Regardless what they were told you had an application for credit. You put a stipulation of an appraisal on the request and the applicant decided not to meet that stipulation. You therefore have an incomplete application and you must take appropriate action under the notification requirements of 202.9 and report on the LAR according the the guidelines for conditional approvals in the FAQs.
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The opinions expressed are mine and they are not to be taken as legal advice.