Is this a valid reason for denial at renewal time if the borrower was not notified at the time of origination that it was a requirement?

Pretty shaky - especially if you ever renew a loan for anyone else that has not moved all their accounts to your bank.

I totally agree.

I have heard of banks making a loan they might not otherwise make on the condition that the customer moves their banking relationship. It is never written or formal but I know that it does happen.

Maybe in this case the customer reniged and the loan officer is butt hurt. If the loan makes sense and is profitable, why not make it?

Try this on for size:

Lender will not renew loan because of some conversation that the loan officer supposedly had with the client when the loan was first made. Client is not able to easily find other financing on such short notice, so agrees to move all accounts to the bank. Client suffers significant financial hardship due to the cost of moving all accounts to the bank (checks, accounts receivables, ACHs, bill pay, payroll, etc. as all have to be reset) and the company fails.

Sounds awfully like some big lender liability lawsuits I remember from the 80's.