Connor Jones, who unsuccessfully stood in May's elections, has been accused of belittling Conservative members from ethnic minorities at meetings, refusing membership applications from Muslims and withholding resources from campaigns of none white candidates.
The complaints date back to last year, however, the national Conservative Party suspended Mr Jones on June 3.
The Conservative Party press office told the Express and Star: "Connor Jones has been suspended from the Conservative Party pending the outcome of an investigation."
A Sandwell Conservative member, who did not want to be named, said: "A lot of members and councillors have complained to the national Conservative Party about the conduct of Mr Jones. I have seen first hand his bullying behaviour and very obvious decision making based on a dislike of none-white members.
"This has been happening since he was appointed as chairman last year but due to the number of complaints, including from elected members, Conservative head office had no choice but to suspend him.
"There would have been an outright civil war if they had not."
Meanwhile the former Conservative leader in Sandwell, Rowley councillor Laured Kalari, has been told that a party investigation into allegations of historic racist and misogynistic tweets has cleared him of wrongdoing.
Posting an email from Conservative HQ saying his membership has been restored, he said: "Following the publication of malicious tweets earlier this year and after a thorough investigation by the Conservative Party, I can confirm I have been cleared of any wrongdoing.
"I want to thank the Conservative Party for its work during the investigation, as well my friends and family who have supported me."
He added: "I will continue to pursue this matter privately via the appropriate legal channels."
The Express and Star, which first published the alleged tweets from Councillor Kalari, was not approached by the Conservative Party during its investigation.
Councillor Kalari has been replaced as leader of the Sandwell Conservative group by Charlemont and Grove Vale councillor David Fisher.
Councillor Fisher has returned to the post having stood down earlier this year after offensive social media posts surfaced.