Proteolysis is essential during branching morphogenesis, but the roles of MT-MMPs and their proteolytic products are not clearly understood. Here, we discover that decreasing MT-MMP activity during submandibular gland branching morphogenesis decreases proliferation and increases collagen IV and MT-MMP expression. Specifically, reducing epithelial MT2-MMP profoundly decreases proliferation and morphogenesis, increases Col4a2 and intracellular accumulation of collagen IV, and decreases the proteolytic release of collagen IV NC1 domains. Importantly, we demonstrate the presence of collagen IV NC1 domains in developing tissue. Furthermore, recombinant collagen IV NC1 domains rescue branching morphogenesis after MT2-siRNA treatment, increasing MT-MMP and proproliferative gene expression via beta1 integrin and PI3K-AKT signaling. Additionally, HBEGF also rescues MT2-siRNA treatment, increasing NC1 domain release, proliferation, and MT2-MMP and Hbegf expression. Our studies provide mechanistic insight into how MT2-MMP-dependent release of bioactive NC1 domains from collagen IV is critical for integrating collagen IV synthesis and proteolysis with epithelial proliferation during branching morphogenesis.