In short -- borrowers have to get a cryptographically signed attestation from what's called a Risk Assessment Attestor in order to request a loan in Dharma. RAAs use whatever means they have to assess a borrower's identity and creditworthiness -- be that through social media logins, uploaded identification documents, authenticated phone numbers, their loan history both on and off chain, etc. They are compensated for this by a fee that is allotted to them in the loan contract. Ostensibly, borrowers are deterred from defaulting on their loans insofar as their future creditworthiness on the platform will be marred.
For the time being, Dharma Labs is the sole RAA of the protocol, but, as time goes on, we hope to build mechanisms for allowing other trusted third parties to enter the ecosystem as RAAs.