My earlier posts appear to now be vindicated. As I said, it sounded like the dealership is doing what it can to take care of you. Obviously they would be worried about a lawsuit, but again, from the way you describe things, they did not do anything intentional here. Sounds like someone ELSE washed the title and screwed the dealership to me. Glad to hear that on your end the results are acceptable and that your sister is getting a car she wants. Actually when you look at the entire course of events, she is actually going to be coming out ahead of the game!
Sounds like the dealership made a mistake, and they are making it right to cover their butts and prevent this from being an expensive legal issue with unneeded costs, fines, and visibility. There may be some conscience involved on their part (probably not, more of a CYA) but at least they stepped up to set it straight.
Take advantage of getting out of the deal. It's up to you if you want to buy from them again. I'd hesitate just for the fact that they made an "error" and I wouldn't want to work again with a company that couldn't keep the history of their cars straight.