I have a situation where we processed the loan however the value of the property comes in lower. We advise the customer that the loan terms remain the same however he will need to bring more money to close. He advises us he is withdrawing his loan. The question is we treated as a withdrawn and we sent our letter as such. An auditor is saying no, we should have treated this as a counter-offer as the dollars to close was different. Which is it???

It is a counter-offer, with the customer not accepting, you have a denial.

You reviewed the loan and made a decision subject to requiring more funds to close. It is a counter-offer. If the borrower does not want to bring more money and canceling the transaction, it is a counter-offer and you decline the loan.