The thing about mods is that while some thing's should be incorporated into the game if the meet quality standards (eg, ports of ingame hair models like Hilda's or uptexturing of hair textures to HQ standards, HQ textured eye models, etc theres even a SFW version of a NSFW mod that gives better base underwear that looks better than the default plastic barbiedoll looking ones) other's can't be unless they're verified to be original creations and this is where the problem happens, there's some beautiful mods that give some amazing costumes but some I've seen have been ported from other games and they obviously cant be used in an official capacity due to this.

That being said if someone creates mods that are from EXISTING game development resource that are 100% owned by SE like say designs for a costume that include not only drawings but the model data as well as a base then there should at least be some way of submitting those for at least consideration there's some people out there who are EXTREMELY good and have managed to basically modify existing ingame assets and improved upon them including some really beautiful long hair styles which the dev team have avoided so far that are as long as Y'sale's for example, if those submissions were also public this would actually work in favour because not only could it be up on say the forum for example for a significant amount of time but if the item was say ripped from another game it would be shot down much sooner.

Modifying the official client of course would still be a nono that they cannot support of course they cant put something in the terms and do the opposite and that's the whole conundrum BUT if there was say an official model viewer SEPERATE from the game which allowed you to basically port a model of a character into purely for the purpose of displaying all ingame gear and costumes purely for the development of models with certain ground rules on its use (aka no nude mods no making models of costumes/items from other games, all creations must be ORIGINAL and not a rip from another IP) then that would allow them to solve the issue without basically breaking their own ToS. It would be essentially be providing an official costume dev kit for modelers whos successful submissions could be added to the game. Rather than fight the mod community they could utilize it and successful winners basically get the glory of say an ingame prize and official recognition of their creation being an ingame item.