The (very thick) rubber band goes underneath the "heel" of the pad. You grip the brake lever to hold the pads against the rim while you tighten up the nuts that hold them in place. (You'll have to push on the pad to keep it from rotating, too - this job takes 4 hands to do right.) Then when they're set, there will be gap at the heel when the toe first touches. Aligning brake pads is my least favorite bike job - the alignment systems are so bad.

Some brake compounds just will not work with some rims, no matter what you do. I have to use different brake pads on my various bikes.