This is not "an open set of circumstances" ... the situation in the law is very clear. Your sister seems to be naive or stupid, (I think that you already know this is the case).
1) Letting an unlicensed driver drive the vehicle is a violation of the California vehicle code and carries a $600 fine.
2) The limitation of liability for the registered owner is typically $35,000 but this cap is not present if the driver is known by the owner "after reasonable enquiry" to be unlicensed. In this case the owner can be judged fully liable... including for a wrongful death.
3) Most insurance policies will not cover a claim when the owner violated the law and lent the vehicle to an unlicensed driver.
Yes, he could lose his house over this.