ER-associated degradation (ERAD) removes defective and mis-folded proteins from the eukaryotic secretory pathway, but mutations in the ER lumenal Hsp70, BiP/Kar2p, compromise ERAD efficiency in yeast. Because attenuation of ERAD activates the UPR, we screened for kar2 mutants in which the unfolded protein response (UPR) was induced in order to better define how BiP facilitates ERAD. Among the kar2 mutants isolated we identified the ERAD-specific kar2-1 allele (Brodsky et al. J. Biol. Chem. 274, 3453–3460). The kar2-1 mutation resides in the peptide-binding domain of BiP and decreases BiP's affinity for a peptide substrate. Peptide-stimulated ATPase activity was also reduced, suggesting that the interdomain coupling in Kar2-1p is partially compromised. In contrast, Hsp40 cochaperone-activation of Kar2-1p's ATPase activity was unaffected. Consistent with UPR induction in kar2-1 yeast, an ERAD substrate aggregated in microsomes prepared from this strain but not from wild-type yeast. Overexpression of wild-type BiP increased substrate solubility in microsomes obtained from the mutant, but the ERAD defect was exacerbated, suggesting that simply retaining ERAD substrates in a soluble, retro-translocation-competent conformation is insufficient to support polypeptide transit to the cytoplasm.