Payday lender Wonga says it is writing off £220m of debts for 330,000 customers after putting in place new affordability checks.
The company, which has faced criticism for its debt collection tactics, says the new checks have been implemented after discussions with regulators.
Those customers whose loans would not have been made under the new checks will have their debts written off.
A further 45,000 customers will not have to pay interest on their loans.
Affected Wonga customers will be notified by 10 October.
Wonga said its chairman Andy Haste, who joined the company in July, had been in talks with the Financial Conduct Authority (FCA) and had conducted a review of lending practices.
He said the need for change at Wonga was "real and urgent", and new stricter lending criteria would mean "accepting far fewer applications from new and existing customers".
Analysis: Jonty Bloom, business correspondent, BBC News
If the payday loan industry thought it was going to be business as usual under its new regulator the FCA it has had a rude awakening.
Wonga has long said that its cutting edge technology meant it weeded out bad credit risks and only lent to those who could afford to repay it. But the FCA decided that is not the case and as a result Wonga is not only writing off hundreds of millions of loans but changing the way it lends money.
From today it has introduced new lending criteria to improve its decisions. That means it will be lending to fewer people and it is unlikely to be the only firm forced to do that, as the FCA said today: "This should put the rest of the industry on notice."
"We want to ensure we only lend to those who can reasonably afford the loan in question and during my review, it became clear to me that this has unfortunately not always been the case," he said.
"I agreed with the concerns expressed by the FCA and as a consequence of our discussions we have committed to taking these actions."
'Industry on notice'In a statement, the FCA said Wonga's changes were as a result of a "voluntary agreement" between the lender and regulator.
End Quote Michael Ruck Pinsent MasonsIt certainly raises questions of Wonga and other firms about how they set up their business models going forward"
"This should put the rest of the industry on notice," said Clive Adamson, director of supervision at the FCA. "They need to lend affordably and responsibly."
Wonga has also been told it must appoint a "skilled person" to monitor its lending decisions and report back to the FCA.
Wonga currently provides lending services to about one million customers a year.
But it and the wider payday loan industry have attracted controversy because of the relatively high rates of interest charged to customers, which can quickly escalate if repayments are not made on time.
In June, Wonga admitted sending customers in arrears fake letters from non-existent law firms in an apparent attempt to scare them into repayments, and agreed to pay £2.6m in compensation.
The move to tighten up lending criteria is likely to hit Wonga's earnings. Earlier this week, it announced a 53% fall in annual profits and said it expected to be "smaller and less profitable" in future, partly as a result of new controls set by the FCA.
Michael Ruck, senior associate at Pinsent Masons and a former FCA lawyer, said Wonga will now be required to get more information on potential customers before making loans - an expensive process.
'Not good enough'He said the whole landscape for payday loan companies was changing dramatically.
"It certainly raises questions of Wonga and other firms about how they set up their business models going forward," Mr Ruck told the BBC.
"They are clearly no longer going to be able to rely on revenues from customers paying high rates of interest without fully understanding the implications.
"In terms of other firms they are being told that: 'If you don't get this right, this is what is going to happen'."
MP Pat McFadden, a member of the Treasury Committee, said the response by Wonga was "not good enough" and said bosses should be called before his committee to face questions on their business model and lending practices.
"By not doing proper credit checks, Wonga looks to have built a business on rolling over loans and building up debt for many people who could never afford to repay in the first place," he told the BBC.
"The effect on consumers has been to build up debts at astronomical rates of interest."
The debt charity StepChange welcomed Wonga's move, but said it needed to be part of a "comprehensive reform of the short-term credit market".
"People will always need to borrow, and we need responsible lenders to allow this to happen in a fair environment," chief executive Mike O'Connor said.
Are you a Wonga customer? Are you in debt arrears of over, or under 30 days? Email us at haveyoursay@bbc.co.uk and leave your contact details if you are happy to talk to a BBC journalist.
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