1) this would be a red-flag
2) WHY on earth is he telling his FIVE year old, sister this?
3) Did you talk to your Son, about this and how this is not, right and INappropriate?
4) A kid your son's age, should know, this is not appropriate.... and you need to plainly, teach him this.
5) Yes, I would not, let him stay at this friend's house. You are the parent.
He is learning, inappropriate things there.
6) The parenting at that house, is HIGHLY questionable. So, do not let your kid go there.
7) YES... TELL THE TEACHER about this other kid. And what that kid has been saying... in great detail. And DOCUMENT what has been going on.
You need to have a blunt talk with your son. Don't let it just happen and him not getting any guidance on it. He NEEDS to learn, that this is inappropriate... and that, HE can get into trouble too. And teach him, about HOW to DISCERN other kids' behaviors.
There will be LOTS of kids, doing wrong things or inappropriate things as they get older. So HE has to learn... about things like this, now.
IF that were my kid, I don't care what the situation is of the other kid at home... I would NOT allow my kid to go over there anymore. Because, I do not "trust" that home nor the parents. AND Your kid, IS DISPLAYING, what he is 'learning' at that house.
You either CHOOSE, to let it continue or not.
And you have to educate YOUR child, on matters like this. He is 9.