Question, is covering drain in the basement with a carpet violation of Wa state building code?

Be careful when taking advice from those who live in other states...they are not familiar with Texas contract law or the Texas Property Code. 

What was the code for the rejection ?

If he has a rental agreement now with his brother, you'd have to honor that till the end of the lease term,, otherwise, if you permitted him to stay it would automatically be a month to month and you'd be required to give proper notice..

You can also draw your own plans, but it can be a painful process for someone not familiar with all the code and design complexities that building departments like to have spelled out on a set of plans.

We are talking about bringing items up to current code, when it was just fine for the last owner.

To the extent that they do that efficiently and honorably it works well but it probably goes bad more than it goes well.

Some utility companies have there own inspectors who come out after the city has inspected (and typically request some changes), and have their own rules and codes in addition the local building codes. 

Also,after learning from BP Podcast and Forum, I called my County to see if I can acquire a Code Violation list and the lady emailed me a list of the Code Violation in 3 of my surrounding cities. 

We don't share the appreciation on our properties with the banks and we should not walk away from them when they don't go as well as we expect.I'm not saying you are less than honorable, but foreclosure should be the last thing suggested.