Lloyds has been accused of behaviour "calculated to mislead" after admitting it had been sending out debt collection letters from in-house lawyers under alternative names since the late 1980s.
Correspondence was sent out under the name Sechiari Clark & Mitchell, later renamed SCM Solicitors, to customers who had ignored previous letters under the bank's own letterhead.
Chief executive Antonio Horta-Osorio disclosed details of the practice, which the state-backed banking group decided to end this year, in a letter to the Treasury Select Committee.
He attached what he described as a "typical" example of such correspondence, on SCM letterhead, dated in January this year, telling a customer that he or she is required to pay thousands of pounds to avoid court proceedings being issued.
Andrew Tyrie, chairman of the committee, said: "This is very concerning. The sample letter seems calculated to mislead.
"Lloyds failed to convince us that this was not the case, or to provide any satisfactory explanation as to why it issued letters in this form, but at least this practice has been brought to an end.
In his letter to MPs, Mr Horta-Osorio disclosed that the letters came from a law firm formed by solicitors within Lloyds Bank to conduct debt collection on its behalf.
Until 2011 it was registered as a law firm with the Solicitors' Regulation Authority, he added. In July 2011, the partnership was dissolved.
The name SCM solicitors was kept "and its status as part of the in-house litigation team was disclosed on correspondence", Mr Horta-Osorio said.
He added: "We believe that views on transparency and clarity have changed. Accordingly, we took the decision in March this year that the use of SCM Solicitors would cease as soon as the necessary changes could be made to IT systems."
The chief executive said customers who received the letters could include both individual customers and small businesses.
He added: "No new claims are being issued in the name of SCM Solicitors and we expect the use of the SCM name to cease completely by the end of September.
"Thereafter all litigation-related correspondence will be sent out on Lloyds Bank plc letterhead, under the name and SRA registration number of an employed solicitor."
A key reason for using the SCM letterheads was to address customers "who have not responded to our previous attempts to engage with them because they do not read or respond to bank letter-head correspondence, exacerbating the problems they face".
Mr Horta-Osorio said: "It is in both our and the customer's interests to engage and address the financial difficulty at the earliest moment.
"However, we recognise that transparency is now a priority and hence the changes we've introduced."
The chief executive added that the group had previously used "internal debt collection agencies" during an "earlier part of the debt recovery process".
He said: "The rationale for their use and the subsequent decision to stop using these are the same as for SCM as mentioned above."
Lloyds Banking Group is still 25% owned by the taxpayer after it was rescued by the Government at the height of the financial crisis.
Earlier this month, consumer campaigners urged the regulator to investigate concerns that customers of a number of major banks had been sent letters from lawyers or debt collectors which were actually operating within the banking groups.
Banks said it was made clear they were from in-house firms.
Last month payday lender Wonga said it had agreed with regulators to pay £2.6 million in compensation after chasing struggling customers with fake legal letters pressuring them to pay up, though in that case it involved law firms that did not exist.
A Lloyds Banking Group spokesperson said: "SCM Solicitors was a name used for correspondence from qualified solicitors employed by the bank who are authorised and regulated by the Solicitors Regulation Authority.
"A small number of customers would have received letters from SCM Solicitors where they had previously not responded to any prior attempts to engage with them. This was intended to encourage customers to speak with us. Earlier this year we decided to phase out the use of SCM in order to improve transparency for our customers and simplify our process. "