Customer was traveling and a neighbor who was housesitting used the customers Visa Debit card to purchase items on Paypal. We have his dispute in writing, have given him provisional credit, processor is investigating. Merchant has supplied proof the goods were shipped to the neighbor.Our processor is requesting that cardholder review it and provide 'additional documentation'(i.e., i do not know this person, that is not my address, etc.). Cardholder has not provided us with this additional documentation. Time is running out. We encouraged customer to get a police report since he knows this neighbor has stolen from him. (i know it is not required for reg E) but customer does not want to make any waves. Can we deny this claim if we do not get the additional docs? I know this customer did not benefit from this transaction-but can't find it specifically in Reg E. Isn't the initial claim in writing enough?

Don't confuse what your card processor requires and what Reg E requires. It appears that you have sufficient documentation to sustain the customer's claim and finalize the provisional credit.
You are now attempting to recover these funds for the bank. One such means is your cardholder supplying an updated letter stating that they did not benefit from the transaction. If the cardholder refuses, this does not impact their Reg E rights, but then the bank becomes the financial victim.
Even if your customer refuses to file a police report, you can inform them that the bank can and will file a police report in an attempt to recover the stolen funds from the neighbor. You may also want to consider not providing a debit card to this customer in the future since they do not wish to cooporate with the bank in this investigation.

I could not have said it better, Crowman.

Thank you very much!