The rumors aren't false, but perhaps misleading. Unlike face detection in, say, iPhoto, this isn't about actually associating a face with a contact you already have (through similar photos), but rather about helping the camera focus on what you'll likely want to have in focus (namely, faces). Here's Apple's marketing text on it:
This camera loves a face.
With new face detection, the iSight camera is smart enough to know whether you’re taking a portrait or a group shot. It focuses on the most prominent face in the frame and balances exposure across up to 10 faces. So you’ll definitely catch smiles. And maybe even a smirk or two.
You'll know face detection is working from the green rectangle that appears.
New to 5.1 is that more than one such green "detected face rectangle" may show up:
Camera face detection now highlights all detected faces