Steve, in my opinion, it is the lender's responsibility to try to find a way to do the loan. You said that there was no mention of seller paid closing costs in the contract. You also said that the lender wanted to raise the sales price and include a closing cost credit of $5000 to the buyer. This is seller paid closing costs. I still think that this was a viable way to do the loan IF (and only IF) it was suggested because the borrower was short on funds to close. And, it appears from your statement of the $5000 credit for closing costs that this is what we have here. I have seen this scenario over and over and over. The buyer signs a contract, but does not have funds for the closing costs. If the value is in the property, they amend the contract to increase the sales price to include seller paid closing costs.
We rely on honest appraisers to come back with a fair market value of the subject property. If the value is not there, then the borrower should look for another property that will not cost them as much out of pocket.
In this particular case, I don't believe that the difference in the originator's commission would be enough to influence them to do something unethical. Even at 2.5 points, it would only be a difference of around $100.
The truth is in the borrower's bank statements.