XSLT SOAP envelope wsse username and password with Parameters

I looked at your API Proxy... I have some feedback.

The XSL sheet should have xsl:param elements, and then you should reference those with xsl:value-of elements. It looks like this:

<xsl:stylesheet version="1.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
  <!-- declare parameters provided by the XSL policy -->
  <xsl:param name="pmtusername" select="''"/>
  <xsl:param name="pmtpassword" select="''"/>
  <!-- this element is optional -->
  <xsl:output method="xml"
              indent="yes"
              omit-xml-declaration="yes"
              version="1.0" encoding="UTF-8" />
  <xsl:template match="/">
    <soapenv:Envelope xmlns:soapenv="http://schemas.xmlsoap.org/soap/envelope/" xmlns:soap="com.pnc.pmt.acbsService">
      <soapenv:Header>
        <wsse:Security soapenv:mustUnderstand="1" xmlns:wsse="http://docs.oasis-open.org/wss/2004/01/oasis-200401-wss-wssecurity-secext-1.0.xsd">
          <wsse:UsernameToken wsu:Id="UsernameToken-20" xmlns:wsu="http://docs.oasis-open.org/wss/2004/01/oasis-200401-wss-wssecurity-utility-1.0.xsd">
            <wsse:Username><xsl:value-of select="$pmtusername"/></wsse:Username>
            <wsse:Password Type="http://docs.oasis-open.org/wss/2004/01/oasis-200401-wss-username-token-profile-1.0#PasswordText"><xsl:value-of select="$pmtpassword"/></wsse:Password>
          </wsse:UsernameToken>
        </wsse:Security>
      </soapenv:Header>
      <soapenv:Body>
        <soap:getLoanInquiryRequest>
          <soap:IdentifierType>
            <!--Optional:-->
            <soap:demo><xsl:value-of select="/Root/demo"/></soap:demo>
            <soap:appID><xsl:value-of select="/Root/appID"/></soap:appID>
            <soap:messageID><xsl:value-of select="/Root/messageID"/></soap:messageID>
          </soap:IdentifierType>
          <soap:search><xsl:value-of select="/Root/search"/></soap:search>
          <!--Optional:-->
          <soap:queryType><xsl:value-of select="/Root/queryType"/></soap:queryType>
          <!--Optional:-->
          <soap:obligorNumber><xsl:value-of select="/Root/obligorNumber"/></soap:obligorNumber>
          <!--Optional:-->
          <soap:facilityNumber><xsl:value-of select="/Root/facilityNumber"/></soap:facilityNumber>
          <!--Optional:-->
          <soap:loanNumber><xsl:value-of select="/Root/loanNumber"/></soap:loanNumber>
          <!--Optional:-->
          <soap:dependency><xsl:value-of select="/Root/dependency"/></soap:dependency>
          <!--Optional:-->
          <soap:loans><xsl:value-of select="/Root/loans"/></soap:loans>
        </soap:getLoanInquiryRequest>
      </soapenv:Body>
    </soapenv:Envelope>
  </xsl:template>
</xsl:stylesheet>

The corresponding XSL POLICY tells Apigee what values to place into the parameters. I think you want something like this:

<XSL name="XSLTransform_LoanInquiryReq">
  <Source>sourceXmlContent</Source>
  <ResourceURL>xsl://Script-1.xslt</ResourceURL>
  <OutputVariable>LoanInquirySoapPayload</OutputVariable>
  <!-- provide parameters to the XSL sheet -->
  <Parameters ignoreUnresolvedVariables='false'>
    <Parameter name='pmtusername' ref='private.abs.v1.pmtusername'/>
    <Parameter name='pmtpassword' ref='private.abs.v1.pmtpassword'/>
  </Parameters>
</XSL>

You can see there I am declaring parameters for the XSL sheet, with specific names, and then referring (ref=) to context variables to use as the source of the value for those parameters. According to my reading of your proxy, those values come from the KVM-Get you have that runs previously.

When I use this combination I get ... something reasonable on output

<soapenv:Envelope xmlns:soapenv="http://schemas.xmlsoap.org/soap/envelope/"
                  xmlns:soap="com.pnc.pmt.acbsService">
   <soapenv:Header>
      <wsse:Security xmlns:wsse="http://docs.oasis-open.org/wss/2004/01/oasis-200401-wss-wssecurity-secext-1.0.xsd"
                     soapenv:mustUnderstand="1">
         <wsse:UsernameToken xmlns:wsu="http://docs.oasis-open.org/wss/2004/01/oasis-200401-wss-wssecurity-utility-1.0.xsd"
                             wsu:Id="UsernameToken-20">
            <wsse:Username>dino@example.com</wsse:Username>
            <wsse:Password Type="http://docs.oasis-open.org/wss/2004/01/oasis-200401-wss-username-token-profile-1.0#PasswordText">Secret123</wsse:Password>
         </wsse:UsernameToken>
      </wsse:Security>
   </soapenv:Header>
   <soapenv:Body>
      <soap:getLoanInquiryRequest>
         <soap:IdentifierType>
            <soap:demo/>
            <soap:appID/>
            <soap:messageID/>
         </soap:IdentifierType>
         <soap:search/>
         <soap:queryType/>
         <soap:obligorNumber/>
         <soap:facilityNumber/>
         <soap:loanNumber/>
         <soap:dependency/>
         <soap:loans/>
      </soap:getLoanInquiryRequest>
   </soapenv:Body>
</soapenv:Envelope>