USP7 is a crucial ubiquitin-specific protease (USP) involved in human development. Its overexpression has been linked to various cancers, while mutations in USP7 are associated with neurodevelopmental disorders, such as Hao-Fountain syndrome, underscoring the importance of tightly regulating its activity. The enzyme consists of an evolutionarily conserved catalytic domain, accessory substrate-binding domains, and a regulatory C-terminal tail. While it has been clearly shown that the tail plays a key role in regulating enzyme activity, its mechanism is poorly understood. Here, we use advanced solution NMR spectroscopy and enzyme kinetics to show that the C-terminal tail specifically binds the catalytic domain in its active conformation and promotes ubiquitin release following substrate cleavage. This interaction facilitates catalytic turnover and significantly enhances enzymatic efficiency. We further identify a small-molecule compound that functionally mimics the C-terminal tail, enhancing USP7 activity via a similar mechanism. Notably, this compound rescues activity in multiple USP7 variants associated with Hao-Fountain syndrome.