First of all your car is not a hotrod if you have an S50, as the S50 was available in the E36 chassis.
And since your car is a 1998 car and came with OBD2 diagnostics, OBD2 diagnostics have to be 100% operational/functioning
And this is nothing new. You're not allowed to put an older motor into a newer chassis car. Plain and simple.
So if you swap your motor and you have a 1998 E36... you're allowed to put any OBD2 motor into your car that will allow you to keep OBD2 tests functioning.
You are NOT allowed to put an OBD1 motor in your car and you are NOT allowed to convert your OBD2 car to OBD1. It has always been this way, it just that in the past they never scanned the ECU so you could get away with it. Now you cannot.