The freeze seems to be a server sided issue which happens on "pseudo CS" NPCs where the compass disappears from the screen. What happens is that the PS2 console stops receiving updates from what happens nearby the player, causing the player to not see what happens close by. Say, Shout seems blocked too, but linkshell, party and tell chat still works. Obviously since it's on Cutscene mode you can't open menus or do anything else.
Pulling the Ethernet cable causes the PS2 to completely freeze instantly while music still plays fine.
Another great NPC to get stuck with is the quest giver NPC for "Escort for hire".