The review will involve visits to 50 lenders and could, the OFT said, result in enforcement action.
It is concerned that firms may have been giving out loans to borrowers who are unlikely to be able to repay.
There have also been worries about lenders allowing customers’ debts to spiral by rolling them over.
The OFT said evidence gathered from its visits would be used to boost standards across the sector.
David Fisher, OFT director of consumer credit, said: “We are concerned that some payday lenders are taking advantage of people in financial difficulty.
“This is unacceptable. We will work with the trade bodies to drive up standards but will also not hesitate to take enforcement action, including revoking firms’ licences to operate where necessary.
“The payday sector has grown considerably since the OFT’s high cost credit review in 2010. This, combined with the current tough economic conditions makes it the right time for us to review the industry and improve protection for consumers.”
Which? chief executive, Peter Vicary-Smith, said the consumer watchdog investigated the sector last year unearthing several potential breaches of the Consumer Credit Act.
“Which? would urge the OFT to also address the poor privacy provisions and lax website security common in this market. Borrowers need to know what will happen to their data when they sign up for a loan, and that data must be protected,” said Vicary-Smith.
