They don't spawn as default NPCs, no.
They're strictly used to add flavor to Challenge worlds as rewards for completing stages and building shelters for them.
For example, when you build an extra house for more population, you add a generic 'does nothing but wander around the house' villager. When you build your militia and provide the gear, you can 'recruit' a villager to become a guard. Give him the gear, set the role to guard and give him a path to patrol.
When you build shops, relocate appropriate villagers to the shops and tell them to stay put. If you want to get creative, you can script the villager to go to the shop at sunrise and hang out, then go home at sunset.
You can designate some of your villagers as Elders (as per the Challenge) and then assign other villagers to 'guard' that villager while he wanders around, thereby providing bodyguards for your officials.
It is all a matter of how much 'RP' you want to invest. They don't actually do much that significantly changes your gameplay apart from the guards, but they add a lot of flavor to your world -- Especially when your other option is either dealing with Vanilla 'squidward' villagers or the MCA variant where you go the 'child labor' route.
Helpful Villagers, if the guy could ever get it stabilized and get the pathing to work a little cleaner, could be functional - but in my opinion it is getting the villagers to do all your work for you, farming, mining, tree-cutting, crafting, guarding. I prefer the CustomNPCs route myself.
Take a peek at
@VaalDeth or
@The Mobius Archives Let's Play videos on YouTube. Both utilize the villagers pretty well I think, though I'm pretty sure VaalDeth caught onto the villager before Mobius did. On the flip side, Vaal doesn't have "Tea Shoppes".