Suppose the community wanted to change this or make a formal policy on root
server hosting requirements. Where would this be done? Could a party submit
a proposal to ICANN via the policy development process? If not where should
the community start this?

That’s exactly what the Root Server System Governance Working Group (https://community.icann.org/pages/viewpage.action?pageId=120820189) is trying to figure out. As John has noted, it has been going on for 6+ years now. See RSSAC-037 (https://www.icann.org/en/system/files/files/rssac-037-15jun18-en.pdf) and RSSAC-058 (https://www.icann.org/en/system/files/files/rssac-058-17nov21-en.pdf). In the past, the IETF has issued RFCs on the topic (RFCs 2010, 2870, and 7720) and the root server operators have made various commitments related to “service expectations” documented in ICANN's RSSAC document series (https://www.icann.org/en/system/files/files/rssac-001-root-service-expectations-04dec15-en.pdf), but as has been pointed out, those commitments are contractual or otherwise binding obligations.