Hi Sue, 

1. 'Les lettres' is the term used in university circles for studying what you would term as literature but it refers to the discipline as opposed to scientific studies for instance 

2. normally it would not be capitalized unless you talk about a particular faculté 

Take a look at the following page from the Sorbonne 

https://formations-lettres.sorbonne-universite.fr//fr/index.html

 

p.s. I studied at an English university so I am prepared to be corrected if wrong!

Hope this helps!