How far do you go with fiction?

When I did book reviews for The X, the Examiner's former entertainment magazine, I came across an author who had written a book about a fictional woman from my hometown (Hiawatha, Kan., for those who may not know).
 
I contacted this author eagar to read his book, and he told me he'd heard about Hiawatha on the Internet and thought it sounded like a fascinating little town because it had the moniker "City of Beautiful Maples" and it had a Maple Leaf Days Festival.
 
 
When the book came I was really excited to see this man from California portray the town I'd lived in for 20 years. I was grossly disappointed when I started reading. He had the town painted as this quaint little village where everyone knows everyone. The kind of town where everyone loves one another unconditionally... More like Stars Hollow from "Gilmore Girls" than the town I still call home. He admitted to me in our exchange that he'd never been to Hiawatha, he just thought it sounded cool.
 
 
The problem I had with the story was he painted Hiawatha as this town you would only see in TV. He made the people sound simplistic and narrow minded, and he completely flubbed the location.  Plus he was a man writing  a book from a woman's perspective – tricky unless you're really really good at your craft. He, frankly, fell quite short.
 
So here's my question. Even if an author deems his work fiction, does he still have a responsibility to base it on a little fact? Can an author use his creative liberty to completely change the demographics, geography and feel of a town because he believes it suits his story better? Or should he do some research – maybe at least visit the town he's portraying?