will win 7 ask for password to sync files
When using the Media Transfer Protocol, the phone handles all the encryption/decryption while transferring files.  

The Windows7/AnyOther PC cannot access the files on device till the device is connected and phone's screen is unlocked.  

Windows7 will never ask your phone unlock password or any other passwords. All it needs is the device to be connected and lockscreen unlocked. The rest of file transfer will be handled by phone.  

All outgoing files from the device are decrypted and sent. And all incoming files to the device are encrypted and stored.