It is now possible to enable character nudity from the game options without having to download an extra patch. Because of this, we have changed the warnings on the game page and community settings.
There is NO nudity by default. You have to go into the options menu and switch it on if you want to see it. If you don't, do nothing and your game will not be affected in any way.
And yes, if you choose 'Everyone naked all the time' that means EVERYONE, male and female, and it means ALL THE TIME. This is very silly.
If you use the comedy censorship option, it will be even sillier.
If you want to see ONLY the character you are romancing naked, then select only the top option. Every character will appear nude at least once at some point during their romance path, but not often.
The nudity options only affect the sprites, not the CGs. This is just a little extra fun. It was available for a while with extra patching, but many people had trouble making it work, so now it's easier to access if you want it.