There is nothing wrong with a breeder requiring an official report by OFA or PennHip or a similar certifying organization rather than taking a vet's word for it. While some vets are very good at interpreting x-rays, many are not and see problems where none actually exist or vice versa. With something like OFA there is also no question as to the objectivity of the evaluators. So requiring an official report is pretty much standard practice amongst most breeders.
As for the warranty only covering moderate to severe HD, and not covering ED, I personally don't agree with that sort of warranty but if this is what is stipulated in the contract you signed and the breeder isn't violating the contract, then there really isn't anything you can do about that as you agreed to those terms.
Fast Normal does not necessarily equate to OFA borderline. I had a FN dog that was also OFA Good and there are many other examples. The systems are a bit apples and oranges so you can't draw direct parallels.
As for the diagnosis of Mild HD on your dog, it IS true that most dogs with Mild HD never experience problems. Especially if they are well managed with appropriate diet that includes joint supplements, appropriate exercise to keep muscles well formed and helping to support the joint, and not allowed to get overweight.
As for if the breeder should stop breeding the male or not, that we can't really determine from the information you've given. The OFA stats list something around 20% of GSDs as dysplastic based on x-rays submitted to them. The real percentage is probably higher as many dogs, especially those with x-rays that are obviously bad, aren't submitted. There is no bloodline of GSD that is completely free of dysplasia and if every dog who produced a dysplastic pup was eliminated from breeding there would be very few GSDs left to carry on the breed. There is one well known breeding program that focused extensively on eliminating HD and was for the most part successful, only to find they now had another genetic health disorder occurring at a much greater frequency than is the norm for the breed. As the saying goes, "breed one thing out and you breed another thing in". Breeders must find balance when it comes to temperament and health and work to reduce the incidence of all problems in those areas and can't over focus on any one thing. So with regard to this particular male, without knowing how he has produced overall and also the frequency of this problem (is it 1 or 2 problems out of a dozen or out of a hundred? Big difference there.) there is no way to say what the breeder should do with regard to continuing to breed him.