NO, CR should cause it go to the start of the line and LF should cause it to go to the NEXT line. Neither one should be displayed.
This can not be done using the resources of the Hitachi controller for the reasons I posted earlier. That controller can be used with displays ranging from 8 characters up to 80 characters in varying configurations and there is no way of letting the controller know which one is attached. You might want to follow the LCD Addressing link at http://web.alfredstate.edu/weimandn to get a better understanding of the problem.
If you use one of the LCD controllers to monitor the output of a GPS without a CPU in the middle then you get totally unreadable data, all run together.
Obviously you must put a CPU in the middle because the GPS device outputs serial data and the LCD module requires parallel data. All of the 'serial' LCD modules include such a CPU, typically a PIC because they have been around for a long time.
Most of those modules were probably designed to get the basic functions of the inherently parallel LCD to work in a serial environment but as you have found out the implementation is a compromise. In order to retain the display of the user defined characters with the lowest ASCII codes they had to implement the and differently and you just don't care for their decision on how to do that. That doesn't really make it 'stupid'.
For your implementation it looks like you have two choices depending on how much programming you want to do.
(1) You can go with one of the existing 'serial backpack' implementations and put another CPU (such as an Arduino) between it and the GPS. You would use that CPU to filter the GPS output and convert it's control codes into ones the serial backpack understands.
(2)You can create your own 'serial backpack' from scratch in which case you can choose any means you want to deal with the ASCII control codes and to differentiate between them and the LCD's custom characters. This would be more work than (1) but it would be a 'cleaner' answer and would result in one less CPU.
Don