Who do you report to? If you are reporting exceptions to the audit committee, they should decide whether it is ok for the loan officer who originates the loan to sign off on the exception.
IMHO the loan officer should not be one of the ones to sign off on the exception. I would keep reporting it as an exception. At least if your examiners cite this, you would have proof that you had cited it as well. It would then be on management to explain why the practice has continued.
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Just my 2 cents worth--for what its worth!!