How to make Crestfallen Saulden not hostile towards me

In order to reverse the hollowing you need to use the Human Effigy (like you would use a lifegem), not burn it at a bonfire. This means you're able to use the item anywhere, and can save them for right before a difficult boss fight.

As of Patch 1.03, you'll regain a small portion of humanity for helping other players:

Players now receive a small portion of Humanity after successfully assisting in a Multiplayer session instead of regaining full Humanity.

Finally, there is a way to increase your maximum HP when Hollowed:

! The Binding Ring will ensure your maximum health can't go lower than 75% when hollowed. You find this ring in The Cathedral of Blue, right before entering the fog gate. It'll be in a chest to your left at the top of the drawbridge. If you are playing Scholar of the First Sin, then the earliest Binding Ring can be found in Heide's tower of flame right before the dragonrider boss fight, there is a Heide's Knight sitting in front of a chest, tackle him and you will receive the ring from opening the chest.

If you visit a bonfire or a lit torch in the environment, you use the action button (A on Xbox 360, X on PS3, Enter or Shift+Click by default on PC) to pull out your torch and light it. At a bonfire, you may need to press the "toggle" button (Y on Xbox 360, △ on PS3, N by default on PC) to show the button prompt to light your torch.

When you light your torch, you'll automatically hold it in your left hand, and it will stay lit until you put it away (by switching your left-hand item to something else). If you want to use it again after you've put it away, you'll need to find a bonfire or torch in the environment to light it again.

There is also a consumable item called Flame Butterfly that will allow you to light your torch anywhere by using the item from your inventory.

(And don't feel bad, it took me a couple hours to figure that one out, too.)