We had a customer from another town that came here to do a house loan. They went to their bank and wanted to buy a house in another town. They were told that the Bank doesn't loan outside of their community. Just wondering if they can do this?

All banks have a defined lending area, although most would not have such a restricted one. However, if this is a small to mid-size community bank it would make sense they would not want to venture into areas they are not familiar with.

So is the are defined by CRA? Is this just a bank policy that they don't go out of their area or are they restricted by a higher power?

The bank's defined lending area is set by them. As an example ours is defined in our lending policy as the county our main office is located and its contiguous counties.