Your sc_selchar (within common5) is too large. Open up the Klonoa CSP's in GIMP (or Photoshop, or any other image editing software), index the images, then import them into common5/sc_selchar.
The CSP's will be at a lower quality, but the game should not freeze any more.
I thought all USB loaders use the exact same code handler.
Whatever. Use whichever feels good for you. I personally used Configurable USB Loader. You know what's great about USB loaders? They cut down loading times.