Dave,
I would try to first wash the whole area out with a good detergent and stiff scrub brush. Let it dry. Then do what you can to grind the lose part out.
If you have an air compressor, go to the local auto paint supply source and buy a body shultz gun (you can get a cheap one under $20) and a quart or two of body shultz, or, you can also get the textured stuff that gets sprayed on lower rocker panels. It is shot with a body shultz gun as well.
Mask off the outside of the car and other areas that you don't want any mess on, then blast it. The difference between the stuff shot from the gun, and the stuff shot from the can is significant. You can get a high degree of build out of the gun shot stuff and it dries nice. It will serve several functions. One, cover up that ugly spot, two, detail the wheel well, three, cut down on some road noise and vibration. It is a win win situation.
If you do go with the can stuff, make sure it is the rubberized version, and not tar based. The tar base will never really dry and will have a dark brown tint to it. The rubber based stuff is fantastic and if done right with several coats can hide and protect almost anything. The thing is, at about $5 a can for the good stuff and four or five cans you have already hit the cost of buying the real deal from the paint supply store.