Yes this is done in a Lounge, actually I was mostly in MyLounge.
1) Free run, is a practice, just to wait for the others.
2) When someone starts a race, everyone in the free run goes into the race.
3) When you start to chat while in Free Run the AI will take over an have your car go slowly through the track. The AI did 20 min Nurburgring laps for me, while I was eating, without crashing by the way.