Paul-Have you tried adjusting the cam-lock nut? I haven't run into that problem specifically on my PM 3520, but I and others have complained about the "spongy" lockup on both the banjo and the tail-stock (which has a tendency to creep backward when cranking down the live-center on a big green blank before I get a solid tenon constructed for a more secure hold). It's a very frustrating problem. I've heard that slightly tightening that cam-lock nut can fix it, though I haven't tried it yet (too busy turning, which is a poor excuse, I know). But given that your locking handle tends to spring back up, is it possible that it is too tight to engage a proper lock? It's worth some experimenting, I think-maybe a very slight adjustment and test it?
And don't even get me started on the fiddly tool-rest lock that (for me) gets stuck in its recess and has to be loosened with a mallet! I love almost everything else about my PowerMatic after almost two years with it, but their locking systems leave a lot to be desired. Maybe a "D" model will address the issue? I have even thought about just swapping out for a OneWay banjo, but they aren't cheap, and I have other shop needs I'd rather spend my money on.
Anyway, I hope this gives you an idea to pursue. I for one would be interested in hearing about any potential fix if you get it figure out.