I know this has probably been answered before, but I could not find it in a search. What is the proper procedure for disbursing funds on draw requests for construction loans?
We want to have control of the funds and not the borrower. Help!

Usually you have an independent inspector (and I mean independent of the loan officer or borrower) complete an inspection report that reports on the progress of the project and then make sure that enough funds remain to always complete the project. Once this inspection and calculation is completed - funds can be disbursed accordingly.

But what is the proper way to disburse funds for the building of the structure? Can the customer send in a request to pay for various aspects of the construction and the bank maintain a checking account in the customers name that the customer cannot sign on, then issue checks to the different contractors?

Set up a draw note and advance funds payable to the borrower and the vendor as invoices are submitted or as construction phases are completed, whichever your construction agreement calls for.

How strictly should the construction phases be adhered to when advancing draws? For example, if the draw sheet calculations show the house is 50% complete, but the lender has advanced 55% to the borrower, would this be considered a problem situation? I'm new at auditing construction loans and not very familiar with actual practices among banks in this regard.

I'm told that because construction doesn't always progress smoothly, lenders need some leeway to overadvance on occasion as long as the overall project is considered to be on track.

I can't speak for others, but we do allow some leadway - however if we need to "overadvance" (to use your term) we will require invoices for the amount requested.

These situation should be addressed in your procedures - the key is not getting out of line where you have 100,000 advanced and only 60,000 worth of work and/or materials.