We reported previously that mice overexpressing cytochrome P450 7a1 (Cyp7a1; Cyp7a1-tg mice) are protected against high fat diet-induced hypercholesterolemia, obesity, and insulin resistance. Here, we investigated the underlying mechanism of bile acid signaling in maintaining cholesterol homeostasis in Cyp7a1-tg mice. Cyp7a1-tg mice had two-fold higher Cyp7a1 activity and bile acid pool than did wild-type mice. Gallbladder bile acid composition changed from predominantly cholic acid (57%) in wild-type to chenodeoxycholic acid (54%) in Cyp7a1-tg mice. Cyp7a1-tg mice had higher biliary and fecal cholesterol and bile acid secretion rates than did wild-type mice. Surprisingly, hepatic de novo cholesterol synthesis was markedly induced in Cyp7a1-tg mice but intestine fractional cholesterol absorption in Cyp7a1-tg mice remained the same as wild-type mice despite the presence of increased intestine bile acids. Interestingly, hepatic but not intestinal expression of several cholesterol (adenosine triphosphatebinding cassette G5/G8 [ABCG5/G8], scavenger receptor class B, member 1) and bile acid (ABCB11) transporters were significantly induced in Cyp7a1-tg mice. Treatment of mouse or human hepatocytes with a farnesoid X receptor (FXR) agonist GW4064 or bile acids induced hepatic Abcg5/g8 expression. A functional FXR binding site was identified in the Abcg5 gene promoter. Study of tissue-specific Fxr knockout mice demonstrated that loss of the Fxr gene in the liver attenuated bile acid induction of hepatic Abcg5/g8 and gallbladder cholesterol content, suggesting a role of FXR in the regulation of cholesterol transport. Conclusion: This study revealed a new mechanism by which increased Cyp7a1 activity expands the hydrophobic bile acid pool, stimulating hepatic cholesterol synthesis and biliary cholesterol secretion without increasing intestinal cholesterol absorption. This study demonstrated that Cyp7a1 plays a critical role in maintaining cholesterol homeostasis and underscores the importance of bile acid signaling in regulating overall cholesterol homeostasis.