Financial Institution has received a request for a business loan from an applicant that it simply does not wish to establish any type of account relationship with (no prior experience with the individual). Rather than spend time and expense of doing a full credit review, loan officer would like to deny. Can this be done and what type of reason could be used as credit history and business potential of the deal have not been reviewed? Institution does make loans of this type to other borrowers.

You don't have to make a loan to anyone you don't want to. As long as it isn't based on a prohibited basis (race, sex, age, etc.). It sounds like this is a character issue. It may not win you any friends, but you could simply use "Undesirable character" as the reason for denial.

Alternatively, you don't have to tell people why they are being denied. Refer to §202.9(a)(2)(ii). You can give them a "no reason" denial and inform them of their right to know why. Most people do not follow through with the requirement to make their request in writing.

A couple thoughts - I'd be very cautious about 1) varying from your standard practice for evaluating applications ("Rather than spend time and expense of doing a full credit review...")and open the door for the applicant to allege disparate treatment on a prohibited basis; 2) using "undiserable character" unless the applicant is the well-known head of the local Mafia (assuming you don't lend to other Mafioso); and 3) varying from your procedure for providing adverse action notices (if don't provide reasons - ok; however, if you do provide reasons, it may be a "red flag" to send a one-off "no reason" denial).

Barring the applicant being the head of the Mafia, IMO, I'd recommend underwriting the request - ideally, the undisirable character will correlate to bad credit, inability to prove (or inadequate) income or inadequate collateral.

Merely my opinion...