It definitely violates the terms of agreement.
Gotta ban the offender from xbox live.
That's pretty much it, the person agreed to a whole bunch of terms (without reading them of course) and this is in direct violation. There shouldn't be any fuss at all, they should of just banned him right away, case closed.
Instead, this guy now has THE most viewed paint job in the whole game. You can't buy this kinda publicity, he should of gotten some sponsorship on there too and made a fortune.