The mod was created because a woman named Maeyanie hated "government/society/whatever forcing companies to 'protect our innocent population from seeing those evil dirty things 50% of them possess personally anyways'". The Escapist points out that the mod was tame, featuring little more than Barbie doll-style nudity, yet the ESRB still flipped out.
User-made content is fast becoming the focus of videogames (see Spore, LittleBigPlanet, The Sims), and with that will come an influx of sex-related creations. How should the ESRB respond? With a new ratings category ("W" for "We're not responsible")? Slapping an "M" on every game that gives you an iota of customization control?