It is Number 1:

When circumstances at the margins indicate that teams are comparable, then the following criteria must be considered:

1. Championships won
2. Strength of schedule
3. Head-to-head competition (if it occurred)
4. Comparative outcomes of common opponents (without incenting margin of victory)

And it is such a big deal that the Big XII even has recognized that for number 1 it must be achieved in a Conference Championship Game itself not just round robin.

Yes, however, if ND is undefeated and every other team in the FBS has 2 losses, they'll probably make it at rank number 4. But how often is that expected to happen? No ND isn't forced to do anything as long as it is brutally clear to them that there is no path to the CFP for them as an independent.