Wonga's new chairman has admitted the company made loans to people who could not afford to repay.
The statement comes after the payday lender's agreed with the financial watchdog to make significant and immediate changes to its business.
Debts for 330,000 customers currently in arrears of more than 30 days will have their loans written off, while 45,000 who are up to 29 days in arrears will be asked to repay without interest and charges over an extended period of four months.
Chairman Andy Haste said: "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.
"I agreed with the concerns expressed by the FCA and as a consequence of our discussions we have committed to taking these actions."
Wonga is to write off the debts of 330,000 customers whose loans would not have been made under new affordability criteria being introduced by the pay-day lender.
Profits at payday lender Wonga more than halved in 2013 because the company was forced to pay £18.8 million in costs over a scandal involving fake legal letters.
In June, Wonga was forced to pay compensation by the Financial Conduct Authority (FCA) after sending legal letters from fake law firms to 45,000 customers.
The payday lender was found guilty of "unfair and misleading debt collection practices".
A 56% rise in operating costs due to investment in staff, infrastructure and its international businesses also contributed to the fall in profits.
Pay-day lender Wonga said it expects that it will be "smaller and less profitable in the near term" after reporting a 53% drop in pre-tax profits to £39.7 million for 2013.
The new chairman of payday lender Wonga has pledged "significant change" after the firm "made mistakes" in sending out letters from fake lawyers to customers in arrears.
ITV News Business Editor Joel Hills confirmed the appointment, tweeting:
Wonga appoints former boss of RSA as new Chairman. Andy Haste says he has mandate for "significant change" and that Wonga "made mistakes".
Andy Haste says he was approached by Greylock - one of Wonga's shareholders - before fake law firm letters made public.
Andy Haste warns that the changes necessary to win full FCA authorisation will make Wonga "a smaller and less profitable business".
ITV News Consumer Editor Chris Choi reports:
The Archbishop says Church of England has sold its shares in Wonga - which means it's taken a year to do so since the link was first exposed
A statement released by the Church of England said it was "pleased to announce" its indirect investment exposure to Wonga in its venture capital portfolio has been removed.
The Church Commissioners for England are pleased to announce that their indirect investment exposure to Wonga in their venture capital portfolio has been removed. The Church Commissioners no longer have any financial or any other interest in Wonga.
The terms ensure that the Church Commissioners have not made any profit from their investment exposure to Wonga.
At no time have the Commissioners invested directly in Wonga or in other pay day lenders. The indirect exposure of the Commissioners through pooled funds represented considerably less than 0.01% of the value of Wonga.
The Church of England has severed its ties with payday lender Wonga, the Church Commissioners for England said tonight.
City of London Police said in a statement:
In March 2013 the Office of Fair Trading (OFT) met with the City of London Police to consider their (OFT's) investigation into Wonga and whether it should be referred to the National Policing Lead for Fraud.
The interests of the consumer were at the forefront of these discussions and directed the decision that the most appropriate course of action was for the OFT to continue to investigate as regulator focusing on but not limited to the consumer credit act, legal services act, and unfair trading regulations.
Now that the regulator's investigation has concluded and a compensation agreement has been reached with Wonga, the City of London Police will be reassessing whether a criminal investigation is now appropriate.