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James purchased the home in Norfolk, Virginia, for her great-niece in 2020 for $137,000 and immediately allowed her and her children to begin living in the house rent-free. Prosecutors met with James' niece, who stated that she had never signed a lease, had never paid rent for the home, and that James had often sent her money to cover some of the expenses, the memo concluded, according to sources familiar with its contents.

While the indictment alleges that James made "thousand(s)" from rental income, sources tell ABC News that prosecutors found no record of James collecting rent from her niece beyond $1,350 that James reported on her 2020 tax return, which was said to cover the cost of utilities, according to sources familiar with the investigation.

As of last month, investigators had met with ten witnesses who offered conflicting accounts about whether James' actions constituted fraud or the degree to which she profited from her actions, the sources said.

James made a 20% down payment on the home -- the same as she would need to make for an investment property -- rather than the 10% typically required for a second home loan, according to sources familiar with the case.

A loan officer who worked with James told investigators that the interest rate for a second home compared to an investment property at the time of James's purchase would have been between 0.25% and 0.50% lower, a difference that would have amounted to $15 to $30 less in a monthly mortgage payment, or as much as $10,800 less over the life of the 30-year loan, according to sources familiar with what the loan officer told investigators. In the indictment, Halligan alleged that James avoided a 0.815% higher interest rate, potentially saving James $17,837 over the life of the loan.

But prosecutors expressed concern that the vagueness of federal mortgage guidelines would make it challenging to prove that James' actions were intentionally fraudulent by falsely claiming that she intended to occupy the home, sources told ABC News. That's because Fannie Mae guidelines do not clearly define the term "occupied" -- leaving it unclear if a person needs to sleep overnight at the home or just visit multiple times each year.

Evidence appears to undercut claims against Letitia James, prosecutors found: Sources