We are going to start offering consumer loan applications on our website (not my idea)-
we want to limit the area that we will accept apps from or to phrase more accurately we want to have the ability to turn down apps for being out of area. Can we limit the area to a smaller area than our official lending territory?
How is the best way to do this? How to phrase it on the web site?

It's certainly legitimate to restrict the service area of web-apps. Otherwise, you'll get them from all over the world. Think carefully about restricting your e-lending channel to a smaller footprint than branch/mail/phone. It's a potential fair lending red flag & there isn't an obvious business reason for this restriction.

How do you plan to define and enforce this service area within a service area?

"How is the best way to do this?"

Don't allow the submission to be accepted when they hit the submit button based on the address of the applicant. It will take some progamming.