Actually I didn't, but that more or less answers my original question. Now I realize why you (or rather, your character) said that it didn't matter that md5 is broken in this case.
In general though, I'm still convinced that putting a hash function in a loop will increase the probability of a collision.
Or maybe I misunderstood your point about the loop? I assume by putting a loop around the hash you mean something like this:
key = SHA1(password)
1000 times do
key = SHA1(key)
return key