(Reuters) - The top U.S. consumer finance agency on Wednesday asked a court to undo an enforcement case which the watchdog had already won last year, accusing prior agency officials of abusing their power as they sought to enforce diversity, equity and inclusion in lending.

Following a case initially brought in 2020 during President Donald Trump's previous administration, the Consumer Financial Protection Bureau in November won a settlement with the Chicago mortgage lender Townstone Financial, which the agency had accused of racial discrimination in the marketing of loans.

"CFPB abused its power, used radical 'equity' arguments to tag Townstone as racist with zero evidence, and spent years persecuting and extorting them - all to further the goal of mandating DEI in lending via their regulation by enforcement tactics," CFPB Acting Director Russ Vought said in a statement.

The CFPB said it is also seeking to return the $105,000 penalty to Townstone.

CFPB workers and consumer advocates are currently suing to block the Trump administration's efforts to neutralize the agency.

The settlement followed the CFPB's legal victory before an appeals court, which had upheld the agency's right to pursue claims of racial discrimination in how companies market their mortgages. It was the CFPB's first such case against a non-bank mortgage lender.

"All we have to add is that we are glad that the current administration conducted an investigation and agreed to file a joint motion in this case," said a representative for the Pacific Legal Foundation, which represented Townstone in the case.

In a motion filed in federal court, the Consumer Financial Protection Bureau and Townstone jointly said the agency's case had been based on a faulty investigation and never should have been brought.

In a sworn declaration, Dan Bishop, an advisor in the White House Office of Management and Budget currently detailed to the CFPB, also said agency lawyers had "misled their superiors in enforcement decisions" and were affected by "animus" toward Townstone.

In 2020, the CFPB accused Townstone of "redlining," effectively discouraging mortgage applications from Black applicants and for homes in majority-Black neighborhoods by disparaging such neighborhoods in allegedly racial terms, allegations the company rejected.

Kathy Kraninger, who was CFPB director at the time, and Thomas Ward, then the director of enforcement, did not immediately respond to requests for comment.

(Reporting by Douglas Gillison; Editing by Lincoln Feast.)