Actually, yes they do have their CO scrubbed by the catalytic converter which oxidizes it to CO2, and very effectively, with some of the oxygen coming from reduction of NO. These are called three-way catalysts and have been standard for decades now. The tailpipe gases are nearly free of oxygen, however, so it can displace air and kill things by this method, but it's not very potent because of the need for a lot of exhaust gas to get the oxygen concentration in the breathing air down at least below 10%. People have no problem with air down to 15%. But below 10% it gets pretty bad.
On your second point, yes, this does happen with modern cars, most infamously by people who mistakenly leave their car running in their attached garage. CO readily permeates drywall and it has killed people in their main residence rooms in this circumstance. However, the mechanism is oxygen depletion in the garage which makes it impossible for the closed-loop emissions system to add more oxygen by adding more air. In other words, there's not enough oxygen to make CO2, so CO gets made. Take that same car outdoors with its tailpipe poking into a hole in the closed garage (don't try this at home) and there would be little danger.
CO in the wild is deadly which is why portable gennys are so dangerous--they have no emissions systems and properly run with high CO concentrations in their exhaust. Those are nothing to play around with, and not just because of the CO. There's the whole gasoline thing, for example.
