Well, the setup in the example scene are just some parts of a larg system I use since around 4.8.
Yes, the Camera location is controlled by the head bone. My reason todo that is that the Viewport is always located where your head is (makes sense for a true FPS camera I suppose)
Yes, the Camera rotation (yaw only!) is controlled by the mouse, so the player actually can look up to the sky and down to his feet (makes sense too i suppose)
I can’t tell for sure, but I think some example/tutorial stuff by epic actually works the same way.
Now the Headbone transform is applied so that other players can see wherever somebody is looking at. It’s also aligned with a 3rd person camera, aimoffsets and various other stuff. I can tell you that it has been a pain in the ■■■ to setup for multiplayer as several properties such as base aim/control rotation are not replicated correctly and it requires tons of workaround to compensate for it, adding more workarounds wouldn’t be joyful.
If your assumption is true, that the camera actually tries to pickup the head bone rotation, then I think that’s probably the/a bug, because the expected behavior (as it was working till 4.14) is that the camera would only listen to the control rotation. Hence the option “Use Pawn Control Rotation” on the camera component. Having that option check, the head bone rotation should not have any influence on the camera.