Hello Rick,
welcome. The HippoEDIT\data folder is correct. It is root for all editor settings (something, not text editor part related stored in hippoedit.config).
When you point to some directory, it should already contain valid files. Because form that time HE starts to save all changes to it, but deos not move untouched files. So, in you case you point oto invalid directory, which does not contain all settings (colours are one level up), so HE saves something there, next start tries to load all settings, but could not, then recreate default settings, and so on. Maybe I need to bring some information message about it, but such problem has not happend before, so this was not done.
If somebody else would stumble on this, I would think how to make this more clear...
Best regards,
Alex.