I think when he said the inside of the ear, he meant the side without hair on it, rather than actually inside the ear flap.
I am glad you are comfortable with this vet and he gave you a good course of action. I am somewhat confused since you said you'd already seen two vets who told you to amputate, and then the "second and third" recommended against it.
I have to agree that I am totally mystified as to how the top knot band could somehow get the tip of the ear in. If you and your wife decide to continue to use bands, please check with a groomer to confirm that it is being put in correctly and that it's the right type of band. Top knot bands are usually tiny, and are also non-stick. Using any kind of rubber band will pull hairs out each time you do the topknot, and eventually your yorkie will go bald.
One consequence of non-stick, tiny bands is that they are usually really easy to get out. Generally speaking, if the yorkie doesn't want to wear a top knot, he manages to pull it off by himself. So I hope you can see why this seems so strange to many of us.
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