Its considered fiction set in "black" or Afro-American community and sometimes hispanic. But dealing with city or urban themes. Crime, gangs, ghetto poverty etc. Many hip hop and rap artists have dabbled in urban fiction.
To clarify, The Color Purple is Black Lit- but not Urban Fiction. Also, urban fiction was never supposed to be limited to violent, drug related, rap/hip hop or pornographic themes. There is even a sub-section of religious Urban Fiction. But these 'hood themes- unfortunately -sort of took over.
My feeling is that urban fiction can reflect and inform about the gritty parts of black, urban or poor life without inventing fake "thug life" and sensationalizing to the point of it being as fake as many "thug" rappers are (most are fairly middle class black dudes posing as "street").
The 'hood has stories to tell and mix with fiction. There are many Urban fiction writers on Wattpad- who don't necessarily use the term. Most of what they write doesn't reflect anything "real"-its just black versions of the weird sex fantasy stuff lots of different people write here or some Bloods/Crips rehash.
Some examples:"Me, My Boo and his Baby (ON HOLD) " or just type "Thug Life" in search.