HLA-DM (abbreviated DM) is an MHC-encoded glycoprotein that catalyzes the selective release of peptides, including class II-associated invariant chain peptides, from MHC class II molecules. To perform its function, DM must assemble in the endoplasmic reticulum (ER), travel to endosomes, and interact productively with class II molecules. We have described previously an EBV-transformed B cell line, 7.12.6, which displays a partial Ag presentation defect and expresses a mutated DM beta-chain with Cys79 replaced by Tyr. In this study, we show that HLA-DR molecules in 7.12.6 have a defect in peptide loading and accumulate class II-associated invariant chain peptides (CLIP). Peptide loading is restored by transfection of wild-type DMB. The mutant DM molecules exit the ER slowly and are degraded rapidly, resulting in greatly reduced levels of mutant DM in post-Golgi compartments. Whereas wild-type DM forms noncovalent alphabeta dimers, such dimers form inefficiently in 7.12.6; many mutant DM beta-chains instead form a disulfide-bonded dimer with DM alpha. Homodimers of DM beta are also detected in 7.12.6 and in the alpha-chain defective mutant, 2.2.93. We conclude that during folding of wild-type DM, the native conformation is stabilized by a conserved disulfide bond involving Cys79beta and by noncovalent contacts with DM alpha. Without these interactions, DM beta can form malfolded structures containing interchain disulfide bonds; malfolding is correlated with ER retention and accelerated degradation.