The lenders, who account for 90 per cent of the payday market, are in danger of losing their licences if they fail to clean up their act.
An investigation of the 50 by the Office of Fair Trading found “widespread breaches of the law and regulations, causing misery and hardship”.
The OFT’s report says irresponsible lending is not confined to a few rogue firms. It is a problem across the whole sector.
The OFT also plan to refer the payday market to the Competition Commission over “deep-rooted problems” in how lenders compete with each other.
And they will talk to the Advertising Standards Authority about restrictions on ads for payday loans.
Plans include limiting the number of ads firms are allowed per hour, limiting the times when they can advertise and forcing them to display their massive interest rates clearly.
The average size of a payday loan is between £265 and £270.
But the OFT found payday lenders get up to half their revenue from loans which are “rolled over” or refinanced.
A fifth of revenue came from customers who had rolled over or refinanced four times or more.
The report says the lenders appear to be “heavily reliant” on struggling customers who can’t pay loans back on time and can’t get cash anywhere else.
The vast majority of lenders allow rollovers and 17 out of the 50 promote them as a “feature” of their loans.
Three-quarters of lenders said they check whether new customers can afford loans. But only 23 per cent did the same for each rollover.
The OFT noted that staff in two large high street firms said rollovers were seen as “key profit drivers” and they were encouraged to promote them.
In one case, this was written into a staff training manual.
In some of the worst cases, OFT inspectors found customers were given 12 or more rollovers in succession.
And debt advisers told the OFT that borrowers seeking help with payday debts had, on average, rolled over their loan at least four times.
The number of payday lenders has exploded as families struggle with the economic slump, falling incomes and Con-Dem cuts.
Last month, the Daily Record published a booklet on how to deal with debt, which highlighted the plight of Scots struggling under the burden of payday loan interest rates.
Jim Sheridan, Labour MP for Paisley and Renfrewshire North, hailed the moves towards tougher regulation of what he called “these legal loan sharks”.
He said: “For the past few years, I have worked with colleagues and debt and advice organisations to expose the risk of using payday lenders.
“These firms target people, particularly on low incomes, to borrow with huge rates of interest.
“They then use heavy-handed tactics to recover money or try to encourage further borrowing to keep people constantly indebted to them.”
As well as highlighting concerns over rollovers, the OFT report accuses the payday lenders of putting too much emphasis on the ease and speed of loans, rather than the cost.
The report says 30 of the 50 firms’ websites made more of the speed of their loans than the size of repayments.
The OFT have been handed beefed-up powers allowing them to stop lenders in their tracks immediately if they believe consumers are at risk of harm.
Before, firms could keep trading for months or even years while they appealed repeatedly against their punishments.
But Unite union general secretary Len McCluskey said: “The Government’s new rules do not go far enough. They must cap the extortionate rates payday lenders charge and there needs to be new rules to rein in aggressive collection methods.
“Controlling how much legal loan sharks can advertise is not good enough. They shouldn’t be allowed on TV at all, nor to sponsor large events or football teams.”
OFT chief executive Clive Maxwell said: “We have found fundamental problems with the way the payday market works.
“Payday lenders are earning up to half their revenue from rolled over or re-financed deals where unexpected costs can rapidly mount up.”
Loans industry body the Consumer Finance Association said the OFT report described “a snapshot in time” and the payday lenders were already changing.
Chief executive Russell Hamblin-Boone said all applicants were now credit-checked, the number of rollovers had been limited and extra help had been made available to people struggling with repayments.
For more information about payday loans visit http://www.textloanlenders.com