You're exactly right off course! I just made the same copy & paste error that lead to the bug as it was before
I just comitted the (hopefully finally) correct version of locallib to CVS.
As I understand it (and I didn't implement the review options, so I may be wrong), the difference between IMMEDIATELY and LATER is that IMMEDIATELY allows reviewing for the 2 minutes you mentioned (review.php, line 52) and LATER allows reviewing IMMEDIATELY and until the quiz closes. So setting this to 5 minutes should not cause any problems, only IMMEDIATELY would be a longer time span. I guess that the allowed 2 minutes are a tolerance interval, which is there to make sure that even via a slow connection students can review their attempt when they are redirected to the review page directly after submitting the quiz.
I hope this bug is done with now