I believe act 3 wipes the internal game memory clean of all the corpses and items littering the world. Pretty clear that this issue is related to the memory growth of keeping track of all the stuff since it gets worse over time.
It doesn't happen in single player, so I suspect there's a piece of crap code running a "cleanup" check or something on character switch in multiplayer split screen. Given it doesn't happen in single player this should be pretty straightforward to debug.
Happy to offer my own services here free of charge if anyone at Larian would like to pay attention to this. I do this kind of debug for a living. PLEASE let me help to make this wonderful game playable again with my wife!
Bless you, your comment nearly brought tears to my eyes...
I have no idea how people manage to even get to the Act 3 in split screen with all the freezing, we're stuck at the end of Act 1 (in Adamantine Forge, to be precise) and it's impossible to do anything without getting a migraine. Whatever action we do, aside from just walking around, it freezes. Since you've mentioned the cleanup check, I think you're on to something there, because we've explored Act 1 thoroughly so far, I don't think there's a nook and cranny we didn't delve into on our way - hence the 50+ hours of gameplay to this point. So all that info is basically stored in our save or something, and it's like information overload? I'm not knowledgeable about these things so I'm just wild guessing.