1. Have you seen the inspection report? What type of repairs, what's the cost? Make the repairs if you can. Keep in mind that if one lender is requiring these to be repaired, chances are every lender will. Unless you have a cash buyer, this will always be an issue.
2. also, I would ask to see the approval from the bank stating that the report is not satisfactory.
If you are saying that the inspection is not done by a licensed or approved inspector, then the buyer needs to get another inspection done. Typically the buyer pays this cost.
If all seems to be open and above board, I would say that the buyer is entitled to their earnest money.
I would recommend that you speak with your attorney and get his/her advice.
but with a financing clause, then you should do the right thing, and give back the earnest money. Then again
without seeing your agrement, there is not enough info to give you a clear cut answer. But ask your self, why should you keep it. Were you out any money, did the deal cost you from selling to someone else, And maybe
you could hold your deal together, Find out from the lender why your house did not pass. Might not take much to meet the lender requirements.