As the Sheriff said that taught the class I was taking then, putting a pubescent boy in charge of younger kids is putting someone in a situation with optimum opportunity and temptation that is dealing with strong hormones and a lack of insight. It doesn't mean that those boys are growing up into pedophiles or that they have evil intentions particularly. Even without this situation, I learned a couple years back that statistically, it's extremely common for boys in puberty to take advantage of smaller children sexually.
I hate to say it, but I would rethink having him watch your kids. Yes, I would talk to his mom, but him as well. He needs someone he can talk to and confide in. What happened does not necessarily mean he is a bad person. Someone else could have touched him like this and he is expressing this. It could be "experimentation", a lot of kids have tried this without meaning any harm. He could be or believe he is gay/bi-sexual. Here are several possibilities for your step brother's actions. It won't be easy however, another parent and child are involved and they could bring it up again - and they might not be nice about it. Instead of going straight to her, make sure your step brother is also involved with this. I don't think you can hide this away from his mother. 13 is a tough age, especially when hormones are flaring and you are learning about your own sexuality. Maybe even find out if anyone else has touched him like that before. Talk to him about what he did and try to find out what was going through his mind. Since you have a good relationship with your step brother, I think you should sit him down and have a serious conversation with him. I can only tell you what I might do in a similar situation. This is tough because it could be something very innocent or there could be other implications. This has got to be heart-wrenching for you - with lots of love and honesty, you will all get through this. His parents should be involved with you and your husband in that conversation and whether he should be allowed to be with your kids unsupervised. He needs to be very aware that it is never appropriate to touch a child sexually.
There should absolutely be a discussion with your step-brother about sexual boundaries, especially with children. I have some wonderful nephews but they never babysit my kids - period. They are just too sexually curious and unfortunately teenage boys brains are wired to act before they think. As a general rule, I never never never, no matter who it is, leave my kids in the care of a teenage boy. I can imagine you are wondering if anything like this has happened to them when in your stepbrother's care. Your other responsibility is to your kids. Other discussions about this can take place between you and your step-brother but not the first one and only with your dad and step-mom's permission. I can imagine you feel responsible because they were in your car, but you are not his parent. Let him in turn tell your stepmom and they can proceed from there. Perhaps tell your dad first since your relationship with him is better. They in turn can discuss this with the parents of the other boy. This needs to be handled by his parents directly. Dont forget that these 2 boys are minors and you are not your step-brother's guardian.
Of course you need to talk to your dad and step-mom before your step-brother.