Agree with pretty much everything ckissick said.
How is the sill plate anchored to the block wall - are the cells all grouted or did they put a bond beam across the top and sink the anchor bolts into that? Or (worst of all) did they just sit the sill plates on the foundation with no anchors or holddowns (*shudder*)?
Unreinforced masonry walls are problematic in seismic zones although the addition of reinforcing is generally just to give the masonry some tensile strength (masonry has good compressive strength but lousy tensile strength on its own). In a situation where the masonry wall is underground and acts only in compression, the fact that it has no reinforcing wouldn't typically be a problem BUT...
In reality the wall
IS probably acting partly in tension. Hydrostatic pressure surcharges against the wall would create a uniformly distributed load on the foundation causing bending and tension on the side of the wall closest the surcharge. Also, if there ARE anchors, any wind loads on the house walls would be transferred via the anchors to the foundation, creating a bending moment at the top (and again, bending with tension on one side).
So to answer your question, yes there could potentially be a few issues if you really do have an unreinforced CMU wall below grade. Realistically, it would probably be okay, but I'd get a structural engineer's okay on it. Alternatively you could devise a system where the second story loads are handled by a separate system, although this is tricky and can get expensive (You essentially build a second house with its own structural system on top of the first). Or you can laterally brace the existing foundation wall (more likely & realistic solution, and cheaper typically)...
Long story short, it depends.
