Besides the above mentioned anonymous ftp chroot jail
use, the loopback mount is also used by the automounter
in a homogenous NFS cluster
The idea is that you want all your machines to look the same
and use the same config files, even the server. When an automount directory
is accessed on the server, the server's automounter sees it is local, and
loopback mounts it instead of NFS mounting it.
Other options would be to put a symlink there on the server, or have the server export the directory from where the automounter mounts it on other machines.
However, either of these would
confuse the automounter, and require you to use a different config file on
the server than on the clients, which is difficult or impossible in NIS or diskless setups, or in situations where there are directories on other
servers also served by the automounter.