Doing a little reading, it seems the issue here is a rating of incompetency for a veteran managing his own benefits. By law, if the VA rates a veteran as incompetent to manage his benefits, he is also ineligible to own a firearm.
In general, I agree that a mentally incompetent person should not own firearms. The concern is that this issue through the VA appears to be a determination of a veteran being rated as incompetent to manage his benefits, not a court-determined finding of mental incompetence. Further, from what I've read, it seems this process may be started by as little as a veteran stating his wife pays the bills when asked who manages the finances at home (leading an examiner to check a box indicating the veteran can't manage his own finances). There is then a proposal to appoint a fiduciary for the veteran, followed by an opportunity to contest this. If the opportunity is ignored, the finding of incompetency may be made (which then includes ineligibility to own firearms).
In short, being denied firearms ownership due to actually being incompetent/mentally defective is appropriate. Being denied firearms ownership due to some weird VA process is inappropriate (and awful).