“Why the shame in playing over SMF or Custom Backing Sequences?”

There is no shame as long as you do not pass it off as all your work.

I have a friend who downloads a midi file, makes some changes and then he calls them his arrangements.

My answer has always been if I do not use the midi file and play it with my arranger keyboard you will not hear all that the original song has to offer. If I do not use my keyboard you will have to hire 4 or 5 musicians to do the job.
(Which would be my preference)

John C.