With the loop closed in the drive only, the control just sends step and direction signals and the drive tries to keep the motor in the commanded position. The drive will have a preset following error which if exceeded, will cause the drive to fault.
With the loop closed at the control, the control can make adjustments to the commanded position on the fly if the motors are out of position. So if one axis starts to slow down, the control can slow the other axis to keep it in position. Not sure how useful this actually is.