The link between cholesterol homeostasis and cleavage of the amyloid precursor protein (APP), and how this relationship relates to Alzheimer's disease (AD) pathogenesis, is still unknown. Cellular cholesterol levels are regulated through crosstalk between the plasma membrane (PM), where most cellular cholesterol resides, and the endoplasmic reticulum (ER), where the protein machinery that regulates cholesterol levels resides. The intracellular transport of cholesterol from the PM to the ER is believed to be activated by a lipid‐sensing peptide(s) in the ER that can cluster PM‐derived cholesterol into transient detergent‐resistant membrane domains (DRMs) within the ER, also called the ER regulatory pool of cholesterol. When formed, these cholesterol‐rich domains in the ER maintain cellular homeostasis by inducing cholesterol esterification as a mechanism of detoxification while attenuating its de novo synthesis. In this manuscript, we propose that the 99‐aa C‐terminal fragment of APP (C99), when delivered to the ER for cleavage by γ‐secretase, acts as a lipid‐sensing peptide that forms regulatory DRMs in the ER, called mitochondria‐associated ER membranes (MAM). Our data in cellular AD models indicates that increased levels of uncleaved C99 in the ER, an early phenotype of the disease, upregulates the formation of these transient DRMs by inducing the internalization of extracellular cholesterol and its trafficking from the PM to the ER. These results suggest a novel role for C99 as a mediator of cholesterol disturbances in AD, potentially explaining early hallmarks of the disease.