I do not see any state law that prohibits being a bank employed loan officer and MLO and a real estate agent. We do not originate FHA, and would not let the MLO handle any transaction where they are representing the buyer or seller. Does anyone have this in their organization?

Would not letting them handle any any customers from the real estate agency help mitigate the risk or is it just not worth the risk???

Many bank conflict of interest or code of conduct policies would prevent this. I personally do not think it is worth the risk. It's a little close to the edge of self-dealing for my comfort. Any complaint to HUD about the real estate agent work could end up pulling in the bank because of the employment relationship.

Do they want to be a banker or a realtor - tell them to make a choice. Being a realtor right now is not a part time job - how are they going to pull that off working full time at the bank?

Did you ever move forward with this? If so, did you write something up for them to sign, if so I'd love a copy.
We have a similar situation, hiring a Mortg Loan Servicer, that acts as a Realtor on the side,

Look at the prior post Becky - Realtors get calls all day long and yours could easily get distracted and start devoting time away from the job. Also should be covered in your HR, Code of Ethics or Conflict of interest policies.

Most financial institutions prohibit any type of work which can conflict with their business operations. But it is brave new world and I know of some banks that allow certain employees to continue consulting on the side.