I really don't know what you're not grasping here. I think I did a good job of summing it up in the OP for those that aren't familiar with Catherine at all.
One of the major criticisms those in the LGBT community had with the original was
- Deadnaming in the credits
- Transphobic lines of dialogue such as what I posted in the OP but also stuff like one character who isn't aware that Erica is trans being picked on and teased by his friends for not knowing, turning it into a kind of gag or long-running joke
- Said character regretting sleeping with Erica and all of his friends making fun of him for doing so
It's a clusterfuck, really, and Full Body introduces a fuckton more of this.