersj
I did some more investigating into this issue. From what I can tell the saslauthd client never sends the rhost to the saslauthd process and it isn't supported in the client/server protocol. So this is somewhat of a problem because of the design of the protocol and maintaining backwards compatibility with existing clients.