Installation of the calipers

actually the rubber bands go on the caliper mount. guess to reduce noise or something. other then that 72bluNblu is right..

Huh. Learn something new everyday. :D

Is it OK the have a snug fit between the pads and rotor ? I haven't added the brake lines to the calipers yet so there may be a bit of fluid stopping the piston from going in any further ?

As long as the rotor spins it should be fine. But without lines the fluid in the calipers should just squirt out when you push the pistons back.

If I back the idler arm torque to 40 or 50 pounds, will it be OK ?

It should be. If everything else is as it should be you might want to throw a lock washer under the idler nut. But you should probably investigate why the idler arm mount is flexing enough under load to keep the idler from moving. Did you install the spacers correctly?