This affects both Windows 7 and Windows 10. I have deployed the Group Policy settings to lock some features down, but the only ones I applied for wallpapers is Disable All Online Image Providers (Both Random and Single Image).
This was actually a bug in 8.1.2, where disabling the online sources would also get rid of the local "My Images" source. Could you try updating to the latest 9.0 Beta?
If you still run into any trouble after updating, please let us know!