I wouldn't worry about it too much...first off I would talk to your friend about the feelings you have for her brother. Tell her that you're not sure where it will go because you have not talked to him yet but are developing feelings. Then I would talk to the brother about what the status of the relationship is, or if it is a relationship at all. Best of luck to you...and as far as the other friend you lost, I think he may have had stronger feelings for you then you were aware of and that is why he decided to check out of the friendship. Either way, it's too bad he did but his loss I guess.
What's the problem?
Your friend said it was okay to be his girl friend as long as you were serious and you ARE serious.
Just go ahead.