Can we deny a Reg E dispute based on the fact that the POS transaction was processed with the debit card being physically used at the terminal and the customer has not reported the card as lost or stolen? Basically, assuming that since it was used physically to make the purchase and the customer states to have always been in possession of the card then we conclude it must have been them? Seems like a stretch to me but this isn't my area of expertise.

This would not be a valid reason to deny a claim. Someone could have "borrowed" the card without the customer being aware & returned it before it was missed. It could also have been a counterfeit card.

Thank you, that was my thought as well.