Here is the definition of the term from Snopes (bolded text mine):

http://www.snopes.com/info/glossary.asp

Urban legend

Urban legends are a specific class of legend, differentiated from "ordinary" legends by their being provided and believed as accounts of actual incidents that befell or were witnessed by someone the teller almost knows (e.g., his sister's hairdresser's mechanic). These tales are told as true, local, and recent occurrences, and often contain names of places or entities located within the teller's neighborhood or surrounding region.

Urban legends are narratives which put our fears and concerns into the form of stories or are tales which we use to confirm the rightness of our world view. As cautionary tales they warn us against engaging in risky behaviors by pointing out what has supposedly happened to others who did what we might be tempted to try. Other legends confirm our belief that it's a big, bad world out there, one awash with crazed killers, lurking terrorists, unscrupulous companies out to make a buck at any cost, and a government that doesn't give a damn.

Folks commonly equate 'urban legend' with 'false' (i.e., "Oh, that's an urban legend!"). Though the vast majority of such tales are pure invention, a handful do turn out to be based on real incidents, and whether or not something actually happened has no bearing on its status as an urban legend. What lifts true tales of this type out of the world of news and into the genre of contemporary lore is the blurring of details and multiplicity of claims that the events happened locally, alterations which take place as the stories are passed through countless hands. Though there might indeed have been an original actual event, it clearly did not happen to as many people or in as many places as the various recountings of it would have us believe.