GPO Loopback processing

In Group policy loopback processing modifies the default processing order, it is a computer setting and applies different user settings to a user logged into the computer that the GPO applies to.

To break it down:
1) It is a computer setting
2) It applies user settings from the computer GPO to the logged in user

Enable loopback processing can be done in the GPMC under Computer Configuration/Policies/Administrative Templates/System/Group Policy/Configure User Group
Policy Loopback Processing Mode policy

When enabled, there are two different options for the policy, Merge or Replace

Merge mode is where the user settings in the computer GPO is merged with any settings set in a User GPO. If there is any conflict then the settings from the computer GPO take precedence

Replace mode, the user settings in the computer GPO replace all settings from a User GPO

Loopback processing could be used for example in a classroom environment where whoever logs into classroom computers they always receive a locked down user profile.

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