A person applied to purchase a rent house in a low income tract. The appraisal came back stating the house is in "poor condition". The bank would like to deny the loan due to poor condition of the property and the applicant, at this moment in time, does not plan on improving it. The applicant does qualify base on repayment ability and the property does have value.

Would this be consider a red flag in fair lending for denying a loan in a low income tract; even though, the reason for the denial is based on the house is in poor condition?

It might be a red flag if looked at but if you properly document the property was in disrepair and in unacceptable condition you'll be able to turn the flag green and go on the next lap.

Fair lending does not mean making bad loans, it means treating all people fairly. .

I agree with Dan. Document it like any other loan and make sure you would do the same to similarly situated properties/applicants, etc. in other areas

You didn't say what the property appraised for in relationship to the loan requested. What does your underwriting policy specifically say about property condition?? You might be able to say the same thing for every other house in the neighborhood. That is just a way to mask redlining.