Exhuming the Truth: How the $17 Billion Mortgage Settlement Concealed Massive Derecognition Fraud

By: William Paatalo – Private Investigator / Expert Witness – bill.bpia@gmail.com

Disclaimer: This article is intended for educational and informational purposes only. It is not legal advice. Please consult legal counsel before taking any action based on the contents herein.

I. Introduction: Exhuming the Body

In the wake of the 2008 financial collapse, millions of homeowners lost their properties to foreclosure. Years later, some of them received checks from government-appointed settlement monitors—paltry payments ranging from $300 to $2,000. These checks were issued with little explanation, but their true origin was far more sinister: they were the culmination of backroom deals involving borrower transaction accounts, secret tax filings, and a deeply flawed federal settlement process.

What follows is a comprehensive re-examination of the so-called “consumer relief” measures stemming from the $17 billion DOJ-Bank of America settlement. With today’s understanding of derecognition accounting, U.S. tax law, and financial privacy statutes, the mechanics of this program reveal a grotesque manipulation of borrower identity for Wall Street’s benefit.

II. The Setup: Borrower Transaction Accounts and Monetized Notes

According to both Federal Reserve materials (Modern Money Mechanics) and expert testimony from former Fed attorney Walker Todd, most bank-issued “loans” are not loans at all. Instead, they are ledger creations monetizing the borrower’s promissory note, which is booked as an asset by the lender. In return, a matching liability is recorded—a transaction account funded not with actual dollars, but with the borrower’s own credit.

Critically, these behind-the-scenes accounts were often created using the borrower’s name and Social Security Number. Yet:

• No loan origination documents disclosed these internal accounts.
• No borrower was informed that their identity was being used for ledger entries later classified as “relief” or debt forgiveness.
• No IRS Form 8821 or 2848 was executed by borrowers to authorize such tax-related actions on their behalf.

This failure to disclose or seek consent may constitute violations of:

• The Privacy Act of 1974 (5 U.S.C. § 552a)
• The Gramm-Leach-Bliley Act (15 U.S.C. § 6801 et seq.)
• The Fair Debt Collection Practices Act (FDCPA)
• Internal Revenue Code Section 6103 (taxpayer identity protection)
• TILA and Regulation Z (material omissions at origination)

III. The $17 Billion DOJ-Bank of America Settlement: A Taxpayer-Backed Laundering Scheme

Annex 3 of the DOJ’s 2014 settlement with Bank of America outlines the so-called “Consumer Relief” process:

“The Monitor shall make Tax Relief Payments to the IRS for the accounts of consumers… in respect of a portion of the recipient’s potential federal income tax liability associated with the income from discharge of indebtedness.”

Translation: the Monitor used the borrower’s SSN and identity to make estimated tax payments to the IRS, suggesting that debt had been forgiven—and thereby derecognized.

Meanwhile, Bank of America received credit toward its $17 billion penalty without truly suffering financial loss. The forgiven amounts were either:

• Already deemed uncollectible,
• Paid off via public funds, or
• Classified as consumer relief despite being derecognized long before.

In effect, banks received full settlement credit for phantom write-downs, while borrowers were saddled with:

• IRS records showing debt forgiveness they never asked for,
• Potential phantom income from 1099-Cs,
• Small restitution checks while their full claims were suppressed.

IV. The Aftermath: Foreclosures Continue on Derecognized Debts

Here’s the kicker: many homeowners who received these settlement checks are still facing foreclosure today.

How is that possible?

If a servicer or trust claimed derecognition and took federal relief credit:

• The debt cannot be legally collectible.
• The trust should have removed the asset from its books.
• The party asserting enforcement rights may be committing fraud, misrepresentation, or unjust enrichment.

Under GAAP (FASB ASC 860), derecognition occurs when the creditor no longer retains the risks and rewards of ownership. IRS guidance also treats forgiveness as a taxable event. You cannot derecognize a debt, accept government credit and tax relief for it, and then re-assert enforcement against the borrower.

Yet that is precisely what is happening in courts across America.

V. The Remedy: Know Your Rights, Challenge the Fraud

If you received a settlement check under the DOJ agreement, you have standing to:

1. Demand Full Accounting:
   • Request IRS transcripts (Wage & Income, Account, Record of Account)
   • Determine if 1099-Cs were filed or tax payments made on your behalf
2. Challenge Standing in Court:
   • Demand servicers or trusts prove they still own a valid, collectible debt
   • Assert estoppel or satisfaction and accord defenses
3. Initiate Administrative Processes:
   • Under UCC § 3-501, demand adequate assurance of performance
   • Under FDCPA, request validation and disclosure of any settlement offsets or derecognition events

VI. Conclusion: They Took the House, Filed Taxes in Your Name, and Now Want More

The record is clear: the $17 billion mortgage settlement was not about justice. It was about public optics, federal backstops, and cleaning up toxic loan portfolios through hidden accounting and IRS tax filings done in your name.

But the story isn’t over.

If you are still being targeted for a debt included in those settlements, you may be the victim of ongoing accounting fraud.

Let us help you demand the truth.

Our team provides investigative and administrative tools to:

• Uncover whether your debt was derecognized
• Determine if you were used in the Monitor’s tax filings
• Push back with facts, law, and force

Contact us to schedule a consultation or initiate your administrative discovery process today.