DriveLine should reduce the volume to zero. DriveLine doesn't use the actual 'Mute' control because some audio lines don't support muting. However, if we can't get this figured out, I can add code to check for Mute support on the audio line and utilize it. When you mute the HD radio in DriveLine, does the volume in the Windows Mixer go all the way down to zero?
I don't think the 'Default Recording Device' setting matters to DriveLine. I've tested with HD Radio on the Mic line and XM Radio on the Line-In and can switch between the two radios without a problem. I guess the issue could be related to having two audio mixer devices. You said you have a USB audio device as well as the onboard audio, right?
I'll see if I can come up with some way to create a test environment that resembles your setup.