Notice that in the story of my friend it is not the original IMMIGRANT who named her daughter Colleen, but her son, the second-generation Irish-American. I would assume that the first persons who turned the word "colleen" into a name were primarily people who had Irish ancestry but were not themselves intimately involved with the culture of the home country. In the American context, "Colleen" sounded like a girls' name because there were many other names ending in the "een" sound being used at the time, and second or third generation Irish Americans thought it was a "cool" idea to use it as a name for their daughters, with no understanding that people back in Ireland itself would think that was ludicrous.
There are many examples of words from one culture or language that have been turned into names in another culture because of romantic associations with the culture that language comes from, but which were NOT used as names in the original culture. The idea of turning the French word mignon, meaning "dainty", into a given name started with the German poet Goethe. Going back to the Irish, Erin, the poetic term for Ireland, was not used as a given name in Ireland itself but is another American idea. Many names used by African-Americans in the USA today taken from the Swahili language, such as Nia (from the Swahili word for "purpose"), are not used as names in the Swahili speaking areas of East Africa. The name Amanda comes from a Latin word meaning "worthy of love", but it was not used as a name by the ancient Romans, only being created in the 17th century by English playwrights.