Hardware reasons. On PSP, MP3 decoding is done in software, and takes CPU hit. ATRAC3 decoding is done on dedicated media processor and takes no CPU hit.
I don't see what's the big deal of converting some of your songs to ATRAC for the purpose of using them in the custom soundtrack? It's better than sacrificing the game itself only so you can use MP3s.
Actually, there is a problem... From what I've heard, the Connect software cannot copy ATRAC files to memory stick pro duo, due to some weird bug, but I guess that should be easily fixable.