"Lender did not feel good about the transaction?" BC, there has to be something in the bank's underwriting guidelines other than that explanation from the LO. If I was the co-borrower, I'd be on the phone with the bank, or send a complaint letter to the regulator.
Like Randy mentioned, the regulation has some guidance in the appendix on the reason for denials. Not following that (especially if it is a HMDA loan and the bank reports reasons for denial) will have an examiner looking at the file. I've only seen "other" a few times in my career.
I can see several issues, including the lack of a 2nd review before the AAN was sent. Make sure that the guidelines have something to cover similar transactions, especially a counteroffer if the co-applicant could have individually qualified. Based on the post, your LO did a disservice to the bank and customer - banks do not make money on turndowns (or friends on a TD that could have been made).
Integrity. With it, nothing else matters. Without it, nothing else matters.