The controversial sub-prime lender Amigo is being investigated over the way it assesses whether customers can afford to repay their loans.
The Financial Conduct Authority (FCA) launched an investigation into the firm’s practices last week, Amigo said.
Amigo lends money to people with a poor credit history, but has been criticised for asking borrowers to sign up family or friends as guarantors.
The FCA declined to comment on Amigo’s announcement.
In an update to the London Stock Exchange on Monday, the firm said that the investigation would focus on whether or not its credit checks on borrowers were carried out in line with lending rules.
The Bournemouth-based firm lends up to £10,000 to borrowers with poor credit scores at an interest rate of 49.9%.
Its requirement for guarantors can mean that friends and relatives are asked to pay off the debt if the original borrower fails to do so.
The firm was recently accused by its own founder of lending irresponsibly and failing to tackle an increase in the number of consumer complaints from those who feel they should have never been given a loan.
The sub-prime lending sector as a whole has faced a blizzard of complaints from customers who believe they were approved for loans which they could never afford to repay. This has led to the demise of some of the biggest names in the sector, such as Wonga.
Major shareholder and founder James Benamor quit the board in March and published a highly-critical blog, accusing the company of knowingly carrying out irresponsible lending.
The company hit back, calling it “fundamentally incorrect”.
Earlier in the year, Amigo – which controls 80% of the UK’s guarantor loan market – put itself up for sale.
On Monday, the company said that talks were ongoing with a potential buyer, despite Mr Benamor having said that he would not consent to such a deal last week.
It added that it had begun legal action against Mr Benamor’s company, Richmond Group, to stop it from voting to remove the company board and appoint its own directors.
Amigo said its board would be prepared to step down, but only “through an orderly process” that protected shareholders.