and the fact that there was a rate and term as part of that application(2nd Prong) would make me as an auditor/examiner ask the question with reference to the NMLSR originator number.
How does him just signing the 1003 have anything to do with the rate and term associated with the application? I understand that it would lead an auditor to question what's going on, but I still don't see where the signer in the OP's scenario became an MLO just because they signed the 1003. The signature on the 1003 may meet prong 1, but it doesn't meet prong 2. Other file documentation should indicate whether or not the signer meets prong 2.
Based on the OP's response that the sales manager signed the 1003 after closing basically to clear an internal exception, leads me to believe that the termnated LO was still on board when the loan closed and thus would have signed the note. As an auditor, this and the manner in which the sales manager signed the 1003 where he referenced the original MLO was terminated, would indicate to me that the 1003 was signed after the fact and may not have had anything to do with offering or negotiating terms.
A good auditor should question what happened, but should not automatically assume that one signature on the 1003 equates to the signer being an MLO. If I were doing the audit, I would ask the question "Why did this person sign it?" Then make recommendations that the bank document the file as to what happened, and implement a better process to have a registered MLO take over for termed MLOs.