Every bank we have talked to has said the same thing, they need two years of tax returns from 1099 employment before they will even look at giving you a loan.

I would just mention to him that what you witnessed isn't ok,  but he's a good contractor and you would like him employed but there's lines that can't be crossed.

The company was a subsidiary of her current employer and when I asked about the property, she knew the address but informed me that the loan was in default and sold... also about 20 years ago! 

Hey Yuriy, I replaced the carpet and water swollen laminate in a new quad of mine recently with Allure Vinyl plank flooring from HD.

I know he is protecting his employer, but I feel like I'm swimming in a shark tank.

@Ha Dang Some good advice above, also consider that generally any loans borrowed from a 401k are due for full repayment if when you are no longer employed by the company, in the event you voluntarily leave or are let go (knock on wood). 

Some of her parameters are you must be less than age 59, have a former employers 401K, and have not paid taxes on it yet.

You can discriminate when you live at that premises, if the place is for a religious or fraternal organization and for employees if the employer owns the property, in such cases you don't have any offering to the public for a rental. 

Issue two is that I looked to a few lenders and tried to go the conventional route and was told by two lenders that they can't help me because I'm not fully employed.

I am currently not employed and my schedule is open all day each day except weekends.